April 29-30, 2014
Union League Club of Chicago
2014 Primer
Presented by
©CarrClifton
SmarterMoney+
The Kellogg School of
Management
is proud to support the
Impact Capitalism
Summit
and its mission to maximize
impact and r...
About the Organizer
OVERVIEW: Watershed Capital Group is a specialty consulting firm assisting sustainable companies and f...
About the Primer
As Impact Investing mainstreams, Watershed Capital Group recognizes
the importance of the dissemination o...
Table of Contents
Article Contributed By
High-Impact Portfolios Can Outperform
Wall Street
HIP Investor 6
A Portfolio Appr...
NOTE: All investing risks loss of capital. Past performance does not indicate future results. This is not an offer of secu...
NOTE: All investing risks loss of capital. Past performance does not indicate future results. This is not an offer of secu...
NOTE: All investing risks loss of capital. Past performance does not indicate future results. This is not an offer of secu...
 
	
  
A	
  Portfolio	
  Approach	
  to	
  Impact	
  Investment:	
  Framework	
  for	
  Balancing	
  Impact,	
  Return,	
 ...
 
	
  
Table	
  1	
  shows	
  some	
  examples	
  of	
  investors	
  including	
  foundations,	
  pension	
  funds,	
  fin...
 
	
  
Define	
  financial	
  parameters	
  
Alongside	
  the	
  impact	
  thesis,	
  the	
  investment	
  team	
  will	
 ...
 
	
  
Map	
  the	
  individual	
  investments	
  
Next,	
  we	
  map	
  out	
  expectations	
  for	
  an	
  individual	
 ...
 
	
  
Once	
  the	
  targets	
  have	
  been	
  set	
  and	
  the	
  portfolio	
  begins	
  to	
  grow,	
  investors	
  a...
 
	
  
Looking	
  Forward	
  
Challenges	
  should	
  ease	
  over	
  time	
  
To	
  be	
  successful	
  today,	
  investo...
Impact Investing 2.0: 12 Outstanding Funds Point the Way Forward
By Cathy Clark, Jed Emerson and Ben Thornley1
From its or...
possible for investors to receive financial returns along with social and/or environmental
impacts. This level of doubt wa...
relationship is not one-sided. The funds also use their experience in the field to
influence the creation of more enabling...
Multilingual Leadership
Those responsible for making investments must execute with unshakable financial
discipline, but su...
There are a number of ways to essentially “lock in” mission. Calvert Foundation
manages a community investment note regist...
Impact	
  investing	
  as	
  part	
  of	
  a	
  responsible	
  investment	
  portfolio	
  
By	
  Karin	
  Malmberg	
  
Imp...
• Wespath	
  Investment	
  Management	
  This	
  case	
  study	
  outlines	
  how	
  this	
  US	
  investor	
  developed	
...
 
	
  
Building	
  Impact	
  Investing	
  Portfolios:	
  From	
  Strategy	
  to	
  Policy	
  to	
  Implementation	
  	
  
...
 
KLF’s	
   Impact	
   Investing	
   Policy	
   was	
   designed	
   to	
   incorporate	
   impact	
   criteria	
   into	
...
 
Due	
   Diligence	
   (Public	
   Strategies):	
   We	
   classify	
   investment	
   opportunities	
   principally	
   ...
 
2. Reclaim	
  ownership	
  of	
  assets:	
  If	
  the	
  service	
  provider	
  is	
  not	
  willing	
  and/or	
  not	
 ...
Agricultural Technology Impact Assessment Framework
The Agricultural Technology (AgTech) sector is emerging as the key wea...
Backup Research/Thoughts on AgTech
Trends driving the AgTech debate:
 Population growth. While the rate of growth is slow...
 Poised to raise crop yields by up to 67% and lower food prices by up to 49% by 2050.10
 Increase productivity and crop ...
 A greater share of the value chain could be pulled to the producer, as technology-enabled
farmers can connect directly t...
TOTAL	
  PORTFOLIO	
  ACTIVATION	
  	
