ImpAlph: Pricing for impact: How Agents of Impact can move from bluster to bold action
Pricing for impact: How Agents of Impact can move from bluster to bold action
Laurie Spengler of Courageous Capital Advisors | Photo credit: Clinton School Photography
Can impact investing chip away at systemic dysfunction?
Can deploying financial capital to achieve positive social, environmental and economic outcomes make a dent in structural racism? Can impact investing tackle the power asymmetry underpinning capital markets? Can it redress entrenched bias that prevents money from flowing to places and people invisible to those with the capital?
Practitioners of impact investing want to say Yes. Others beginning to consider impact within their portfolios are inclined to say Yes. The hard truth we must confront as a community is that the answer will be No unless all of us step up, move beyond our comfort zones and price our capital to preserve and expand impact.
The terms and conditions of capital should enable the impact the capital is set to achieve and should reflect the value of the impact. Why are we not rewarding impact with better pricing and terms, particularly at this moment in time?
Intentions aren’t good enough to achieve real change. We are in the market for actions.
If we are truly in this together, if we want impact investing to be a pathway to a resilient future for all, surely, we can do better as a community. Our message cannot be: You are on your own. When you stabilize and show me you are fully back on track in a world none of us can anticipate, then come talk to me for investment.
The issues laid bare by the convergence global crises – the COVID-19 pandemic and recession, the climate emergency and the long overdue recognition of structural racism and systemic injustice – represent sweet spots for impact investing.
Opportunities for impact investing cut through the recovery and rebuild phases of the COVID crisis response: The opportunity to strengthen small businesses, particularly those led by people of color and women. The opportunity to support community banks who have demonstrated how proximity to and understanding of local communities makes them powerful distributors of finance to rebuild. The opportunity to stimulate innovation in healthcare, from vaccines to therapeutics to clinical care. The opportunity to promote no carbon or low carbon alternatives in energy, transportation and logistics. The opportunity to introduce digital footprints for many businesses. The opportunity to repurpose manufacturing facilities for PPE and other needed supplies. The list goes on. This is a moment for impact investing.
The pages of ImpactAlpha in recent weeks have highlighted examples of action. Yet compared to the magnitude of the crises and in the context of all that needs to be done to even begin to stimulate systemic change, the examples are few in number and paltry in amount of capital deployed.
For most impact investors, 80% of energies remain focused on ‘defensive activity’, protecting current investments. While understandable as a first response, investor energy cannot remain focused there. By playing offense, making impact explicit and accountable and driving solutions for the benefit of people and planet, we have a chance to achieve a just, equitable and sustainable society for all.
The time is now for impact investing to demonstrate its relevance. If the past decade was a warm-up, now is the real deal.
Enough impact excuses
Rhetorical claims of solidarity are loud; we hear the refrain of ‘Build Back Better’, ‘We are in this Together’, ‘Impact is our Future’. Memoranda of understanding have been signed among coalitions of investors. Many have published statements. Yet the actions following these rhetorical claims remain weak and insufficient.
Of course, we are seeing a few sparks of leading action – the Mary Reynolds Babcock Foundation unilaterally and pre-emptively reduced interest rates on all PRI loans across its portfolio. Global Partnerships moved swiftly to reschedule loans for performing borrowers so that they, in turn, can keep liquidity in local markets. The new U.S. Development Finance Corp. set up a dedicated investment committee for COVID-19 deals and has already approved several deals with new money commitments.
But there are not enough of these examples. We need many more, and particularly from those with larger balance sheets, funds and portfolios.
As a community, impact investors have put out too many words over these past few weeks and not enough capital. On an ImpactAlpha call last week, we heard a few of what are becoming familiar excuses for the delay and modesty of actions. Practitioners in the midst of negotiating impact transactions are seeing these excuses at play. To be clear, these excuses are coming from well-intentioned, professional organizations. Many subscribe to the IFC Operating Principles; most are part of the Impact Management Project; many are members of the GIIN; they are experienced and with track record.
What we are hearing and seeing is not just a hesitation to act, but an unwillingness to price for impact at a time of global pandemic, social unrest, and the incontrovertible exposure of deep systemic bias.
– Example: A veteran impact investing asset manager demands extra basis points on a current debt deal in the face of a rescheduling request. The borrower is a top performer in the portfolio and is current on all interest payments. The reason given: ‘risk perception’ has gone up in the eyes of the investment committee.
