Impact Investing Digest #3 - 22nd February 2024

Here are some thoughts reacting to what I've been trying to absorb and reflect upon this week as part of my ongoing learning journey about the all things impact investing. Thanks for reading!

ECOSYSTEM NEWS

Endowments "going all in" on impact: the ongoing quest for more sources of impact-aligned capital frustrates many practitioners committed to scaling impact investing. Family offices, faith-based investors and foundations are amongst the most active allocators to this sector - providing the impetus, flexibility, creativity and (most of all) patience to support social entrepreneurs, impact fund managers and innovative new financial structures. Yesterday's announcement that the The California Endowment is "going all in" for impact was significant. Ceniarth has long advocated this 100% impact approach (as profiled in this Impact Investing Institute case study), learning from pioneers such as Heron . Ford Foundation commitment to move $1bn (roughly 8% AUM) to impact investing in 2017 was a strong signal from a larger foundation that this was possible with bigger asset pools. To quote the announcement, "With $4 billion in assets under management, we believe this makes us the largest foundation to make an “all in” impact investing commitment to date." Progress in mobilising Foundation endowments in the US and UK has been frustratingly slow. Let's hope this creates a step change in foundation allocations globally to more values-aligned investment strategies.

Donor Advised Funds as a pool of catalytic capital: another largely untapped pool of potentially highly catalytic capital are Donor Advised Funds (DAFs). These allow philanthropic donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time.? Donors can contribute to the fund as frequently as they like, and then recommend grants to their favorite charitable organizations whenever it makes sense for them. According to National Philanthropic Trust , these held $229bn of assets across nearly 2m DAF accounts in the US in 2022. While accusations of "wealth-hoarding" may be unfair, with payout rates of only 22.5% many have wondered whether DAF assets could be channeled to more impact-oriented investments in the interim period before being disbursed. ImpactAlpha highlight how multi-donor funds, which aggregate individual DAFs, are emerging as a highly catalytic source of early stage capital for innovative new impact strategies. The DAF market in the UK is significantly smaller - a recent report by Philanthropy Impact (thanks to Jamie Broderick for sharing it on this network) profiles the leading providers in the ￡2.2bn UK DAF market, but Jamie notes to date they have been making limited allocations to impact strategies.

DFIs - moving in the right direction: my serendipitous journey to working in this space started with a last-minute application for ODI Global 's fellowship scheme in 2008 and a 2-year stint in Malawi. ODI continue to be one of the leading think tanks exploring themes of injustice and inequality globally. I've enjoyed two recent pieces by former U.S. International Development Finance Corporation employee Andrew Herscowitz , highlighting the "carnival game" he believes the institution is stuck in (via Devex ) while also providing a more constructive 10-point plan for improving the impact the institution can have in low-income countries around the world. I particularly liked "Stop bragging about how much money it’s spending" as "the amount of money a development agency spends is not an indicator of success." While DFI-bashing is a favourite past-time for many of us in the international impact investing ecosystem, there has been clear progress in increasing risk appetite (such as British International Investment 's new Kinetic strategy) and driving down cost-of-funds for impact-first strategies (DFC and FMO - Dutch entrepreneurial development bank investments in MCE Social Capital 's recently launched MESA Fund). KfW remains the market leader in this regard, with a deeply catalytic focus on seeding new fund strategies. That being said, it is a fair criticism to say that not enough of the aggregated DFI balance sheets are being deployed in such ways - this continues to undermine their developmental potential as institutions.

UK news: I have been educating myself over the last few years on the UK's small but growing CDFI sector, learning from the great work of Responsible Finance and others about the nuances of different lending models (personal vs SME vs charity & social enterprises). It's a first for me to find myself linking to an article on ConservativeHome - but Jo Gideon makes a passionate plea to the Chancellor to ensure much of the recent growth in the CDFI SME lending sector is not undone by the looming expiration of the British Business Bank Recovery Loan Scheme guarantee. NPC (New Philanthropy Capital) released the State of the Charity Sector 2024, highlighting the challenges of underfunded public sector contracts and increasing pressure on budgets faced by front line organisations. While more focused on conventional charity business models, it does highlight the strain these organisations are feeling and emphasise the need for creative channelling of impact investment where appropriate via organisations such as Key Fund Investments and Social Investment Business .

IMPACT MEASUREMENT & MANAGEMENT

Benchmarking, benchmarking, benchmarking: last week I referenced some of the innovative work 60 Decibels has been doing to bring more clarity to the impact being created for end beneficiaries via microfinance industries. At the other end of the spectrum, there are promising advances in attempts to verify the overall impact performance of fund managers. One of the emerging market leaders is BlueMark , who have conducted independent 164 "impact verifications" for investors managing a combined $232bn and are expanding rapidly after a $10m Series A led by S&P Global . Impact practice will vary across sectors, geographies and asset classes, but the attempt to standardise and create benchmarks of what constitutes good practice is a welcome move forward for those allocating to fund managers. I was delighted to see that Quona Capital (part of the Ceniarth portfolio ) recently completed its second successful impact verification process and achieved the highest possible (“advanced”) score on 7 of the 8 principles measured, and scored in the top quartile of BlueMark’s benchmark for these principles. As with beneficiary level impact from providers such as 60DB, I hope to see enhanced engagement in such process from GPs going forward.

Poverty level uncertainty and data gaps: last week I noted the enduring increases to poverty levels in low-income countries as a result of the pandemic. Lee Crawfurd of Center for Global Development highlights some of the uncertainties around grand pronouncements on poverty statistics that become part of the common lexicon, trying to answer the question "Do Half of the World’s Poor Really Live in Fragile States?" Technology provides an opportunity to rapidly improve data around poverty and other social & environmental indicators. Shamina Singh and Danil Mikhailov talk about the vital work of DataDotOrg (funded by Mastercard Center for Inclusive Growth ) in using data science to improve social impact. Whether it is better targeting social protection, new infrastructure investment or agricultural services, companies like Atlas AI are trying to help change what is possible for businesses like Hello Tractor and the farmers they work with.

SECTOR-SPECIFIC CONTENT

• Can revenue index insurance outperform yield index insurance? - I'll confess to only having read the abstract, but this article (via Timothy Ogden 's ever illuminating Financial Access Initiative, NYU Wagner blog on financial inclusion) suggested that solving for price risk via insurance of other mechanism may have stronger effects than the traditional approach of mitigating production risk.
• Sustainably bridging the infrastructure finance gap in emerging economies – are multilateral development banks the answer? - 德勤 summarise the catalytic role of infrastructure in economic development and the potential for MDBs to sustainably bridge the infrastructure finance gap in emerging economies.

Thanks for reading!