  
A	
  FRAMEWORK	
  FOR	
  CREATING	
  SOCIAL	
  
AND	
  ENVIRONMENTAL	
  IMPACT	
 ...
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  1. 1. April 29-30, 2014 Union League Club of Chicago 2014 Primer Presented by ©CarrClifton SmarterMoney+
  2. 2. The Kellogg School of Management is proud to support the Impact Capitalism Summit and its mission to maximize impact and return, which aligns with our vision of sustainable capital as an instrument of positive change.
  3. 3. About the Organizer OVERVIEW: Watershed Capital Group is a specialty consulting firm assisting sustainable companies and fund managers seeking solutions including raising capital and executing M&A transactions and in evaluating strategic financial options. Watershed’s clients include entrepreneurs, companies, and fund managers scaling sustainable solutions that lead to competitive advantages and long-term value creation. A new model of value creation is emerging deploying capital in strategies that leverage the inherent link between natural, social and financial capital. strategies that leverage the inherent link between natural, social and financial capital. The global move toward sustainability represents one of the most attractive investment opportunities of our era. In the face of increasing resource scarcity and growing global demand for these resources, sustainable strategies are enabling differentiated competitive advantages that lead to long-term value creation. Watershed’s clients are entrepreneurs, companies, and fund managers scaling sustainable solutions. EXPERIENCE: With over 100 years of experience and over seventy-five engagements, Watershed partners are committed to assisting its clients achieve success and scale a sustainable economy. Each partner has domain knowledge in multiple industries, in both operational and financial capacities making Watershed one of the most experienced teams in the sector. Specific industry sector experience includes: organic foods, renewable energy, energy efficiency, media, water, sustainable ag and aquaculture, green consumer products, manufacturing, industrial technologies, recycling, bio-plastics, advanced lighting, green building products, transportation and environmental services. The Watershed team brings a diverse set of functional backgrounds to clients including private equity, venture capital, investment banking, securities law, and operational management. NETWORK: With an exclusive focus in the sustainable/impact sector, Watershed Capital Group represents one of the most comprehensive global networks of companies, funds and institutional investors focused in this sector. Watershed Capital Group maintains a reputation as an innovator in the sustainable sector launching and developing several initiatives. Some of these initiatives are the Five Fund Forum, Impact Capitalism Circle, and the Global Cleantech Cluster Association. These activities have given Watershed Capital Group one of the broadest networks in the industry. Watershed is also proud to be a founding B Corp member. Michael Whelchel Shawn Lesser Aaron L. Enz Lydia Miller Managing Partner Managing Partner Partner Managing Director michael@watershedcapital.com shawn@watershedcapital.com aaron@watershedcapital.com lydia@watershedcapital.com (828) 251 4645 (404) 257 3382 (415) 686 0068 (773) 415-2063 www.watershedcapital.com Securities offered through Intellivest Securities, Inc., Member FINRA/SIPC Impact Capitalism Summit 2014 Primer 3
  4. 4. About the Primer As Impact Investing mainstreams, Watershed Capital Group recognizes the importance of the dissemination of research and thought-leadership to those new and experienced in the sector. This primer, development for the Impact Capital Summit, includes articles and excerpts articulating the value and opportunity available to institutional investors interested in Impact Investing. These capital initiatives harness the power of investment for positive social and environmental impact alongside maximum return. Impact Capital is SmarterMoney+. Watershed Capital Group is pleased to be publishing this primer in partnership with the Kellogg of School of Management. For the past five years, under the leadership of Jamie Jones, Kellogg has been a leader in the area of social enterprise and of impact investing, forming leaders for the future. In addition to providing assistance in the preparation of this primer, Kellogg will offer a white paper summary or lessons and findings noted during the Summit. The Primer demonstrates the movement of Impact Investing “from the margins to the mainstream” - a phrase from the World Economic Forum article. The astute voice and collective experience gathered in the Primer challenge the traditional investment mindset and encourage, through sound structure and rigor, an innovative capitalism that generates returns and addresses world issues. This compendium of excerpts advances the conversation around impact investing and shifts the investment mentality around impact from why to why not, from a defensive of posture of why invest in the sector to a proactive why not invest. Savvy investors seek to maximize their returns. These articles drive the point home that if investors are not looking at this sector, they are forgoing an entire category and opportunity of return. Regards, Shawn Lesser Michael Whelchel Co-Chairs, Impact Capitalism Summit 4 Impact Capitalism Summit 2014 Primer
  5. 5. Table of Contents Article Contributed By High-Impact Portfolios Can Outperform Wall Street HIP Investor 6 A Portfolio Approach to Impact Investment: Framework for Balancing Impact, Return, Risk J.P. Morgan Social Finance 9 Impact Investing 2.0: 12 Outstanding Funds Point the Way Forward PCV, CASE, ImpactAssets 15 Impact investing as part of a responsible investment portfolio Principles for Responsible Investment (PRI) 20 Building Impact Investing Portfolios: From Strategy to Policy to Implementation Sonen Capital 22 Agricultural Technology Impact Assessment Framework The CAPROCK Group 26 Total Portfolio Activation: A Framework For Creating Social & Environmental Impact Across Asset Classes Trillium Asset Management & Tellus Institute 30 A Historical Look at the SRI Industry and Recent Industry Research US SIF 33 Women, Wealth and Impact: Investing with a Gender Lens Veris Wealth Partners 36 From the Margins to the Mainstream World Economic Forum 39 From Ideas to Practice, Pilots to Strategy Practical Solutions and Actionable Insights on How to Do Impact Investing World Economic Forum 43 Articles contained herein have been reprinted with permission Impact Capitalism Summit 2014 Primer 5
  6. 6. NOTE: All investing risks loss of capital. Past performance does not indicate future results. This is not an offer of securities. ©2006-2014 HIP Investor Inc. and © 2014 HIP Investor Ratings LLC. All Rights Reserved. The New Fundamentals of Investing High-Impact Portfolios Can Outperform Wall Street New Research Reveals a Diversified Portfolio, Rated for Future Risk, Can Deliver Stronger Returns with Lower Risk + Positive Impact Executive Summary: + Investor portfolios today, even those guided or managed by expert advisors, could achieve stronger returns with lower risk, and more positive impact on society – if they use all the meaningful information on future risk that is publicly available on their investments. + More than 20 quantifiable metrics of value-creation – which comprise up to 80% of the S&P500 stock market value – are knowable yet ignored by the majority of investors. + For investors who seek a stronger portfolio, a diversified blend of mutual funds and investments – optimized for future risk and potential return, as well as positive impact using HIP Investor’s ratings – can produce lower portfolio volatility, higher portfolio returns (relative to risk), and more positive net benefit to society. More than $220 trillion is invested globally. Nearly all investors, advisers, and fund managers evaluate their results – and decisions to buy or sell – based on measures of past risk and return. As we all hear: “Past performance is not indicative of future results.” This is true. Looking forward, value-creation and volatility depend on evaluating future risk and return potential. According to interviews with institutional investors representing trillions of investor capital, the tools from Morningstar, Bloomberg, FactSet, and other firms “primarily analyze historical risk and return, not the full set of factors that drive future risk and return.” Across the S&P500, 80% of the S&P 500 stock market valuation is driven by factors that are not accurately captured on the financial statements (Ocean Tomo) – and typically ignored by investors, analysts, advisers and fund managers. More than 20 quantifiable factors creating cash flow and profit, or lessening risk, are not used by Wall Street experts. Most financial analysis focuses on historical results, but not all the forward- looking sources and drivers of shareholder value creation. Also, no common standard is used by Wall Street investors for measuring net beneficial impact on society. HIP Ratings measure meaningful knowable-yet- ignored factors – and how they drive financial risk and return. Investors can enhance return potential and lower risk by:  Valuing people as an asset: A portfolio model of publicly listed firms in Fortune’s Best Companies to Work For, calculated by Wharton finance professor Alex Edmans, typically outperforms the S&P500 (since 1998).  Natural Resource Efficiency: The S&P Carbon-Efficient Index of firms more efficiently using energy has outperformed the S&P500 since its inception in 2011.  Leadership Inclusive of All Talent: Boards of firms with 1 or more women on the Board have realized higher return on equity with lower volatility (2005-2011), according to Credit Suisse (see chart above). 6 Impact Capitalism Summit 2014 Primer
  7. 7. NOTE: All investing risks loss of capital. Past performance does not indicate future results. This is not an offer of securities. ©2006-2014 HIP Investor Inc. and © 2014 HIP Investor Ratings LLC. All Rights Reserved. A Diversified Portfolio Built to Benefit Society Can Beat Wall Street “The markets are efficient.” “All available information is built into the stock price as soon as it is available.” “Index funds are the most reliable way to invest.” These investment mantras are embedded in Wall Street portfolios, integrated into the curricula of leading business schools, and rewarded with Nobel Prizes in economics. But new fundamentals of investing portfolios in the 21st century have arrived – that can lessen risk and enhance returns. Investors benefit from diversified portfolios across all asset classes. Modern Portfolio Theory (MPT), distilled in 1952 by Nobel-prize-winning Dr. Harry Markowitz at the University of Chicago, is seen as the gold standard of portfolio construction. To apply MPT systematically, investors typically use index funds that follow the market. However, the underlying assumptions are that the market prices are efficient and accurate, incorporating all relevant information. Yet more than 20 factors of future risk, potential return, and net impact appear to be ignored by the market, and miss out on capturing the full set of drivers of value-creation. Thus, trusting the market-price based indexes can lead to a sub-optimal portfolio – with higher risk and lesser return. Sustainable Portfolios Can Beat Wall Street and Modern Portfolio Theory A more optimal portfolio that lowers risk and ONE-YEAR (2013) PERFORMANCE enhances returns – and can beat Wall Street – is possible. In 2006, HIP Investor developed a unique methodology to rate investments and funds globally. Today, HIP’s 6000 ratings include 