Impact Investing for Foundations and Family Offices

 – Aligning your investing needs with your values

 A Deetken Impact webinar with Kelly Gauthier, Managing Director and Partner.

This recording is distributed for general informational and educational purposes only and is not intended to constitute financial, legal, tax, accounting or investment advice. The information contained herein is does not constitute a solicitation, recommendation, endorsement or offer to buy or sell any security or other financial instrument. The information, opinions and views contained in it have not been tailored to the investment objectives of any one individual or organization, are current only as of the date of the recording and are subject to change at any time without prior notice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation to purchase the investment or as a guarantee of any specific outcome.

Transcript

[Victoria] Today many of us are looking for sound investments, but few find opportunities that truly make a difference both to our portfolios and the communities in which we invest. We’re here today with some insights to help. I’d like to introduce our two speakers. Alexa Blaine, Co-Founder and Managing Partner at Deetken Impact and Kelly Gauthier, Managing Director at Rally Assets. First off, may I ask you to introduce yourself and your company?

[Alexa] Alexa Blaine, Managing Partner of Deetken Impact. We are an impact asset management firm focused on Latin America and the Caribbean.

[Kelly] Thanks for having me. My name is Kelly Gauthier and I’m the Managing Director at Rally Assets. We are an impact investing asset manager and we focus specifically on impact investing across all asset classes.

[Victoria] Great. Now, first thing, let’s just check we’re on the same page. This decade has already been defined as sort of the decade of action, and the role of impact investing in fighting climate change and achieving the United Nations SDGs and private capital is absolutely essential to get us there. But let’s just understand really, what is impact investing?

[Kelly] Yeah, I can start there. And Victoria, thank you. And I agree with the decade of action; that’s something that we’re actually focusing on here at Rally as well. So in terms of impact, investing, the terminology can be complicated and confusing. And it can be a barrier for some folks – responsible investing, sustainable investing ESG and impact. So the way that within the community that we define impact investing is really focused on intentionality. And so looking at that intention within your investments to not only generate a financial return, but to create a positive impact either on the planet or on people. And so that intentionality needs to be present, both in the investor and in the investee. So the investor has to also be looking to intentionally create that impact. And then between them, they need to be measuring that impact, and being accountable to the type of impact that they’re trying to create and how well they’re actually doing that.

[Victoria] That’s really interesting. I mean, the two things, I’m picking out intentionality and measurability. So that seems key.

[Alexa] I totally agree with that definition. Yeah, impact investing is really about that intentionality and being deliberate about where you decide to place your capital. Like you say, for companies, who you raise your capital from. And it’s not about exclusions, right. It’s not saying, you know I don’t invest in in this, or I don’t invest in this sector. That can be part of it but impact investing is really about selecting your investments in a way that is designed to achieve a specific community or environmental benefit, and is also where you are looking to achieve a financial return.

[Victoria] So, tell me a bit about the history of impact investing and its growth as an investment approach.

[Alexa] I can talk about it from my perspective as a fund manager, I think Kelly has a much more broad-based market view. Speaking from our perspective, when we started this business about 12 years ago, impact investing didn’t really exist, or it certainly wasn’t well known. And we  founded this business, in part because this is how we wanted to invest. We wanted to be able to put our money to work in a way that was in alignment with our values. And at least, you know, as Canadians, there weren’t a lot of options. I think the impact investing market has grown more quickly in Europe and in the United States. But at the time, there just weren’t products available for people like us.

And since then, there’s really been a proliferation of funds and I think also the emergence of some really high-quality advisors and intermediaries like Rally Assets. And that’s helped a lot. But you know, still impact investing is mostly private market products, it’s still not typically offered by mainstream banks or through traditional channels. So it can still seem kind of opaque to new investors that are coming into the space. Now we are starting to see, with the assistance of intermediaries, and the rise of some lower risk products as well, in the space, the contribution of blended finance, which is helping to de-risk a lot of products. As well, just recently, at least from our perspective, we’ve started to see a surge of family offices and foundations enter the space. And we welcomed some new investors into our funds last year, and for many of them this was their first impact investment. So that was really exciting,

[Kelly] I don’t disagree with anything Alexa said, I think the only thing I would add is really across the growth across asset classes. And so I think, even three or four years ago, impact investing was very much seen as only being in the private markets and being accessible to accredited investors or institutional investors. And that ESG and responsible investing was the domain of public equity and fixed income. What we’ve seen is that, you know, if we go back to the concept of intentionality, I think that what we’ve seen is investors wanting to intentionally make an impact across their asset classes, and very different kinds of investors coming to the table to have that conversation. And I think that’s driven entirely by where our social dialogue is at, where the types of conversations that you’re having at the dinner table, be that with colleagues or family or your children around these topics, and how those relate back to what you’re doing at work and how you’re investing your capital.

