Impact Investing Digest #8 - 24th May 2024

ECOSYSTEM NEWS

From ripples to (potential) waves in the UK CDFI market : Responsible Finance launched their 2024 impact report this week, celebrating a record year of Community Development Finance Institution (CDFI) lending in the UK. Lending volumes to SMEs, social enterprises and financial excluded households rose 14% to ￡287m in 2023. The market has grown by over 30x in the last 20 years, with ￡3.3bn deployed cumulatively since 2003. Ceniarth has played its own small part, providing wholesale finance to CDFIs across the spectrum of SME lending (Business Enterprise Fund (BEF) ), social enterprise lending (Key Fund Investments ) and personal lending (Salad Money ).

Beneath these headline numbers are deep impacts created through the provision of affordable finance:

• 12,135 jobs were created or safeguarded
• 3,829 new enterprises were created
• 38% of social enterprise loans & 60% of small business loans were in the 35% most disadvantaged areas in the UK, with over 90% of loans of London
• 85,000 individuals made ￡29m in interest savings.

Despite this positive growth trajectory, much remains to be done to scale the impact of the sector further. Across the Atlantic, US CDFIs have aggregate balance sheets approaching $450bn and they deployed $34bn during the pandemic to vulnerable communities. Opportunity Finance Network , a leading network of over 400 US CDFIs (roughly 25% of the total), estimates its members deployed $10bn in 2022 . Government has had an important role to play in the growth of the sector in the US via the Community Reinvestment Act - while guarantee schemes and tax reliefs do exist already in the UK, a more holistic public sector approach to supporting the growth on sector is needed. Specific details of this are outlined in the Responsible Finance 2024 report, which could enable the sector to build on the recent success in unlocking mainstream wholesale capital for the sector from Lloyds Banking Group .

$25bn allocated green private market investments (via ImpactAlpha ): CalPERS , the US’s largest public pension plan with $438bn AUM, will allocate more than $25bn into green-related private market investments over the next six years. This will be one of the largest commitments by a major actor to unlisted climate assets to date. It is examining the private equity, real estate and infrastructure markets, particularly in Asia and Europe. Allocations at this scale into the private markets from major institutional asset allocators are essential to using impact investing to address the social and environmental challenges facing the world.

EU urged to lower capital charges for blended finance (via Responsible Investor ): as part of a wider discourse on how to better support development financing in emerging markets, the issue of overly punitive prudential regulation in blended finance has been raised by a group of advisors to the European Commission. It notes that insurers investing in a senior tranche of a blended finance fund would be subject to twice the capital charges of more risky conventional structures, and urged "EU prudential treatments to accurately reflect...the de-risking mechanism of the structure and the quality of the underlying assets". Blending will be necessary to facilitate $1bn+ structures like Allianz Global Investors ' SDG Loan Fund and Climate Fund Managers (CFM) Climate Investor One - it is important regulation does not unintentionally restrict the ability to institutional investors to allocate to de-risked positions in such structures. For those interested in learning more about what it takes to successfully construct large blended finance transactions, I'd recommend Kusi H. 's recent article on "blending billions" in ImpactAlpha .

IMPACT MEASUREMENT & MANAGEMENT

Why Investment Funds Don’t Have Enough High-Quality Impact Data (via Stanford Social Innovation Review ): Sasha Dichter of 60 Decibels and Aaron Bourke of RPCK Rastegar Panchal highlight some of the challenges for impact funds to collect and analyse high quality impact data. Much of this ultimately comes down to cost, with the authors suggesting allocating some costs to fund expenses in LP agreements or normalising them as part of wider traditional outsourced due diligence costs (e.g. tax and legal) as potential solutions.

Delivering impact in the public markets : at Ceniarth we are gradually divesting out of our legacy “responsible” public market investments. Like many in the sector, this is borne out of a belief that both deeper impact and more investor additionality can be found in the private markets. There is a tendency to denigrate investments in public equity and fixed income markets as "not real impact" - I'm definitely guilty of this at times. However, public markets do bring information, liquidity and most importantly scale. I found this recent piece by WHEB and the Impact Investing Institute helpful in clearly framing the impact narrative for the majority still primarily allocating to more mainstream asset classes.

SECTOR-SPECIFIC CONTENT

• International migration kickstarted structural transformation in Malawi (via VoxDev ) - interesting research shows how shows that temporary capital inflows from Malawian migrants working in South Africa can permanently reshape rural labour markets by jumpstarting a structural transformation out of agriculture. (Having lived there from 2009-2011 I always keep an eye out for interesting news/research looking at Malawi!)
• The Future of Digital Credit: A Recent Report Explores How to Make its Second Decade More Impactful Than its First (via NextBillion ) - good summary of both the potential but also risks associated with the rapid growth of digital credit in emerging markets.
• Insights from a pilot programme for healthcare electrification in Sub-Saharan Africa (via Shell Foundation ) - six renewable energy companies have been supported to electrify 11 health facilities in Nigeria, Ghana, Benin, and the Democratic Republic of Congo. These facilities range from small clinics to large hospitals, serving over 300,000 people. This report summarises the layered impacts created.

Thanks for reading!