4500 corporations (equity and debt) and 1500+ issues of bonds (including governments and nonprofit muni- bonds) on their future risk, return, and impact. Using HIP’s approach to manage future risk, at least two diversified portfolio models of mutual funds and investments (one with 24 funds; another with 10 funds) can lower financial volatility (as calculated by the standard deviation of monthly returns) and earn higher annualized returns, for the 1-year and 3- year periods ending December 31, 2013 (see charts). Over all time periods analyzed – 1, 3, 5, and 10 year THREE-YEAR (2011-2013) PERFORMANCE periods – sustainable, high-impact portfolios (HIP 24 HIP 10 models) incurred lower risk (and lower portfolio Beta) and stronger returns relative to risk (higher Sharpe ratios). Across all time periods analyzed, the HIP 10 portfolio approach shows less risk and exceeds the annualized returns of the Modern Portfolio Theory approach. New fundamentals can transform traditional investing. Sustainable portfolios can outperform the market, as they integrate meaningful, quantifiable information (captured by HIP Ratings) that is knowable yet ignored by most investors, analysts, endowments, pensions, and foundations. Investors integrating this info can strengthen their portfolios. Vanguard 2025 Fund HIP 10 HIP 24 MPT 0% 5% 10% 15% 20% 0% 5% 10% 15% 20% Less Risk RETURNS: Annualized Returns* RISK: Standard Deviation of Returns* PORTFOLIO: color of bubbles: Dark Green = HIP 24 Light Green = HIP 10 Red = Vanguard 2025 Fund Gray = MPT MoreReturn Vanguard 2025 Fund HIP 10HIP 24 MPT 0% 5% 10% 15% 20% 0% 5% 10% 15% 20% Less Risk MoreReturn RETURNS: Annualized Returns* RISK: Standard Deviation of Returns* PORTFOLIO: color of bubbles: Dark Green = HIP 24 Light Green = HIP 10 Red = Vanguard 2025 Fund Gray = MPT *For annualized time period over the past 3 years ending 12/31/2013 *For annualized time period over the past 1 year ending 12/31/2013 Impact Capitalism Summit 2014 Primer 7
  8. 8. NOTE: All investing risks loss of capital. Past performance does not indicate future results. This is not an offer of securities. ©2006-2014 HIP Investor Inc. and © 2014 HIP Investor Ratings LLC. All Rights Reserved. Smart Portfolios Include Funds & Investments that Can Realize Both Positive Impact + Profit Smart investor portfolios diversify to mitigate the potential downside of future risks and seek the upside associated with all the possible opportunities. More than $220 trillion of global financial assets – including your portfolio – could be stronger and more resilient by measuring its future risk exposure and allocating to funds and investments that can lower that risk, seek enhanced returns, and spur net positive impact for society. US-SIF identifies $3.7 trillion in the USA and $4 trillion in Europe that is pursuing positive impact in portfolios. Every investment – stock, bond, mutual fund, ETF – can be rated for its future risk, financial return potential, and net impact on society. Investors can track their portfolio performance on all these dimensions. Color- coded HIP Ratings can visualize future risk and upside potential in portfolios (red connotes riskier; green implies more resilient, striving for higher impact and possible stronger returns with lesser risk). In the 3 years ending 12/31/2013, a HIP-designed portfolio’s funds exceeded the MPT portfolio funds; more HIP-selected funds performed above the financial “efficient frontier” and were color-coded “green” for lower future risk and more positive impact. Using investment ratings of this type to measure and decide can strengthen your portfolio. 3-Year Fund Performance of HIP-24 portfolio** 3-Year Results: Modern Portfolio Theory funds*** * For annualized time period over the past 3 years ending December 31, 2013 (one fund with less than 3 years history blends in its benchmark-index performance) ** HIP 24 funds cover mutual funds, ETFs, and stocks that are fund-like (e.g., KKR private equity, partnered with EDF.org) *** MPT funds and allocations follow the model approach followed by software-based advisor WealthFront, as published on its website in Q4-2013 Every investment and fund has a future risk-return-impact profile; HIP rates more than 6000 investments and funds. Muni bonds can rate higher impact by funding nonprofits in healthcare and education, as well as government services for water and cities. Private-equity funds can manage risks and pursue impacts more systematically than publicly listed companies. Hedge funds can be low transparency about the portfolio’s future risks. Do you know the future risks embedded in your portfolio? Is it built for 21st century opportunities? Portfolios designed thoughtfully that incorporate knowable-yet-ignored factors of value-creation and future-risk reduction – which HIP Ratings methodically calculate – can result in stronger, more resilient, and higher performing results. Download the full whitepaper and slideshow at www.HIPinvestor.com To discuss HIP Ratings, contact: R. Paul Herman, CEO, +1 415 902 7741, Paul@HIPinvestor.com HIP Investor Inc is a registered investment adviser in CA, WA and IL with clients nationally. iShares JPMorgan USD Emerg Markets Bond iShares iBoxx $ Invst Grade Crp Bond Vanguard FTSE Developed Markets ETF Vanguard Dividend Apprec Idx ETF Vanguard REIT Index ETF Vanguard Total Stock Market ETF Vanguard FTSE Emerging Markets ETF -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% -5% 0% 5% 10% 15% 20% 25% 30% 35% IMPACT: color of bubbles: Green = higher IMPACT Yellow = medium IMPACT Red = lower IMPACT ALLOCATION: size of bubbles is percent (%) allocated to fund RISK: Standard Deviation of Returns* RETURNS: Annualized Returns* Ariel Appreciation Investor DFA Five-Year Global Fixed-Income I iShares JPMorgan USD Emerg Markets Bond iShares International Dev Rel Est KKR & Co LP 2 INDEXES + Shelton Green Alpha Pax World High Yield Bond Individual Inv Pax World Global Envrnmntl Mkts Indv Inv iShares Morningstar Small-Cap Guggenheim Timber ETF Pope Resources LP First Trust S&P REIT Idx Parnassus Fixed-Income Pax World Small Cap Individual Inv Parnassus Workplace Calvert Global Alternative Energy A Calvert Global Water A iShares S&P 100 ETFS Physical Swiss Gold Shares RidgeWorth US Gov Sec Ultra-Short Bd I iShares TIPS Bond Praxis Intermediate Income A Guggenheim S&P Global Water Index -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% -5% 0% 5% 10% 15% 20% 25% 30% 35% IMPACT: color of bubbles: Green = higher IMPACT Yellow = medium IMPACT Red = lower IMPACT ALLOCATION: size of bubbles is percent (%) allocated to fund RISK: Standard Deviation of Returns* RETURNS: Annualized Returns* 8 Impact Capitalism Summit 2014 Primer
  9. 9.     A  Portfolio  Approach  to  Impact  Investment:  Framework  for  Balancing  Impact,  Return,  Risk     By  Yasemin  Saltuk,  Director  of  Research,  J.P.  Morgan  Social  Finance     This  is  an  extract  from  A  Portfolio  Approach  to  Impact  Investment  (Y.   Saltuk,  J.P.  Morgan  Social  Finance,  October  2012),  a  report  written  as  a   practical  guide  to  building,  analysing  and  managing  portfolios  of  impact   investments  for  professional  investors.  Since  completing  this  work,  we   have  been  using  the  framework  for  managing  our  own  portfolio  and   representing  the  profile  of  our  targets  and  investments.  For  the  full   report,  visit:  www.jpmorganchase.com/socialfinance.   In  traditional  financial  analysis,  investment  management  tools  allow   investors  to  evaluate  the  return  and  risk  of  individual  investments  and   portfolios.  This  research  presents  a  tool  to  analyse  impact  investments   across  the  three  dimensions  that  determine  the  performance  of  these  assets:  impact,  return  and   risk.  Throughout,  we  reference  the  experiences  of  impact  investors  with  case  studies  of  how  they   approach  each  step  of  the  portfolio  construction  and  management  process.  The  content  for  this   research  was  informed  by  our  own  investment  experience  as  well  as  that  of  23  institutional  investors   that  we  interviewed.  Figure 1  gives  an  overview  of  the  report  structure,  and  we  provide a summary of  the  key  findings.   Figure  1:  A  Portfolio  Approach  to  Impact  Investment   Source:  J.P.  Morgan   Building  an  Impact  Investment  Portfolio   Find  a  home  for  the  portfolio   To  successfully  build  a  portfolio  of  impact  investments,  investors  need  to  assign  an  individual  or  a   team  to  source,  commit  to  and  manage  this  set  of  investments,  and  institutions  are  setting  up  their   organizations  in  different  ways  to  address  this  need.     Some  institutions  establish  a  separate  portfolio  with  its  own  management  team,  while  others   employ  a  “hub-­‐spoke”  strategy  where  a  centralized  impact  team  partners  with  various  portfolio   managers  across  instrument  types  (such  as  fixed  income  and  equity)  to  manage  the  portfolio's   multiple  dimensions.  Still  others  bring  the  total  institution  in  line  with  the  impact  mission.     Define an impact thesisFind a home for the portfolio Define financial parameters Building an Impact Investment Portfolio Mapthe individual investmentsMapthe target profile Mapthe aggregate portfolio & compare to target A Framework for Impact, Return and Risk Manage risk through structuralfeatures Identify the risks in the impact portfolio Manage friction between impact and return Financial & Impact Risk Management Throughout,  the  term   "social”  is used to   include  both  social  and   environmental  concerns.   Also,  the  term   “institutional  investor”   refers to  non-­‐individual   investors,  including   foundations,  financial   institutions  and  funds.   Impact Capitalism Summit 2014 Primer 9
  10. 10.     Table  1  shows  some  examples  of  investors  including  foundations,  pension  funds,  financial   institutions  and  fund  managers,  and  their  organizational  structures.   Table 1:  Organizational  Structures  across  Institutional  Investors   Investor  Type   Example   Portfolio  Management   Foundation   The  Rockefeller  Foundation   Separate  team     The  F.B.  Heron  Foundation   Whole  institution   Pension  fund   TIAA-­‐CREF   “Hub-­‐spoke”  partnership     PGGM   “Hub-­‐spoke”  partnership   Financial  institution   Storebrand   Separate  team     J.P.  Morgan  Social  Finance   Separate  team   Fund  manager   MicroVest   Whole  institution     Sarona  Asset  Management   Whole  institution   Source:  J.P.  Morgan   Define  an  impact  thesis   Once  the  organizational  structure  is  in  place,  the  portfolio  management  team  will  need  to  articulate   the  impact  mission  of  the  portfolio  to  set  the  scope  of  their  investable  universe.  For  many  impact   investors,  the  impact  thesis  is  usually  driven  by  the  value  set  of  an  individual  or  organization  and  can   reference  a  theory  of  change,  often  with  reference  to  specific  impact  objectives  such  as  access  to   clean  water  or  affordable  housing.  An  impact  thesis  can  reference  a  target  population,  business   model  or  set  of  outcomes  through  which  the  investor  intends  to  deliver  the  impact (see Table 2 for   examples). Table  2:  Illustrative  Components  of  an  Impact  Thesis   Target  Population   Target  Business Model   Target  Impact   Income  level     Product/service  provider  to   target  population   Number  of  target  population   reached   Degree  of  inclusion   Utilizing  target  population  retail   distribution     Per  cent  of  business  reaching   target  population   Region  of  inhabitation   Utilizing  target  population   suppliers   Scale  of  outputs     Implementing  energy  and   natural  resource  efficiency   Quality  of  outputs   Source:  J.P.  Morgan 10 Impact Capitalism Summit 2014 Primer