“Fundamentally, foundations and family offices get it. They’re mission-driven organizations. And once they understand that this opportunity is possible for them with their capital, they get it and they absolutely understand that they have an opportunity to have impact with more than two-and-a-half percent of their capital.”

 

[Victoria] I think that’s very interesting, because it is all about alignment of values, and actually now you have an option to do so when you’re investing. We’ve seen a growing number of family offices and foundations investing for impact. So why is this a good fit for them?

[Alexa] I think what makes foundations and family offices a little bit different from other institutional investors is that they’re really acting as kind of stewards of a legacy. And there can often be very strong values behind that. And I think for that reason, family offices and foundations can be particularly thoughtful about where they’re putting their money, and there’s a real desire to know what your capital is doing on the ground. I think impact investing can really meet a lot of those requirements, and in a way that perhaps other investment approaches don’t, because I think we’re able to now provide impact investment products that can help to contribute to a specific mission, whether that’s, you know, we want to empower women, we want to have an impact on climate change, or we were in pursuit of social justice; you can really invest along each of those themes now, because the products have emerged.

I think another way that family offices and foundations sometimes seek to magnify their impact by investing in a way that’s going to draw other investors in that maybe are not as mission driven. We have seen that in some of our funds, where a foundation may come in and make an investment, perhaps provide like low-cost debt into a fund, which will enhance the returns and then bring in other private sector investors. So I think that blended finance model is also really allowing people to see how catalytic their capital can be.

[Kelly] I think I’d add two things. I left the pension industry, working in responsible investment in the pension industry, to come and work with foundations and family offices. And it’s particularly for the reason that Alexa outlined, that fundamentally, foundations and family offices get it. They’re mission-driven organizations. And once they understand that this opportunity is possible for them with their capital, they get it and they absolutely understand that they have an opportunity to have impact with more than two-and-a-half percent of their capital. And so unlocking the rest of that capital to align with their mission and to do something that they feel strongly about, if they can do so in a responsible and prudent way, which is what we’ve been busy proving for the last 10 years is, is aligned with what they would like to do. I think that’s one hurdle that larger institutional investors still have to cross. And so I think that part helps in terms of foundations.

The other piece is really thinking and what we certainly, you know, gently press our clients to think about is, what is the utility of this capital? Why is this capital here? What does this capital need to do? What is the real risk profile of this capital? And so if this capital is put there was in doubt, or it has the intention to have a mission-specific output, then you should be looking at all the different ways in which you can do that, and not just traditional avenues and looking for different models and new ways that this capital can play a role and, and catalytic ways are some of those, there’s lots of different structures I can use, but it opening your mind to what those possibilities could be.

[Victoria] Could you give me some examples of investments that have resonated with family offices and foundations and why?

[Kelly] I’ll probably come at it more from a portfolio perspective. And that’s the way that we work with our clients. With our foundation clients, we have some that come in, as Alexa is indicated, specifically to target a certain issue. They want to target a very specific issue. And they’re looking for investments either across portfolios, and across asset classes to do that, or maybe within a specific asset class. We also have other investors that come to the table from an asset class perspective, that are looking for broad-based impact be that in the public markets or in the private markets. And so we can create a portfolio for clients that pivots in either one of those directions.

I think thematically some of the trends that we’re seeing really pick up steam, both from an interest in and a product-based perspective in Canada. Real estate based assets have been the cornerstone of the growth of this market up until now. And I think, we’re seeing a real push on gender and diversity, inclusion and looking for products that reflect those values, not just in terms of endpoints, but also operationally and how that works in a product. I think we’re seeing a lot more conversation around nature-based capital, and what that looks like, not just the renewable energy and that part of the climate solutions package, but also around how we’re dealing with our natural environment, how to capitalize on some of that, and Canada has been way behind some other regions in terms of taking advantage of those opportunities.

[Alexa] I can share some examples of investments that we’ve made. So through the Ilu Women’s Empowerment Fund, which has a broad regional focus in Latin America, a core holding for us is Pro Mujer, which is Spanish for, for women. And it’s a leading Latin American women’s development organization started as village banking or micro finance three decades ago, and since that time has really evolved into what we see as best practices for financial inclusion for women and girls, where they are providing a real full set of services for women entrepreneurs that include financial products, but also health services, so primary health services, preventative health services, and education. We’ve been investors with them for seven years, and they’ve actually now become our partner in investment management for the Ilu Women’s Empowerment Fund.

