Impact Investing Process 

In fall 2021, Kelly Gauthier spoke to Maria Maisuradze, Founder and CEO of Education for Sustainability (Ed4S), to outline Rally’s impact investing process.

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

Good morning, my name is Kelly Gauthier, I’m the managing director for Rally Assets. Thank you so much for having me.

Rally is an impact investing asset manager and advisory firm, we’ve been around for about 10 years and impact investing is all that we do. We don’t do traditional investing, or ESG; we really focus on the deep impact. And we help investors, both accredited and institutional investors to figure out what impact investing is to help them place their capital, and to help them measure the impact of that. And so this is the work that we do. And I’m thrilled to be here to help you learn a little bit more about what I do on a daily basis.

Okay, so the first question we’re going to answer is what is impact investing and how do you define impact.

I’m sure as you’ve been reading and learning, you’ve heard different definitions when it comes to responsible investing ESG and impact. For Rally, impact investing is really focused on that global definition, which is intentionality around positive environmental or social contribution. It’s around measurement, measuring that impact to know that it’s happening. And it’s around a positive market rate, financial return. And so that’s the type of work that we’re doing.

When we start to break down that impact definition, we’re looking for companies and fund managers that are generating impact both through what they do to their product and services of their company, but also how they do it. So being really thoughtful in terms of how they run their businesses, how they are equity seeking in that how they are thinking about sustainability, and thinking the whole way through their operations, in terms of the impact that they’re generating. And so with those two pieces, we then layer those on to a sense of innovation and transformation, wanting to look for companies that are doing things differently, are able to be leaders in their sectors and their categories, and those that are going to transform the way that we do things, whether that’s on a small scale or a large scale.

So the next question we’ll tackle will be around investment process.

If we have a clearer sense for what impact is, then the next question is, how do we find it? How do we find these investments? And how do we assess them? At Rally our investment process integrates impact with financial analysis, the entire way through. Our impact assessment is not a sideline item, after we’ve done our financial assessment. In fact, it leads our sourcing process. So as we’re out there, looking at funds and companies, from an impact perspective, we use the Sustainable Development Goals, the SDGs, we make sure that our investments are all aligned to one or more of the Sustainable Development Goals in a meaningful way. And we’re looking for their revenue to be aligned to those goals, and to not have it be a small part of what they do, but have it be the majority of what they do. And when we think about how to assess those companies, those Sustainable Development Goals allow us to narrow that universe down from all the possible companies and funds that are out there to a shorter list. And at that point, we obviously then want to do fundamental financial analysis, and that gets integrated into the way that we look at a company. But it’s done in partnership with the impact. So whether we’re thinking about their competitive advantage, whether we’re thinking about who else is in the market with them, whether we’re thinking about their balance sheet, we’re looking at it from an impact perspective as well. And so we really integrate that the entire way through our process. Like any business or any fund, we’re looking for strong teams, we’re looking for teams and businesses that are fundamentally impact leading that understand the sustainability imperative in front of us that understand equity, and are building out into how they construct their own teams and run their businesses and also in terms of how they’re generating their revenue.

The question that then should come to mind is really around measurement.

So how do we measure the impact in a business once we’ve done all this diligence, and we have decided to move forward with an investment? How are we going to measure its impact on an ongoing basis. This is a place where Rally has spent a ton of time building our methodology because the standards aren’t there yet globally, the way that they are in financial markets. In financial markets, we understand how companies will report their financial performance because there’s standardized ways of doing it and ways of auditing and verifying that impact measurements are not there yet, so it’s still a bit have creative art in terms of how companies report on impact. How do we assess those? That’s disclosure. When we look at our impact measurement. in the public markets and public companies we’re looking for, we have to use disclosure that they give us. And we have to do a lot of research and fundamental analysis on top of that. So we dig into those companies to understand how authentic their impact commitments are, what their track record of keeping to their promises has been, what their pace of change is, how they’re dealing with different controversies, or different challenges that come up, the types of decisions that they make. In the private markets where there isn’t disclosure or regulation, we’re looking for fund managers and companies that are fundamentally impactful, and that will work with us. So we will do our own assessments and our own manual investigation of their impact. And they’ll tell us how they’re aligned to the SDGs, how they’re generating impact and how they’re including equity in their approach. And so we look at those things both as part of our diligence process upfront and then also throughout the term of that investment. As long as we hold it, we’ll look at those quarterly and do an annual deeper dive.

So then, the last piece that I’ll cover is really the question of what is a good impact investment.

An example in the public markets. Think about an athletics apparel company that is doing things differently, that is thinking about sustainability throughout their products throughout their supply chain, that is thinking about how to eliminate plastics, from their shoes, from their athletic wear, that is thinking about glue that is thinking about where their inputs are coming from. That’s working on labor issues within the apparel industry, in various parts of the world. They’re thinking about equity in terms of the types of people who buy their products, and who they’re including or excluding by the type of apparel that they make. And they’re thinking about equity and inclusion within their workforce in terms of how they treat and represent different disadvantaged groups within their workforce. And so that’s a company that has impact very much at the forefront of a very mainstream business, and one that can lead a category and lead its competitors to do better and to raise the bar in terms of sustainability and equity.

On the private side, a fund I’ll draw your attention to is Raven Indigenous Capital Partners. They are a venture capital fund that finances Indigenous-led and Indigenous-serving businesses. They provide capital to those businesses who often can’t get it from mainstream financial institutions, because they are Indigenous businesses. And they don’t have the same access that other businesses do. These businesses also serve Indigenous communities, both in  terms of the products and services that they create. They’re creating employment opportunities, they’re creating product opportunities and services for Indigenous communities. So tremendously interesting equity proposition within this fund. This is a venture capital fund that’s targeting 8% returns. And it is private, because it’s a private investment. It does have a long lockup of 10 years, which is very standard in the private markets

Two very different modes of how you can think about integrating impact into the type of investments that you that you’re seeking.

I hope this was helpful and informative.