  11. 11.     Define  financial  parameters   Alongside  the  impact  thesis,  the  investment  team  will  determine  the  investment  scope  with  respect   to  the  parameters  that  can  drive  financial  performance.  These  parameters  include  the  instruments   that  will  be  eligible  for  investments;  the  geographies  and  sectors  of  focus;  the  growth  stage  and   scalability  of  the  businesses  that  will  be  targeted;  and  the  risk  appetite  of  the  investor.     Abandon  the  trade-­‐off  debate  for  economic  analysis   In  setting  the  investment  scope  and  return  expectations,  we  encourage  investors  to  abandon  broad   debates  about  whether  they  need  to  trade off  financial  return  in  exchange  for  impact.  We  rather   propose  that  investors  rely  on  economic  analysis  on  a  deal-­‐by-­‐deal  basis  of  the  revenue  potential   and  cost  profile  of  the  intervention  they  are  looking  to  fund,  and  set  risk-­‐adjusted  return   expectations  accordingly.   A  Framework  for  Impact,  Return  &  Risk   Once  the  target  characteristics  of  the  portfolio  are  defined,  investors  can  map  the  following  across   the  three  dimensions  of  impact,  return  and  risk:  a  target  profile  for  the  portfolio,  the  expected   profile  of  the  individual  opportunities  and  the  profile  of  the  aggregate  portfolio,  which  can  then  be   assessed  against  the  target.   Map  the  target  profile   To  illustrate  how  different  investors  might  map  their  portfolio  targets,  we  present  the  graph  of  our   own  J.P.  Morgan  Social  Finance  target  portfolio  –  the  shaded  grey  area  in  Figure  2  –  alongside  the   profile  that  might  be  targeted  by  an  investor  with  a  higher  risk  appetite  and  a  lower  return  threshold (Figure  3),  and  the  graph  that  might  represent  the  target  for  an  investor  pursuing  only  non-­‐negative   impact  with  a  low  risk  appetite (Figure  4). i Figure 2: J.P. Morgan Social Finance Target  Portfolio  Graph Source: J.P. Morgan Figure 3: High Risk Investor’s Target Portfolio Graph Source: J.P. Morgan Figure 4: “Non-negative Impact” Investor’s Target Portfolio Graph Source: J.P. Morgan   Impact Capitalism Summit 2014 Primer 11
  12. 12.     Map  the  individual  investments   Next,  we  map  out  expectations  for  an  individual  investment   based  on  assessments  of  the  impact,  return  and  risk.  Once  that   investment  is  mapped,  we  can  then  compare  it  to  the  portfolio   target  as  shown  in  Figure  5.  Although  we  show  an  example  in   which  the  individual  investment  profile  does  fit  within  the   portfolio  targets,  in  general  investors  may  not  require  that  each   investment  necessarily  fits  within  the  target  range,  so  long  as  the   aggregate  does.   Map  the  aggregate  portfolio  and  compare  to  target   Once  the  portfolio  begins  to  grow,  we  can  consolidate  the   individual  investment  graphs  into  one  graph  representing  the   characterization  of  the  portfolio  as  a  whole,  aggregating  the   individual  graphs  by  either  overlaying  them  or  averaging  them   (simply,  or  on  a  notional-­‐weighted  basis).  Then,  this  aggregate   can  be  compared  to  the  target  profile  for  the  portfolio  to  ensure   alignment.   Expand  the  dimensions  of  the  graph,  if  desired   Investors  should  consider  the  three-­‐dimensional  graph  as  a  template.  For  some,  the  simplicity  of  this   approach  might  be  appropriate  for  aggregating  across  large  portfolios  at  a  high  level.  Others  might   prefer  to  use  a  more  nuanced  framework  that  better  reflects  the  different  contributing  factors  of  the   parameters  represented  on  each  axis  –  impact,  return  and  risk.ii  As  an  example,  we  could  consider   an  investment  graph  across  six  dimensions,  splitting  each  of  the  three  into  two  components,  as   shown  using  a  hypothetical  investment  in  Figure  6.  Alternatively,  an  investor  might  choose  to  show   four  dimensions,  where  risk  is  split  by  financial  risk  and  impact  risk.   Figure  6:  Illustrative  Graph  in  Six  Dimensions   The  bold  blue  hexagon  illustrates  the  profile  of  a  hypothetical  debt  investment.     Source:  J.P.  Morgan.   Figure  5:  One  Investment  in  the   Context  of  Portfolio  Targets   The  shaded grey  area   represents  our  portfolio   targets;  the  bold  blue  triangle   represents  an  individual   investment.     Source:  J.P.  Morgan   12 Impact Capitalism Summit 2014 Primer
  13. 13.     Once  the  targets  have  been  set  and  the  portfolio  begins  to  grow,  investors  are  then  faced  with   managing  the  investments  to  ensure  that  the  portfolio  delivers  both  impact  and  financial  returns  in   line  with  the  targets.   Financial  and  Impact  Risk  Management   Identify  the  risks  in  the  impact  portfolio   On  an  individual  investment  basis,  the  risks  that  arise  for  impact  investments  are  often  the  same   risks  that  would  arise  for  a  traditional  investment  in  the  same  sector,  region  or  instrument.  Just  as   we  abandon  the  trade-­‐off  debate  on  return  across  the  asset  class  and  encourage  deal-­‐by-­‐deal   analysis,  we  encourage  investors  to  assess  the  risk  profile  that  results  from  their  particular  impact   thesis  and  motivation.     There  are  also  some  cross-­‐market  risks  to  consider,  including  the  early  stage  of  the  market  and  its   supporting  ecosystem;  mission  drift;  the  responsible  combination  of  different  types  of  capital   (including  grants);  and  the  moral  hazard  of  recognizing  impact  failure  or  financial  loss.  The   development  of  the  market  over  time  should  erode  some  of  the  risks  associated  with  its  early  stage   and  ecosystem.  While  some  of  these  risks  will  remain  in  place,  investors  will  likely  develop  better   processes  for  recognizing  and  dealing  with  them.     Manage  risk  through  structural  features   Once  the  risk  profile  of  the  investment  is  determined,  investors  manage  it  using  structural  features   such  as  seniority  in  the  capital  structure,  fund  intermediaries  and  compensation-­‐related  or   covenant-­‐based  incentives.  With  respect  to  the  currency  risk  that  arises  for  investors  allocating   capital  internationally,  some  investors  referenced  diversification  across  countries  as  the  preferred   means  of  management.   Manage  friction  between  impact  and  return   Many  investors  cite  that  they  pursue  opportunities  where  the  impact  mission  is  synergetic  with  the   financial  return  pursuit.  Several  organizations  also  acknowledged  that,  at  times,  friction  can  arise   between  these  two  pursuits.  Some  of  the  challenges  referenced  include  the  investee’s  growth   coinciding  with  a  reduction  in  jobs;  the  investee  maintaining  mission;  or  ensuring  impact   measurement.  Some  investors  manage  these  challenges  by  building  covenants  referencing  the   mission  into  the  deal.   Portfolio  diversification   Investors  often  find  a  softer  approach  to  diversification  to  be  more  suitable  to  the  private  nature  of   this  market.  Rather  than  setting  exposure  limits  as  can  more  easily  be  done  for  public  equity   portfolios,  impact  investors  tend  to  start  with  a  more  opportunistic  approach.  They  assess  the  merits   of  investments  mostly  on  a  stand-­‐alone  basis,  while  monitoring  the  broader  concentrations  in  any   sector,  geography,  instrument  or  impact  pursuit.  Once  the  portfolio  reaches  a  critical  mass,  many  of   them  become  more  strategic  about  diversification,  considering  an  investment’s  individual  merits   alongside  those  in  the  context  of  the  broader  portfolio.   Impact Capitalism Summit 2014 Primer 13
  14. 14.     Looking  Forward   Challenges  should  ease  over  time   To  be  successful  today,  investors  need  to  be  realistic  about  the  stage  of  the  market,  employing   patient  capital,  bringing  a  dynamic  approach  and  taking  an  active  management  role  to  the   investment.  Whether  investing  directly  or  indirectly,  they  need  to  navigate  a  broad  ecosystem  to   ensure  success.  Investors  today  share  a  collaborative  spirit  in  meeting  these  challenges  with  the   broader  goal  of  catalysing  capital  towards  impact  investments.  This  research  has  been  a  first  step   towards  sharing  the  experiences  of  these  field  builders  to  help  investors  establish  a  strategic   approach  to  portfolio  management  for  impact  investments.     About  J.P.  Morgan  Social  Finance   J.P.  Morgan  Social  Finance  was  launched  in  2007  to  catalyse  the  growing  market  for  impact   investments  and  accelerate  the  delivery  of  market-­‐based  solutions  to  social,  economic  and   environmental  challenges.  Our  business  is  dedicated  to  growing  this  market  through  client  advisory   services,  principal  investments  and  research.   Disclosures   ________________________________________   J.P.  Morgan  is  the  global  brand  name  for  J.P.  Morgan  Securities  LLC  and  its  affiliates  worldwide.  This   research  is  written  by  Social  Finance  Research  and  is  not  the  product  of  J.P.  Morgan’s  research   departments. For further disclosures, please see the full publication at www.jpmorganchase.com/socialfinance. ________________________________________     Copyright  2012  JPMorgan  Chase  & Co.                                                                                                                             i The term “non-negative” is used to indicate, for example, a socially responsible investor that might employ some negative screening to exclude negative impact from a portfolio, but does not actively pursue positive impact. Readers should note that no particular correlation or relationship between impact, return and risk is implied. ii To ensure the investment profile is not oversimplified, the use of this framework is advocated – whether in three dimensions or more – in conjunction with a more detailed understanding of the investments, and never on a stand-alone basis. 14 Impact Capitalism Summit 2014 Primer