And then another example, on the sustainable energy side, you know, we’re supporters of a business called KW financial, which is really interesting business where we were able to provide about $5 million of equity through our sustainable energy funds and support a portfolio of commercial and industrial rooftop solar installations. And those would be in the Dominican Republic, and also in the broader Caribbean Basin. And what we really liked about that was that this is an innovative business solution that is scalable, and could be replicated in other areas of the region. The Caribbean is one of the world’s most vulnerable regions to climate change. And in addition, you know, is characterized by typically very high energy prices, because these countries are often reliant on imported fossil fuels. So there’s this real alignment where providing solar capacity has a really positive climate action, impact and also can make energy a lot more affordable for the client. That project is a real way to demonstrate that these projects are economic when you work with an experienced sponsor and where you bundle several commercial and industrial clients together to make it efficient for capital to flow into the marketplace.

“There are products that have a ‘light green’ type of investment thesis, and that’s OK if they’re being transparent about what they’re aiming to achieve, and the way in which they’re aiming to achieve it; it doesn’t have to be the deep end of the pool every time. For the broader investment community, we actually need products along that spectrum that have different investment characteristics and impact profiles, so that different investors can participate in different ways.”

[Victoria] Really interesting seeing the breadth of projects you’ve been involved with. But one thing that sort of when I’m reading around about impact investing, you know, I see quite a few comments about impact washing…

[Kelly] Yeah, so there’s definitely a lot in the press right now. That is sort of counter to our cause. And I think that the prevalence of those articles is going to increase.

On the impact washing and the greenwashing, I think currently there’s a separation between understanding what the products are designed to do, what the investment strategy of those products is, versus the way that they’re being judged in the public eye and in the media. So I think that can obviously be really misleading in terms of the way that that press is out there. There are legitimate concerns around impact washing and greenwashing, for sure. But those have to be within the context of what the investment strategy is intended to create. There are products that have a ‘light green’ type of investment thesis, and that’s OK if they’re being transparent about what they’re aiming to achieve, and the way in which they’re aiming to achieve it; it doesn’t have to be the deep end of the pool every time. And for the broader investment community, we actually need products along that spectrum that have different investment characteristics and impact profiles, so that different investors can participate in different ways. I think that point is really important when thinking about impact washing.

The metrics piece is something that all folks in this industry have struggled with; it’s not a science by any means, is very much an art. And so different funds, such as Deetken are trying to figure out how to do this for their own fund. The challenge for us is really quite different because we are looking at it from an investor’s perspective. So how do we aggregate all the pieces in an investor’s portfolios, such as Deetken, and then roll that up so that an investor can have a sense for what their overall portfolio looks like how that relates to other parts of their portfolio that maybe somebody else is managing, you know, mainstream products and those pieces.

And so we’ve created a framework internally that we’re using to do that. It is focused on the SDGs, the Sustainable Development Goals, and it’s utilizing the IMP, which is the Impact Management Project. And so those are two standards that are being used relatively widely. But there’s a big difference too, between, you know, the public equity side, where you can pull in lots of data. There is publicly available data on the private equity side but it’s a much more manual process, as Alexa certainly knows, and in doing it for her fund. Aggregating that is highly labor intensive.

[Victoria] Alexa, do you want to speak to that?

[Victoria] Just touching on the impact washing point, maybe this is more of my personal perspective, but I still see impact as a pretty high touch investment approach, I think you typically need to have a lot of communication and engagement with your investees to really make it work and to really achieve the outcomes that you are aiming for. And so for that reason, I think impact investing is still something that you’re typically going to be talking about in millions and not billions, and certainly not trillions.

So when people are talking about these billion dollar funds or bonds, you know, I would dig pretty deep to confirm that there really is that kind of impact being created here.

And, when you’re looking at metrics, there’s counting, right, you can count the number of women that are affected or the number of services that are provided but there’s also that quality aspect. When you’re looking at jobs, you can say, this many jobs were created, but what’s the quality of that job? Is it a fair wage? Is there a diverse workforce?

Trying to dig a little bit beyond those headline figures can really help to confirm that this is an impact investment, or it’s not.