– Example: Community development financial institutions, or CDFIs, are ‘having a moment’ as written about in ImpactAlpha. There are numerous examples of banks and loan funds. Yet what they need in order to deliver more impact is equity. Institutional investors will not even consider equity, only debt. Even the big banks with their CRA mandates argue that equity is not possible given the risk-weighted cost of capital.
Imagine the multiplier effect of a $5 million equity investment from each of the big banks – 10x for the CDFI banks and 2-3x for the CDFI loan funds. That is capital that will get to communities that the big banks could not even find on a map.
– Example: A 3% loan note supporting women-led small and growing business in sub-Saharan Africa is deemed concessionary and therefore ‘not possible’ by several development finance institutions. The stated mandates of those DFIs include prioritization for small businesses (the “s” of “SME”) and a gender lens. In a 0% interest rate environment and with demonstrable impact, how is it that this loan note rejected out of hand and taken off the table?
– Example: The recent survey by the Global Impact Investing Network found that only 18 of 122 respondents said they will “likely” commit more capital than planned in response to the COVID pandemic. Almost 60% are “unlikely” to change the volume of capital they plan to commit in 2020; another 20% plan to cut back commitments.
Given the magnitude of the challenges confronting all of us, and the role private capital can play in contributing to solutions, how can we respond in any way other than by dialing up commitments? Preserving the status quo – of our commitments, in our actions – simply won’t get us to where we say we want to be. Impact must be our guide when it is needed not just when it is convenient.
Let’s cut through these excuses. In the current ‘uncertain’ environment, why is it that investees are expected to bear 100% of the risk?
The female business operator working to keep her employees on payroll and her doors open; the first-time fund manager of color who remains confident in how to deploy capital to local enterprises but can’t get over the first close finish line; the local capital provider who understands how to use fresh funding to ensure that a liquidity crisis does not become a solvency crisis. These investees are operating through uncertainty, delivering their products and services, employing people (retaining if not creating new jobs), working to stay afloat and eventually grow again. These investees generate the impact we say we seek.
Another excuse comes in the form of ‘I can’t make an investment that is concessional’. What does concessionary even mean in a debt environment where interest rates are zero and will remain there for an extended period? What does concessionary mean where we are trying to preserve a market opportunity for people, a chance to survive and ultimately thrive? Grant versus investment is a clear and valid distinction. But is this not a time to use the full potential and range of investment instruments for impact? If only in part of a portfolio?
And in terms of risk assessment, why are we not using impact clarity as a mitigant to risk? We heard on last week’s ImpactAlpha call the agility of investees and businesses to adapt to current circumstances and maintain impact integrity; an appropriate pivot might be from significant job creation to job retention; a repurposing of manufacturing capability to local PPE.
Why are we not rewarding these pivots with better pricing, doubling down on impact objectives? Rather, what we are seeing from some self-identified impact investors is an attempt to increase interest rates on debt deals or back away from equity deals because of perceived increased risk.
Why is an investor sitting in a home office in the Netherlands, the UK or the US demanding more protection on its investment right now? Why is the investor not willing to share the risk, a risk that was brought on by an external force in the case of COVID-19 and by an unjust system of which the investor is, intentionally or not, a part. The impact investing universe of actors is not immune to the power asymmetry that exists between those who have capital and those who seek it. Perhaps now is the time to reset this power asymmetry.
The impact investing community is perilously close to hypocrisy and empty claims overwhelming its relevance.
As impact investors, if we truly seek impact, then there is an obligation to assess it and make the terms and conditions of our capital work to achieve it. We cannot just demand it and not reflect it in the price of our capital. That is what the market might call ‘impact gouging’.
Much needs to be done; opportunities to invest are plentiful. As we demonstrate the relevance of impact investing at a time of crises let’s each ask ourselves:
- Am I… willing to move beyond my current investment comfort zone at this time?
- Am I… willing to modify my risk and return expectations in the face of demonstrable impact?
- Am I… willing to allocate a material percentage of my portfolio to impact (the ‘C’ of the Impact Spectrum ‘A,B,C’)?
- Am I… willing to allocate at least part of my portfolio to deeper impact opportunities that are proximate to local communities and where the impact is being generated by people who do not look like me?
If the answer to these questions is no, please stop claiming to be an impact investor. Please stop making claims of solidarity. Please stop making promises you are not prepared to fulfill.
Perhaps investors can take the advice often offered to investees: “Under promise and over deliver.”
Actions speak louder than words. The time for action is now.
Laurie Spengler is founder and CEO of Courageous Capital Advisors.