  15. 15. Impact Investing 2.0: 12 Outstanding Funds Point the Way Forward By Cathy Clark, Jed Emerson and Ben Thornley1 From its origins in socially responsible investing, community finance, microfinance, and international development, impact investing has emerged as a distinct practice. This has warranted the creation of new field-level infrastructure, like the Global Impact Investing Network and Impact Investing Policy Collaborative, and motivated volumes of excellent research adding tremendous depth to the conversation among practitioners. All this has played out in the first, “1.0 era” of the market’s emergence – where “observation” has necessarily trumped “evidence.” However while observation has so far been sufficient to align key stakeholders, and drive product development and demand from capital providers like high net worth individuals, private foundations, and even commercial institutions, it is no longer enough. The market has not been growing as fast as many practitioners had hoped, in part because the larger wealth advisors and institutional investors on which growth depends are demanding a level of product and performance specificity that only time and experience can provide. And to the extent that impact investing can be more difficult to perfect than traditional investing – operating as many impact investors do in newly forming markets, with financial tools and infrastructure that necessitate extreme creativity and collaboration – the need for evidence is even more acute. The three of us, together with colleagues at Pacific Community Ventures and CASE at Duke, have spent the last three years shifting the discussion from the “why” of impact investing to the “how,” by examining the practices and performance of 12 outstanding funds in detail, culled from an initial list of 350. Detailed case studies, information on our research methods, and full findings are available at our project microsite: www.pacificcommunityventures.org/impinv2. A recently released e-book, Collaborative Capitalism and the Rise of Impact Investing (John Wiley & Sons), also connects the experiences of the 12 funds to the bigger picture of a more outcomes-oriented, transparent, and responsive form of business and finance writ large. What the 12 funds demonstrate is that, while inherently diverse in its application, impact investing is in fact a cohesive discipline. With decades of practice to draw upon, there is no need to speculate on what impact investing might be or debate whether it is 1 The Impact Investor project – a research collaboration between Insight at Pacific Community Ventures, CASE at Duke University and ImpactAssets – was made possible with the generous support of Omidyar Network, Annie E Casey Foundation, RS Group, Heron Foundation, W.K. Kellogg Foundation, and Deutsche Bank. This article is an edited excerpt from the final project report published in November 2013, Impact Investing 2.0: The Way Forward – Insight from 12 Outstanding Funds. The 12 firms/funds studied include Aaavishkaar, Accion Texas, Bridges Ventures, Business Partners Limited, Calvert Foundation, Deutsche Bank, Elevar, Huntington Capital, The W.K. Kellogg Foundation, MicroVest, RSF Social Finance, and SEAF. Impact Capitalism Summit 2014 Primer 15
  16. 16. possible for investors to receive financial returns along with social and/or environmental impacts. This level of doubt was warranted in the 1.0 era, but the 12 funds we studied prove the opposite. The bottom line is this: a first generation of private impact investing funds has delivered on the promise of concurrently delivering financial returns and explicit social outcomes. Developed and emerging market equity and hybrid funds, all with some participation of commercial investors aiming for market-rate performance, have generated financial returns of 3-22 percent. Social debt funds – with primarily individual, philanthropic or policy-driven bank investors – have returned 0-3 percent, matching their targets and never losing a dime. We can now enter a “2.0 generation” of impact investing with confidence, knowing what practices undergird success and building on these lessons to bring the field to scale. Four Practices Common to 12 Outstanding Impact Investing Funds Outstanding impact investing funds undertake many practices common to all asset managers; they carefully nurture their brand, leverage all of the relationships at their disposal, are often headed or backed by singularly reputable or experienced individuals and institutions, demonstrate exceptional financial discipline, are models of operational excellence, and work relentlessly to support the growth of their investees. However there are four qualities that are distinct to impact investing: 1. Policy Symbiosis 2. Catalytic Capital 3. Multilingual Leadership 4. Mission First and Last Policy Symbiosis While many people believe that the most successful capital market is one in which government is least involved, our 12 funds prove that impact investing is grounded in deep cross-sector partnership that benefits from the government’s engagement. In fact the public sector is ubiquitous in impact investing at all levels of government, consistent with its strong interest in maximizing social and environmental benefits to society, and the promise that impact investing can deliver these benefits at scale. Many of our funds actively maintain relationships with government, either seeking direct investment from public entities or leveraging other policy incentives. And the 16 Impact Capitalism Summit 2014 Primer
  17. 17. relationship is not one-sided. The funds also use their experience in the field to influence the creation of more enabling and supportive public policy environments. The UK Government played a foundational role helping to form Bridges Ventures and provided a 1:1 investment match for every pound raised in the £40 million Sustainable Growth Fund I. Business Partners Limited was created as a partnership between the South African government and some of that country’s largest corporations. And Huntington Capital’s second fund received investment from institutions motivated by both the U.S. Community Reinvestment Act and California state-level regulations. Funds should be aware of policies that apply to them, cultivate relationships with public officials, be part of the field-level conversation, and invite policymakers to the table as a real partners in impact investing. Catalytic Capital The concept of Catalytic Capital is relatively intuitive: one set of investments triggers additional capital that may not have otherwise been available to a fund, enterprise, sector or geography, thereby generating exponential social or environmental value. We know that investors providing capital for strategic in addition to financial reasons have been critical to the development of impact investing; however, we did not expect Catalytic Capital to have been so prevalent. As it happens, every one of the 12 funds benefitted from, or deploys, Catalytic Capital. Catalytic Capital in the form of grants, guarantees, or concessionary or cornerstone investments may have the potential to negatively distort markets, particularly at the investee level. However at the fund level, our 12 case studies show Catalytic Capital has been nothing short of transformative, unlocking billions of dollars of non-catalytic investments. Accion Texas receives half of its $14 million operating budget for making high-impact microloans from grants—a proportion that is falling but will likely never reach zero. Deutsche Bank’s Global Commercial Microfinance Consortium was made possible by a grant from the Department for International Development in the UK, which provided operating income during fund creation, and additional security to other investors. And RSF Social Finance is becoming adept at using an “integrated” approach in its lending, tapping philanthropic capital, at the margins, to make more borrowers eligible for financing. Funds should re-conceptualize the motivations of investors (with an awareness of the wide range of factors for individuals and institutions that drive their engagement in impact investing), target and partner with investors who are both mission- and strategy- aligned, and create peer groups of structural innovators given the importance of layered funds in making newer or more idiosyncratic markets investable. Impact Capitalism Summit 2014 Primer 17
  18. 18. Multilingual Leadership Those responsible for making investments must execute with unshakable financial discipline, but successful fund leadership is about more than simply effective money management. The founders and leaders of the 12 funds in this study often had cross- sector experience in multiple essential areas: finance/business, policy, and impact/philanthropy. Multilingual Leadership takes this notion a step further and indicates the institutionalization of a fund’s ability to move seamlessly among diverse stakeholders and audiences. Taken as a whole, each fund team exhibited fluency in the vocabularies, networks, and unwritten norms of the private, public and nonprofit sectors. Kellogg Foundation’s Mission-Driven Investment program was created and led by two “intrapreneurs” with deep programmatic experience and institutional credibility, championed by a CEO who had been a pioneer in venture philanthropy, and implemented in partnership with a third-party investment consultant. MicroVest has a governing board mostly composed of social sector representatives, even while management operates autonomously with an explicit goal of achieving market rates of financial return. Funds should recognize the need for different kinds of expertise, leverage strong individual or institutional foundations into strong teams, be open to growth and transformation (constantly evaluating and adding expertise), and actively work to train the next generation of leaders to be multilingual. Mission First and Last While a defining piece of conventional wisdom in the 1.0 era has been that investors approach impact investing through either a financial-first or impact-first lens, this is rarely the case. In reality, funds put financial and social objectives on an equal footing by establishing a clearly embedded strategy and structure for achieving mission prior to investment, enabling a predominantly financial focus throughout the life of the investment. Knowing early and explicitly that impact is in a fund’s DNA, all parties (investors, investees and the fund itself) are able to move forward with the investment disciplines akin to any other financial transaction, confident that mission drift is unlikely. Towards the end of the investment, the focus of funds returns to the impact achieved according to a stated mission. Mission First and Last demonstrates that, in practice, every fund combines explicit impact intention with operational accountability to impact, and suggests that it is time to retire our dichotomous financial-first or impact-first thinking. 18 Impact Capitalism Summit 2014 Primer
  19. 19. There are a number of ways to essentially “lock in” mission. Calvert Foundation manages a community investment note registered in all 50 U.S. states accessible to non- accredited investors. The impact thesis and constraints of the fund are built into the registered security. The Bridges Ventures Sustainable Growth Funds I and II focus on a cluster of thematic areas where established social or environmental need creates a commercial growth opportunity for market-rate or market-beating returns, and then report rigorously on the impacts that its investees are delivering. RSF offers mortgage loans, construction loans, and working capital lines of credit exclusively to nonprofit and for-profit social enterprises that meet stringent impact criteria. Funds should lock in their mission (establishing a clear “investment thesis of change” highlighting the intentional social or environmental impacts they seek to create, and the manner in which they will be delivered through investment), align accountabilities with mission, track targeted metrics and strengthen feedback loops, and maintain absolute financial discipline. Looking Ahead When taken together, the four themes help explain why building scale is a gradual and deliberate endeavor:  Funds take the time to build teams with multi-sector experiences, approaches and skill sets;  They become familiar with policy and spend energy cultivating mutually beneficial relationships with philanthropists as well as governmental actors;  They are less masters of the universe than they are both masters of collaboration (soft skills) and financial structuring (hard skills); and  They recognize and act on their accountability to multiple stakeholders. We need to be careful about our generalizations and not claim them as universal too soon. Yet we are pleased to celebrate the arrival of the 2.0 era in impact investing: a core set of successful practices taken from illuminating, real-world examples of investors, funds, entrepreneurs and beneficiaries doing well and doing good together. Impact Capitalism Summit 2014 Primer 19