And then, on the metrics side, yeah, like Kelly says it’s a constant work in progress. I think like a lot of other impact investment funds, we’ve aligned our impact measurement framework with the Sustainable Development Goals. And we’ve found that to be a really helpful way to communicate our impact to our investors. So we’ve done that across all three funds. So for our investors, you receive a quarterly report showing the impact metrics of the fund versus all of those goals. So in the case of the Ilu Women’s Empowerment Fund, a big one is, of course, gender equality, but we also look at decent work and economic growth, we look at health and we look at education, and we look at affordable and clean energy, and we are able to provide an update regularly based on the information that is provided by our portfolio companies.

But you know, we’re always looking to improve. And so one thing that we’ve recently rolled out for the Ilu Women’s Empowerment Fund is really enhanced, gender-based reporting. We now have a gender smart investment framework where we are going to each of our portfolio companies and talking to them about their gender smart business practices. And for us that’s 33 questions about the women served in your business, women in leadership and governance, how you think about gender and your value chain. And you know, as that data is coming back, and we’ve done about two-thirds of our portfolio now, it’s this incredibly rich data set of qualitative and quantitative information. We’re still working on how we’re going to be reporting on that to investors. So we’ve done some and then I think you’ll continue to see more over time. But it’s a really interesting part of our business and a challenging one.

[Victoria] And I’m guessing it also depends on what people are looking for. They’re going to be looking slightly different metrics so that your investors will probably have an influence on that just as much.

[Alexa] Oh, absolutely. Especially like very large institutional investors and development banks. They have a framework and that’s how they want to receive the information. And in some cases, that’s bribing harmonization of reporting as well, which is probably a good thing.

“I don’t think that the risk-return profile is really that different than mainstream investing. It’s very much asset class by asset class.”

[Victoria]  I have my first question coming in: Can you talk a little bit about the sort of different risk returns that are out there?

[Alexa]  I think in the past impact investing, was really seen as kind of a high-risk activity where you were investing in really early stage startup companies. And, you know, it had a certain profile. Over the years that has really changed and that you can now invest across the risk-return spectrum, and like Kelly was talking about, there are some, you know, basically like GIC, what’s the US equivalent of a GIC? You know, savings products, basically, that have low return and, and are invested in in impactful ways, and are very low risk. And then there’s also a fixed income products, there’s equity products. And we’re also seeing the rise of blended finance products where, for example, for our fund focused on Central America, the Honduras Renewable Energy Financing Facility, we actually have a portion of the capital was provided by the Inter-American Development Bank then was placed at first lost other investors. That was really meant to catalyze additional investment into, in this case, Honduras. Any investments that do not go well, in that country, the first loss would be taken by this catalytic investor. And that really helped us to raise additional private sector capital for that fund, while still achieving our mission of deploying capital in Honduras. So these kinds of structures can be really helpful to fine tune the risk-return profile, so that each investor is at a place where they’re comfortable.

[Kelly]  I don’t think that the risk-return profile is really that different than mainstream investing. It’s very much asset class by asset class. And if anything, the data and some of the better meta studies that we’ve seen over the last few years have shown that looking at impact and ESG is neutral to positive in terms of risk and return. What we are definitely seeing on the ground is that, at this point in our societal development, we are seeing a huge amount of movement into this area, we’re seeing tremendous benefits in terms of reducing risk, in terms of HR in terms of personnel, people want to work in businesses that are aligned in this way. They have lower cost of capital almost universally; again, we’ve got lower risk businesses that are doing better things that have a more sustainable out outcome for the future. And that helps their financial returns.

[Victoria] Question, How can I get started? Do I do it myself? Or hire someone? Are there any investment minimums? And what are the three fee structures?

[Kelly] I can start with some of those. We get the ‘how do I get started? And do I do it myself?’ question all the time. And that shows up for a lot of folks, particularly in the foundation space of the barrier. You know, there’s a saying that if you know one foundation, you know… one foundation. In the foundation space, we see foundations that, particularly outside of the Canadian boundaries, that are really large and well staffed and have all sorts of support services. And we also have lots of foundations that have no staff, or one staff and try to figure out how to do this.

I think there’s a few basic steps. So one is to educate yourself to listen to webinars like this and read materials. There’s a lot out there, sort of a one-on-one level to say what is this? How do I do it? Where do I even get started? I think for foundations universally, regardless of their size, you have a board, you had investment committees. And so getting those folks, not just the one champion, up to speed and interested in the subject matter and willing to move forward.

The governance piece of this takes a while to get everybody there, it takes a while for folks to figure out the way in which they want to do this. And then based on your scale, you can decide whether this is something you want to take on internally and train up a staff member and really dive into this or if it’s something you want to outsource. And there are increasingly more options for getting some help on this.

