Fotolia

Calculating financial ROI has not been a challenge for impact investors. The greatest obstacle has been measuring the social and environmental benefits of an investment.

Katherine St. Onge is a Senior Officer on the Investor Relations team of Calvert Foundation. She is responsible for managing relationships with individual investors, foundations, institutions and financial advisors to increase their understanding of Calvert Foundation’s impact investing product and services. Prior to Calvert Foundation, Katherine worked at the Aspen Institute where she focused on building entrepreneurial and early-stage investment ecosystems in the Middle East and North Africa. She also worked for Louisiana Economic Development, crafting policies and strategies to enhance the state’s economic competitiveness, and Goldman Sachs, managing both equity and fixed-income investment products. She received her Bachelor’s Degree in economics and mathematics from Bucknell University and her M.B.A. from the Wharton School at the University of Pennsylvania.

Calvert Foundation is an impact investing institution that offers investors an accessible way to invest for social and environmental good. The Community Investment Note is a deep impact, fixed-income investment opportunity that has allowed investors to receive consistent financial returns and measurable social returns for over 20 years. More than 18,000 investors have invested a total of $1.4 billion through Calvert Foundation, supporting loans to non-profits, social enterprises and community development organizations throughout the U.S. and around the world.


Christopher P. Skroupa: What are the greatest challenges preventing the widespread adoption of impact investing? How do the U.N. Sustainable Development Goals (SDGs) play a role in alleviating some of those challenges?

Katherine St. Onge: Interest in socially responsible and impact investing has grown significantly over the last few years, as has capital allocated to SRI strategies. The U.S. SIF, a trade/membership association for institutional and individual asset owners and managers focused on sustainable and responsible investing, reported in their 2016 Trends Report that SRI investing experienced 33% growth over the past two years, and a 14-fold increase since 1995.

However, SRI investments—while accessible to any investor through a variety of products that encompass all asset classes—are not held in everyone’s investment portfolios and retirement accounts. One of the greatest challenges to this widespread adoption is the lack of understanding of impact investing.

The SDGs are 17 ambitious goals that provide insight into global development challenges and their solutions. This framework will hopefully make it easier for investors to understand the issues that affect communities around the world and the type of impact that can be achieved through aligned investment opportunities. One of the greatest challenges to the widespread adoption of impact investing is people understanding the power that their money can have on specific social and environmental issues and the issues that are ripe for impact investing.

 

Skroupa: How can an impact investment strategy aligned with the SDGs produce financial returns and elevate global markets?

St. Onge: The SDGs aim to make progress in issues such as poverty and gender equality. While these development goals are important to the wellbeing of our environment and our society, investment in the SDGs also generates economic value.

It is often assumed that organizations that provide services to low-income communities cannot produce cash flow or profit. However, there are many nonprofit organizations that do not sustain themselves only on grants but have revenue generating operations. Instead of returning profits to shareholders, they reinvest their profits into their mission.

One of the SDGs is to “ensure access to affordable, reliable, sustainable and modern energy for all.” Calvert Foundation has increased its focus on investing in renewable energy to enable more communities to access electricity and improve their economic well-being. Let me share an example.  

Calvert Foundation made a loan to Off-Grid Electric, an organization providing clean, transformative energy to off-grid communities in Tanzania and Rwanda. Through Off-Grid’s innovative financing model, Miriam, a salon owner in Tanzania was able to access a reliable source of solar energy so she can maintain consistent business hours, serve her customers as needed and process their payments. Energy access is key to her small business being able to compete with other salons in the area and enables her to generate a livelihood that her and her family can depend on. Investing in energy access in off-grid communities enables those markets to function better and improves the economic productivity of their members. Impact investments aligned with the SDGs offer return opportunities and bring capital to markets so they can fully function and grow.

Similarly, it has been shown that companies that measure and disclose ESG (environmental, social and governmental) data and actively pursue improvements in ESG metrics tend to have lower costs of capital and higher operational and stock price performance. Investing in companies and funds that are aligned with the SDGs can reduce investment risk and increase returns.

 

Skroupa: There is no doubt that the SDGs set ambitious goals for companies to achieve by 2030. How are the inherent reporting challenges of impact investment return being addressed to ensure that the SDGs are met?

St. Onge: Measuring impact remains a challenge for the industry. The many different types of impact investments—from investments in public companies that maintain strong board and management diversity to organizations that are providing microloans to entrepreneurs in developing countries—make it difficult to create a standardized measurement and reporting framework.

The non-profits, social enterprises and community development organizations that accept impact investments to reach scale often have limited financial and administrative resources to measure and report impact, and are under tight timelines to deliver on their goals and mission. Their resources can be further stressed when they are faced with multiple and, at times, unrelated requests on non-financial metrics for a variety of stakeholders.

There are many ways that impact investors measure the social and environmental impact of their investments. Calvert Foundation strives to 1) understand what impact metrics are also helpful for the company to collect and monitor over time so that it benefits their company’s bottom line, trajectory of growth, etc., 2) ensure those metrics are standardized, and 3) limit the output to a handful of impact metrics for all stakeholders (borrower, investors, industry).

There are several standard reporting tools like IRIS, AERIS, and others that contribute to reporting alignment within the industry, including the SDG Impact Framework that Toniic recently released to help impact investors align their investments with the SDGs. The partnerships and information sharing that can result from work towards the SDGs offer innovation opportunities for measurement tools and standardization. The SDGs can make tremendous progress in ensuring accuracy, timeliness and meaningfulness of data.

 

Skroupa: Why is private capital essential to fulfilling the SDGs?

St. Onge: Government funding and philanthropic dollars are consistently devoted to solve social and environmental issues, but unfortunately are unable to meet the needs of people around the world.

The SDGs face the same funding issue. The UN estimates the annual cost to meet the SDGs globally to be about $5-7 trillion. Unfortunately, actual funding is estimated to fall short of that leaving an annual funding gap of $2.5 trillion, according to the World Investment Report published by the United Nations Conference on Trade and Development in 2014.

It is up to private investors and asset managers to fill that gap so significant progress can be made towards reducing inequality and improving environmental sustainability. The good news is we already have the tools!

Conscious consumers realize that their purchases have the ability to improve their society and environment, from the car they drive to the food and clothing they purchase, and can be a representation of their values. Investments are the same. How we choose to allocate capital can have a significant impact on the condition of our society today and for many generations to come.