  20. 20. Impact  investing  as  part  of  a  responsible  investment  portfolio   By  Karin  Malmberg   Impact  investing  is  an  approach  to  responsible  investment  which  signatories  to  the  United  Nations-­‐ supported  Principles  for  Responsible  Investment  (PRI)  are  becoming  increasingly  interested  in.  We   work  with  those  signatories  to  explore  investment  opportunities  that  deliver  positive  environmental   and  social  benefits,  while  producing  attractive  financial  returns.   PRI  signatories  have  fiduciary  responsibilities  which  means  all  their  investments  must  meet  certain   risk  and  return  requirements.  We  might  therefore  talk  about  'finance  first'  impact  investing,  or   environmental  and  social  (E&S)  themed  investing.  Figure  1  below  illustrates  how  such  an  approach   fits  with  other  investment  approaches.   Figure  1:  The  spectrum  of  investment  approaches     Source:  Adapted  from  Bridges  Ventures   Institutional  investor  case  studies   These  seven  case  studies  demonstrate  how  E&S  themed  investing  can  form  a  valuable  part  of  an   institutional  investors’  approach  to  responsible  investment,  focusing  on  a  particular  aspect  of  the   investment  process.  All  major  asset  classes  and  several  themes,  such  as  affordable  housing,  health,   agriculture,  microfinance  and  sustainable  infrastructure,  are  covered  in  the  investments  profiled.   • Environment  Agency  Pension  Fund  This  case  study  describes  how  clear  and  stringent  ESG   requirements  were  embedded  into  the  tendering  and  appointment  processes  for  a  recent   mandate  in  environmentally  themed  funds  in  property,  sustainable  infrastructure,   forestry/timberland  and  agriculture/farmland.   20 Impact Capitalism Summit 2014 Primer
  21. 21. • Wespath  Investment  Management  This  case  study  outlines  how  this  US  investor  developed  its   highly  successful  Positive  Social  Purpose  Lending  Program  and  overcame  the  challenges  it   faced.   • Local  Government  Super  This  case  study  looks  at  the  Australian  pension  fund’s  environmental   and  social  themed  investments  within  four  asset  classes:  international  listed  equities,  private   equity,  sovereign  bonds  and  absolute  return  strategies.  It  describes  how  these  investments   help  LG  Super  hedge  against  climate  change  risk,  their  performance  to  date  and  how  LGS   identifies  and  executes  them.     • PGGM  This  case  study  outlines  how  the  Dutch  pension  administrator  goes  about   understanding  the  direct  and  wider  impacts  of  its  E&S  themed  investments,  illustrated  using   examples  of  how  it  applies  its  approach  to  microfinance  investments.   • Storebrand  This  case  study  looks  at  the  Norwegian  insurance  company’s  investments  in   health  and  agriculture  sectors  focusing  particularly  on  the  strict  criteria  Storebrand  uses  to   identify  and  evaluate  these  investments.     • Merseyside  Pension  Fund  This  case  study  outlines  the  rationale  for,  and  the  structure  of,   investments  made  to  support  local  regeneration.   • Christian  Super  This  case  study  focuses  on  the  Australian  pension  fund’s  investments  in   community  infrastructure  and  community  finance.  It  illustrates  the  clear  social  impacts  the   selected  funds  aim  to  deliver.  It  also  outlines  the  investment  structures  and  risk  mitigation   strategies  these  funds  employ  to  facilitate  institutional  investment.     Measuring  impact   The  paper  Understanding  the  environmental  and  social  impact  of  your  investments  explains  the   value  of  measuring  impact,  provides  guidance  on  what  investors  should  be  tracking  and  summarises   practical  tools  and  techniques  available.   The  paper  is  supported  by  two  case  studies  looking  at  indirect  investor  approaches  to  measuring   impact:     Obviam     Sarona  Asset  Management   PRI  in  Person  2014   PRI  in  Person  is  the  leading  global  responsible  investment  conference.  At  this  year’s  event,  taking   place  in  Montréal  22-­‐26  September,  topics  discussed  will  include  green  bonds,  impact  measurement   and  institutional  investor  case  studies.  Please  go  to  unpri.org/montreal  to  find  out  more.   Find  out  more   These  case  studies  and  other  resources  can  be  accessed  on  PRI’s  website:   http://www.unpri.org/areas-­‐of-­‐work/implementation-­‐support/environmental-­‐and-­‐social-­‐themed/     Please  contact  Karin.malmberg@unpri.org  if  you  are  interested  in  finding  out  more.   Karin  Malmberg  is  Manager,  Environmental  and  Social  Themed  Investing  at  The  United  Nations-­‐ supported  Principles  for  Responsible  Investment  (PRI)  Initiative.     PRI  is  an  international  network  of  over  1200  investors  and  intermediaries,  together  managing  over   US$  34  trillion  in  assets.  These  signatories  work  together  to  put  the  six  Principles  for  Responsible   Investment  into  practice.  Our  goal  is  to  understand  the  implications  of  sustainability  for  investors   and  support  signatories  to  incorporate  these  issues  into  their  investment  decision  making  and   ownership  practices.     Impact Capitalism Summit 2014 Primer 21
  22. 22.     Building  Impact  Investing  Portfolios:  From  Strategy  to  Policy  to  Implementation     Sonen  Capital  LLC  Authors:  Justina  Lai,  Associate  Director;  Will  Morgan,  Director  of  Impact;     Joshua  Newman,  Investment  Analyst;  and  Raúl  Pomares,  Senior  Managing  Director.     Key  Insights     • An   impact   investing   policy   is   the   critical   link   to   translating   an   impact   investing   strategy   into   tangible  implementation  steps.   • Impact  investors  can  benefit  from  an  additional  layer  of  due  diligence  by  using  specific  impact   lenses  to  identify  investments  that  fit  clients’  financial  and  impact  requirements.   • In  addition  to  diversifying  across  asset  classes,  impact  investors  can  increasingly  diversify  across   impact  sectors  as  markets  deepen.       Introduction:   The   following   was   adapted   from   Evolution   of   an   Impact   Portfolio:   From   Implementation   to   Results,   a   landmark   report   released   in   October   2013   by   Sonen   Capital   in   collaboration  with  the  KL  Felicitas  Foundation  (KLF,  or  the  Foundation).  The  report  demonstrates  to   investors  that  impact  investments  can  compete  with,  and  at  times  outperform,  traditional  asset  class   strategies  while  pursuing  meaningful  and  measurable  social  and  environmental  results.i     In   2004,   to   meaningfully   address   the   world’s   most   pressing   social   and   environmental   issues,   KLF   began   a   process   that   would   eventually   allocate   100%   of   the   Foundation’s   capital   to   impact   investments.  Over  the  seven-­‐year  period  of  2006-­‐2012,  the  Foundation  moved  from  2%  of  assets   allocated   to   impact   to   over   85%,   while   generating   index-­‐competitive,   risk-­‐adjusted   returns.   This   article   highlights   Sonen   Capital’s   strategy   for   building   impact   investment   portfolios,   utilizing   our   experience  in  investing  KLF’s  assets  as  a  case  study  to  concretely  illustrate  this  approach.ii    The  full   report  is  available  for  download  via  Sonen’s  website  at:  http://www.sonencapital.com/evolution-­‐of-­‐ impact.php     Creating   an   Impact   Investment   Policy:   Constructing   KLF’s   impact   investment   portfolio   required   following  a  framework  through  which  investors  could  move  towards  action  –  from  establishing  to   executing  and  maintaining  an  impact  investing  strategy.  This  cycle,  depicted  below  and  described  in   detail  in  Solutions  for  Impact  Investors:  From  Strategy  to  Implementationiii ,  provides  a  roadmap  for   building  impact  investment  portfolios.  Central  to  this  process  is  developing  a  comprehensive  Impact   Investing  Policy,  the  critical  link  to  translating  a  strategy  into  a  tangible  implementation  plan.     Impact  Investing  Cycle     Source:  Solutions  for  Impact  Investors:  From  Strategy  to  Implementation.  Rockefeller  Philanthropy  Advisors,  2009.     22 Impact Capitalism Summit 2014 Primer
  23. 23.   KLF’s   Impact   Investing   Policy   was   designed   to   incorporate   impact   criteria   into   the   portfolio   construction   process   and,   to   the   extent   possible,   select   impact   investments   that   satisfied   the   Foundation's  Investment  Policy  Guidelines.iv  The  selected  policy  targets  reframed  KLF's  Investment   Policy  with  respect  to  asset  allocation  to  achieve  both  financial  and  impact  objectives.     Anchored   by   rigorous   financial   analysis   and   ongoing   assessments   of   factors   affecting   macroeconomic   conditions,   the   asset   allocation   targets   are   still   designed   to   diversify   KLF's   investments  across  and  within  asset  classes,  while  achieving  lower  volatility  and  risk  over  time  to   protect  portfolio  capital  and  achieve  competitive  returns  across  market  cycles.   Figure  9:  KLF  Impact  Investments  by  Impact  Strategy  and  Asset  Class     Source:  Sonen  Capital     Portfolio   Construction:   As   KLF’s   assets   were   moved   into   impact,   a   balance   was   sought   between   financial   and   impact   considerations.   As   the   impact   investment   universe   expanded,   so   did   the   opportunity-­‐set   through   which   KLF   could   express   preferences   for   impact   themes   and   investment   views  according  to  asset  class  targets.  KLF’s  Return-­‐Based  Impact  investments  performed  in  line  with   their  asset-­‐class  exposures  while  providing  for  diversification  benefits.  The  impact  industry  has  since   matured  enough  to  offer  a  more  complete  set  of  investment  options,  making  it  increasingly  possible   to  find  financially  compelling  investments  across  asset  classes  that  achieve  required  impact  criteria.     Adding  “Impact”  to  Investment  Due  Diligence:  In  addition  to  the  fundamental  financial  analysis  and   discipline  that  goes  into  investment  decision-­‐making,  KLF  used  a  specific  impact  lens  based  on  the   Foundation's  charitable  mission  and  its  founders'  values  to  further  refine  the  investment  selection   process.   This   included   an   assessment   of   a   potential   investee's   impact   strategy,   impact   reporting   capabilities  and  fit  with  the  Foundation's  mission.  Meetings  were  set  up  with  portfolio  managers  and   analysts,  and  each  team's  investment  process  was  studied  to  understand  how  investment  decisions   were  made,  all  in  an  effort  to  understand  how  ESG  or  impact  factors  are  integrated  to  add  value.             Impact Capitalism Summit 2014 Primer 23