I think it is still true in a lot of spaces that asking your existing investment managers won’t necessarily get you anywhere. But you’re more likely now than you were three or four years ago. And even if it doesn’t get you anywhere, please keep asking those questions, because all asset managers need to be answered the answering these questions.

And then, reach out to the right people. I think one of the things that I love the most about working in this space is that it is incredibly collaborative and generous. Alexa and I probably spend far more of our time answering questions for folks, because we really want to help them that is good for either of our business models. That is the nature of the folks that that we work with and the place that that we choose to spend our time.

[Victoria] Alex, do you want to add to that?

[Alexa] Investment minimums have come down a lot. I mean, this definitely used to be a space just for high net worth and large institutional investors. But now you can do impact investing with $500 or $5,000. There’s quite reasonable investment minimums and they’re coming down all the time. I don’t think that that needs to be a barrier anymore. But I think for some equity funds there’s still the typical private equity $1 million minimum, as well. It’s just a question of really understanding the landscape and knowing what products are available

[Kelly] Within different communities, there’s other groups that are doing this. So, CFC, the Community Foundations of Canada provides support for their members. PFC does the same thing in the philanthropic side. There’s lots of different associations and groups that are starting to focus on this and look at it. The only other thing I’d add in terms of minimums is the retail space has not yet developed really globally, and certainly not in Canada, on this front. And so that is the holy grail for some folks and what some people are seeking. And certainly, it is one avenue towards really democratizing this process. We’ve seen more movement in Europe and in the United States than we have in Canada. People get there, but it’s, it’s not there yet.

“Impact investors are looking not just at what a company does that would get it excluded, but also how they’re doing it. “

[Victoria] Can you accommodate specific exclusions that we may have in our investment policy statement?

[Alexa] Typically, yes. The most common exclusion is fossil fuels that we have encountered. And that’s easy for us. Because we don’t invest in that space, so we have been able to accommodate that. I think most other exclusions, you know, like munitions and tobacco, these are not typically things that are in our portfolio. So those are also quite easy to accommodate. Yeah.

[Kelly] I think Alexa’s right: within the impact space exclusions doesn’t come up as much, because the things that would be excluded are pretty fundamentally opposed to what it is we’re looking to do anyway. On the ESG, and RI side of things, there’s definitely lots of options out there for accommodating those types of exclusions. From what we see across a diverse set of investors and their investment policy statements, those exclusions are now fairly common and most asset managers can accommodate for those. Where there’s some nuance it’s around what counts as an exclusion. So where you see there’s headline risk, and where you see funds getting put on the front page of the newspaper because they’re holding something that somebody thinks is against their policy.

Alexa touched on this implicitly, but not necessarily explicitly, that impact investors are looking not just at what a company does that would get it excluded, but also how they’re doing it. You can have a solar company that on the surface looks like a great impact investment, they’re creating solar panels, but maybe they’re using child labor, and they’re polluting the rivers and waterways around where their production facility is. And so is that an impact investment? From the way that we look at it, we are looking at everything very critically through both lenses to make sure that we’ve got both pieces of those going and that those types of things aren’t slipping past us.

[Alexa] Yeah, we have exclusions within our own investment policy statements. For example, when we invest in hydro, we’re typically looking at small run-of-river hydro projects, and we would not invest in a large hydro project with a dam and a large reservoir. We invest in sustainable energy and for the most part, we’re looking for those projects that have benign environmental impacts, nothing has no environmental impact, and in a solar project on are on a bare field is going to get in the way of the snakes that are trying to cross the field. There’s always something. But, you know, I think by the kinds of projects that we target, it’s, it’s pretty limited.

[Victoria] A specific question, what kind of investors do you have? And can you talk about them?

[Alexa] Sure. The Sustainable Energy funds, which are the Caribbean Basin, Sustainable Energy Fund and the Honduras Renewable Energy Financing Facility, are more institutional in nature, and the lead investor is a development bank, and then some larger US foundations, and more recently, we brought in some Canadian foundations, which has been great. And then for the Ilu Women’s Empowerment Fund, the investor mix is a little bit different, because that was originally designed to allow individual investors to participate so that is about 50-50, North American and Latin American investors. We have now seven foundations invested, all Canadian foundations, which has been really great. And we also have credit union investors, so a large Canadian credit union as well as a Latin American credit union.

[Victoria] Thank you very much for attending today. I hope it has helped you see how impact investing is growing and can help align your values with your return expectations.