  24. 24.   Due   Diligence   (Public   Strategies):   We   classify   investment   opportunities   principally   according   to   three  categories,  listed  from  lowest  to  highest  impact:       After   categorizing   strategies,   quantitative   screens   for   financial   track   records   are   applied.   Impact   investors   should   analyse   not   only   the   returns   of   a   strategy,   but   also   attempt   to   understand   the   underlying  drivers  of  returns  and  risk,  including  the  factors  to  which  each  strategy  is  exposed.  After   promising  candidates  have  been  isolated  within  each  asset  class,  investors  must  thoroughly  analyse   managers’  impact  strategies.  As  investors  become  more  comfortable  with  the  options  in  the  impact   marketplace,   they   can   begin   to   think   about   “impact   allocations”   –   allocating   their   investments   optimally   across   various   impact   approaches   and   target   themes   –   in   addition   to   asset   and   risk   allocations.   Due   Diligence   (Private   Strategies):   For   investors   able   to   access   private   market   investments,   alternative  strategies  are  critical  components  of  an  investor’s  diversified  asset  allocation  strategies.   Private  investments  offer  both  compelling  economic  exposures  and  the  potential  to  capture  unique   impact   opportunities   through   highly   thematic   exposures.   For   example,   private   strategies   can   provide   exposure   to   direct   impact   in   themes   important   to   investors,   such   as   clean   energy   and   technology,   community   development,   sustainable   forestry,   sustainable   ranchland   and   financial   services  for  base-­‐of-­‐the-­‐pyramid  (BoP)  communities.v   Just  as  in  the  public  markets,  private  investments  require  extensive  financial,  impact  and  operational   due  diligence.  Investors  should  be  aware  that  the  due  diligence  process  is  iterative  and  non-­‐linear;   new   quantitative   and   qualitative   data   points,   enhancing   the   quality   of   due   diligence   and   ongoing   monitoring,  can  surface  by  integrating  impact  criteria  into  the  investment  process.     Asset   Allocation:   For   KLF,   once   appropriate   investments   were   identified,   each   investment   was   matched   to   the   Foundation’s   overall   asset   allocation   targets.   KLF’s   impact   investments   were   allocated   across   all   asset   classes,   making   it   possible   to   identify   specific   social   or   environmental   impacts   for   each.   As   a   greater   number   and   wider   spectrum   of   impact   investment   opportunities   continue  to  become  available  to  investors,  all  asset  classes  are  expected  to  be  capable  of  delivering   risk-­‐adjusted,  financially  competitive  and  mission-­‐aligned  impact  returns  to  investors.   Next   Steps   for   Investors:   For   investors   seeking   to   integrate   impact   across   their   investment   portfolios,  the  impact  investing  cycle  roadmap  can  serve  as  a  useful  guide  for  moving  from  strategy   to  implementation  to  results.     1. Ask  for  impact:  Asset  owners  should  no  longer  accept  the  premise  that  sacrificing  financial   performance  is  necessary  to  achieve  measurable  and  meaningful  impact.  Evolution  of  an   Impact  Portfolio:  From  Implementation  to  Results  can  serve  as  a  reference.   Responsible:   Negative  Screening   Sustainable:   Positive  Screening   Thematic:   Social/Environmental  Themes   When  high-impact   opportunities  are  unavailable   as  a  result  of  portfolio   construction  necessities,   investors  may  opt  to  screen   out  issue  areas  such  as   tobacco,  firearms  or  alcohol.   Investors  should  note  that  the   use  of  sometimes arbitrary   negative  screens  can  reduce   the  efficiency  of  portfolios  and   may  entail  certain  risk/return   trade-­‐offs.   Investors  can  add  value  to  the   investment  process  by   incorporating  ESG  criteria  or   sustainability  considerations  into   manager  or  security  selection.   Positive  screening  allows  managers   to  express  themes  and  investment   ideas  through  best-­‐in-­‐class   approaches  or  through  careful   selection  of  companies  that  manage   their  ESG  risks  and  opportunities  in   a  proactive  manner.   Thematic  strategies  look  to   focus  on  a  particular  social  or   environmental  trend  by   expressing  investment  ideas  that   are  best  positioned  to  benefit   from  exposure  to  the  theme.   Typically,  managers  identify  and   invest  in  the  most  progressive   companies  (or  other  issuers)   with  strong  ESG  performance   within  a  theme.       24 Impact Capitalism Summit 2014 Primer
  25. 25.   2. Reclaim  ownership  of  assets:  If  the  service  provider  is  not  willing  and/or  not  able  to  deploy   assets  to  impact,  another  service  provider  should  be  found  who  is.     3. Become   more   educated:   Growing   industry   networks   and   an   abundant   set   of   topical   resources  are  available  to  those  interested  in  learning  more.   4. Widen  options:  The  industry  continues  to  evolve,  and  investors  today  have  an  increasing   number   of   choices   to   implement   their   impact   strategies.   More   high-­‐quality,   turnkey   solutions  are  available  in  the  marketplace  than  ever  before.                                                                                                                               i  For  a  complete  understanding  of  the  strategies,  principles  and  performance  results,  please  see  Evolution  of  an  Impact  Portfolio:  From   Implementation  to  Results,  October  2013.  San  Francisco,  CA:  Sonen  Capital,  http://www.sonencapital.com/evolution-­‐of-­‐impact.php.   ii  Sonen  Capital  was  founded  in  September  2011,  and  therefore  much  of  the  performance  commentary  relates  to  investments  made  under   the  supervision  of  Raúl  Pomares  (with  significant  input  from  KLF)  before  the  existence  of  Sonen  Capital,  and  by  an  investment  team  that  is   different  from  that  of  Sonen  Capital.  There  can  be  no  assurances  that  Sonen  Capital  would  have  achieved  similar  performance,  or  that   investments  made  by  Sonen  Capital  in  the  future  will  achieve  their  stated  objectives  or  avoid  losses.   iii  Godeke,  S,  Pomares,  R.  Solutions  for  Impact  Investors:  From  Strategy  to  Implementation.  Rockefeller  Philanthropy  Advisors,  2009.   iv  The  complete  investment  policy  is  available  at  http://www.klfelicitasfoundation.org/  and  depicted  in  Evolution  of  an  Impact  Portfolio:   From  Implementation  to  Results.   v  Base  of  the  pyramid  refers  to  the  4  billion  people  with  annual  income  under  US$  3,000  in  local  purchasing  power.  Hammond,  A,   Kramer,  W,  Tran,  J,  Katz,  R  and  Walker,  C.  “The  Next  Four  Billion:  Market  Size  and  Business  Strategy  at  the  Base  of  the  Pyramid”.   World  Resources  Institute,  2007. Impact Capitalism Summit 2014 Primer 25
  26. 26. Agricultural Technology Impact Assessment Framework The Agricultural Technology (AgTech) sector is emerging as the key weapon in the battle for global food security. The triple threat of population growth, rising incomes among the emerging middle class, and limited arable land and water resources are projected to cause widespread food shortages, high levels of food price instability, and increased strain on existing environmental and governmental resources. AgTech seeks to address the food security threat using technological solutions to raise agricultural yields, improve supply chain efficiencies to lower food spoilage, improve water resource management, and combat food safety issues. AgTech innovations could raise global crop yields by up to 67% and lower food prices by up to 49% by 2050.1 From a financial perspective, the high demand for food security solutions could result in attractive exit valuations and potentially compelling cash yields. This said, several debates have emerged that question the ultimate beneficial impact of AgTech investments beyond increased crop yields. Is there impact intentionality in AgTech, given that exits are likely to involve strategic sales to large multi-nationals operating in the food and agri industries? Does AgTech facilitate the industrialization of food production, with potentially negative environmental consequences? Does it threaten organic/natural, local farming practices? Are production yields rising at the potential expense of public health, due to the unknown consequences of genetically modified crops and increased reliance on hormones and antibiotics in animal proteins? Is any AgTech benefit trickling down to small scale farmers, notably those in developing economies? The purpose of this paper is to provide investors with a framework for making informed decisions about whether or not to pursue investments in the AgTech sector, considering all sides of the debate, most notably the ultimate social benefits of an adequate food supply vs. the question of intrinsic impact. This should be done within the context of the investor’s investment philosophy and financial objectives. Decision points to frame an Investor’s AgTech strategy:  To what extent does the investor want exposure to the AgTech sector? Why?  What is the investor’s position on the lack of impact intentionality in most AgTech investments vs. the end goal of increased food security? Does the meaningful benefit to society outweigh the impact mission drift risk?  Can an investor occupy a position of innovation leadership in impact investing, yet still invest in the AgTech space? Does AgTech investing optimize the investor’s capacity to add value?  Would direct investing in AgTech be a better strategy to pursue, as it would allow investors to seek out specific AgTech investments that could offer intrinsic impact?  If we define success as “the intention of an investment being materialized and fulfilled,” then what does that look like in the AgTech context? There are three reasons investors may want to participate in AgTech investing: 1. To generate positive financial return from a sector with projected high product demand. 2. To enhance long-term food security through new technologies. 3. To ameliorate food inflation. There are three primary strategies to pursue exposure to the AgTech sector: 1. Direct private investment into AgTech companies. 2. Investment in AgTech companies through the public securities’ markets. 3. Investment in private funds focused on AgTech, mainly using PE or VC vehicles. 26 Impact Capitalism Summit 2014 Primer
  27. 27. Backup Research/Thoughts on AgTech Trends driving the AgTech debate:  Population growth. While the rate of growth is slowing, world population continues to expand: it is expected to reach 9.1 bn by 2050, a 70% increase.2 This will drive increased demand for food, as well as higher prices.  Rising food prices are driving more people into poverty. 110 million people were driven into poverty, and 44 million more became undernourished, in 2008. 925 million people go hungry because they cannot afford to pay for daily nutrition. In many developing countries, people spend 50-80% of their income on food.3  Growth in EMG middle class. Emerging markets are also seeing unprecedented growth in the middle class, as income levels rise. GDP worldwide is projected to increase by 3.3% annually over the next decade, but by 5.6% annually in emerging markets. This will increase demand for animal protein and certain produce, both of which previously were too expensive for this group. Meat consumption during this period is projected to rise 2.4% annually in emerging markets, vs. 0.9% in developed countries.4 Demand for livestock feed, and the land on which to grow it, will rise as a result, putting additional pressure on traditional food resources.  Food inflation. Despite declining per capita consumption of wheat and rice, the rising population, particularly in developing countries, is expected to increase global demand for staple food grains. According to the USDA, 82% of the increase in world wheat consumption over the 2013-22 period will be driven by emerging markets.5 This could result in food inflation spikes similar to that seen during the 2008 food crisis, as global supply curves destabilize.  Increased transportation costs. Inexpensive transportation fuels have made the global food supply chain profitable and efficient. Increased transportation costs threaten this supply chain, as the countries who may experience sharp increases in food import needs are the same countries least able to afford it.  Limited land supply. There is a limited supply of arable land, water resources are becoming more scarce, and desertification continues to claim previously arable land across the globe. Farmland prices in the US are rising at unprecedented rates, up more than 400% over the last ten years, and more than 90% over the past five. 6 This ultimately increases the end cost of food to the consumer.  Land grab in EMG. Increased demand for arable land is resulting in land grabs in emerging markets, which is destroying rainforests and reducing carbon offsets, disrupting indigenous populations, increasing the strain on the water supply, increasing the burden on the global food supply chain and creating mono-cultures in previously diverse food ecosystems.  Strain on water resources. Rising demand for food, and notably the growth in animal protein consumption, will increase agriculturally-based water demand. 1 kg of rice production uses 3,500 liters of water, whereas 1 kg of beef requires 15,000 liters. Current water management techniques in agriculture are changing ecosystems significantly, and rendering the provision of ecosystem services ineffective. The external cost in the US is US$9–20 billion per year.7  Food loss/waste. 30% of food production is lost or wasted each year, meaning the productive inputs (water and land) are also wasted.8  Greenhouse Gases. Agriculture contributes to greenhouse gas emmissions.9  Biodiesel demand. Rising demand for biodiesel is increasing demand for vegetable oils in emerging markets. AgTech investments can ameliorate some of these issues: Benefits: Impact Capitalism Summit 2014 Primer 27
  28. 28.  Poised to raise crop yields by up to 67% and lower food prices by up to 49% by 2050.10  Increase productivity and crop yields on existing farmland through technological advancements in seed technology, fertilizers, agri equipment, and precision agriculture (notably irrigation).  Improve animal protein yields through programs and investments promoting animal health and innovations in livestock feed.  Reduce food spoilage and loss through supply chain innovations, with cold storage being a notable near-term opportunity. Similarly, vertical integration or direct grower/distributor/consumer interaction can reduce food cost.  Increase effective water management through improved irrigation techniques that reduce water waste during the growing process; develop water recovery/repurposing systems to increase water recapture.  Reduce food safety issues through innovations in diagnostics, processing, and packaging.  Solid investment exit opportunities exist through strategic sales. High demand for food security solutions could result in attractive exit valuations and interest from multiple buyers. However, there are concerns arising from the AgTech strategy: Risks:  Mission drift upon exit: Strategic sales would likely be to large companies in the food and agri business, resulting in an increased industrialization of the food supply. Many of these corporations are utterly devoid of impact intentionality (example: ConAgra).  Higher crop and protein yields are often achieved through genetic modification to seeds and crops, and hormones and antibiotics used in animal protein production. Debate continues over the long-term public health impact of these techniques.  AgTech innovations may not be environmentally friendly (ex: pesticides and fertilizers).  Increased automation in the farming process could reduce jobs for LMI populations.  The potential for higher profits via rising crop yields, plus a lack of environmental regulation around land usage, could encourage additional transformation of rainforest/jungle to farmland, resulting in the negative externalities mentioned above, but potentially impacting region-scale ecosystems.  Productivity improvements in emerging markets meant to support domestic consumption needs may instead enhance the export market, depending on relative pricing. Investor Interest:  Increased awareness of the food security dilemma and the potential for solid returns is attracting more investors to the sector. However, the development of AgTech-focused investment vehicles is still nascent, resulting in fewer fund investment options for interested AgTech investors.  To our knowledge, there are no purely AgTech-focused funds that require impact intentionality on behalf of their portfolio companies (funds that eschew the environmental and social negatives mentioned above while also investing solely in AgTech).  Investing in AgTech may result in deviation from parts of the investor’s stated investment policy. Impact:  AgTech investments bring an undeniable enhancement to global food security by raising the productive capacity of existing farmland and the efficiency of the agricultural supply chain.  Productivity increases could help control food inflation.  More productive farmland could reduce the demand for land conversions in emerging markets (I know this conflicts with a similar point listed under Risks; it could go either way).  Water consumption and waste could be reduced. 28 Impact Capitalism Summit 2014 Primer
  29. 29.  A greater share of the value chain could be pulled to the producer, as technology-enabled farmers can connect directly to end markets. Complications:  A debate has evolved within the impact investment community concerning the need for food security (an adequate, affordable food supply, notably to emerging market populations) vs. the environmental need for sustainable and natural farming, local agriculture and LMI livelihood promotion, and concern over the public health unknowns related to productivity enhancements. Impact investors recognize that all aspects of the argument present pressing concerns, but disagree on which is most important. Does the investor need to formulate a view concerning this debate?  Does the investor’s commitment to impact intentionality outweigh the fact that most AgTech funds do not invest with the goal of creating social impact, despite their ultimate goal of increased food security?  Can the investor occupy a position of innovation leadership in impact investing, yet ignore the concerns above? Notes: 1. http://www.ifpri.org/pressrelease/agricultural-technologies-could-increase-global-crop-yields- much-67-percent-and-cut-foo 2. UN http://www.un.org/waterforlifedecade/food_security.shtml 3. Ibid. 4. http://www.ers.usda.gov/amber-waves/2013-august/developing-countries-dominate-world- demand-for-agricultural-products.aspx#.Uzdgs1ydrwI 5. Ibid. 6. http://www.ncreif.org/farmland-returns.aspx 7. http://www.un.org/waterforlifedecade/food_security.shtml 8. Ibid. 9. Ibid. 10. http://www.ifpri.org/pressrelease/agricultural-technologies-could-increase-global-crop-yields- much-67-percent-and-cut-foo Disclosure: The CAPROCK Group, Inc. (‘CAPROCK”) is an SEC Registered Investment Adviser. CAPROCK provides individual client services only in states in which it is filed or where an exemption or exclusion from such filing exists. Provided for informational purposes only. Independent advice should be sought in all cases. Investment in securities or financial instruments involves the risk of loss. Impact investing does not guarantee any level of performance. Past performance is not a guarantee of future performance. Alternative and private investments, including private placements, involve additional risk, including lack of liquidity, restrictions on withdrawal/redemption/transferability and the risk of loss of a full investment. Because these types of investments involve certain additional degrees of risk, they should only be utilized when consistent with the client’s investment objectives, tolerance for risk, liquidity and suitability. Impact Capitalism Summit 2014 Primer 29
  30. 30. TOTAL  PORTFOLIO  ACTIVATION     A  FRAMEWORK  FOR  CREATING  SOCIAL   AND  ENVIRONMENTAL  IMPACT  ACROSS   ASSET  CLASSES   A  paper  published  by  Tides,  Trillium  Asset  Management,   and  Tellus  Institute  has  developed  a  novel  framework   for  pursuing  social  and  environmental  impact   opportunities  across  asset  classes.   The  study  “Total  Portfolio  Activation,”  by  Joshua   Humphreys,  Ann  Solomon  and  Christi  Electris,  provides   concrete  steps  to  help  institutional  investors  begin   working  toward  a  fuller  activation  of  their  portfolio  to   advance  their  mission.   The  basic  insight  that  drives  Total  Portfolio  Activation  is   that  every  investment  across  every  asset  class  has  social   and  environmental  impacts—positive  and  negative.  The   paper  provides  both  a  framework  and  a  set  of  analytical   tools  to  help  mission-­‐driven  investors  understand  the   specific  impact  opportunity  set  that  can  be  pursued.   In  addition  to  wide-­‐ranging  research  on  the  burgeoning   field  of  sustainable,  responsible,  and  impact  investing,   the  authors  relied  on  the  advice  and  examples  of   numerous  investors,  investment  officers,  and  fund   managers  who  agreed  to  speak  about  their  efforts  to   pursue  investment  impact,  whether  across  their   portfolios  or  within  asset  classes.  With  case  studies  of   The  Oneida  Trust,  Equity  Foundation  and  Dominican   Sisters  of  Hope  among  others,  the  report  provides   specific  examples  of  investors  who  have  begun  to   activate  increasing  allocations  of  their  portfolios  for   deeper  social  and  environmental  impact.     Total  Portfolio  Activation  outlines  four  related  areas  of   activity  where  opportunities  for  impact  can  be  readily   seized  within  each  asset  class  and  ten  key  steps  that   investors  can  take  in  order  to  implement  the  Total   Portfolio  Activation  framework.         Download  the  full  report,  Total  Portfolio   Activation:  A  Framework  for  Creating  Social   and  Environmental  Impact  across  Asset  Classes   http://croataninstitute.org/publications/publicat ion/total-­‐portfolio-­‐activation-­‐2012     The  following  is  an  excerpt  from  the  paper:   nterest  in  investment  that  pursues  social  and   environmental  impact  has  exploded  in  recent   years.    Although  opportunities  for  impact  investing   have  emerged  across  asset  classes,  most  impact-­‐ investment  activity  has  remained  largely  confined  to  a   I   30 Impact Capitalism Summit 2014 Primer

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