Factoring Impact Into Risk Assessment
August 07, 2017
Risk management is an important part of our work here at Calvert Foundation but not often discussed here in our blog. Risk management, for any type of investing, is used to determine the likelihood of achieving expected returns. This involves extensive research, due diligence, and underwriting to understand the management, operations, and financial performance of each investment. At Calvert Foundation, we add another factor into our assessment: social and environmental impact.
When we make investments, we set out to achieve financial, social, and environmental returns. A key part of ensuring our investments will produce impact is assessing performance in all three when we do our risk analysis. These considerations are made in every investment decision that we make and are also tracked and measured for the duration of our investments. By working this way we are able to better understand how investments can truly result in positive impact.
When our Risk Management team assesses an investment opportunity and its potential for impact, we first look at how it aligns with our portfolio strategy. We have shaped our portfolio to focus on nine impact sectors that provide services to communities, increase access to capital, and reduce the effects of climate change. These sectors are: affordable housing, community development, education, environmental sustainability, health, microfinance, renewable energy, small business, and sustainable agriculture.
For each impact sector we have an investment thesis (what we call a theory of change) that articulates the desired impact we want to see and how we plan to catalyze these changes. Alongside this we have developed a list of relevant metrics that are used to assess performance in relation to each sector theory of change. These metrics align with established impact measurement standards within the impact investing industry, such as the Impact Reporting and Investment Standards (IRIS), Aeris, the CDFI Fund, and more.
Calvert Foundation aggregates and publicly reports the results of our impact measurement work in our annual Impact Report. The report is an important tool for our investors to understand the social and environmental impact of their capital.
Alongside all of this, our Risk Management team collects and manages financial performance. This information helps us to understand the likelihood of repayment and also the need for our capital. A part of our investment strategy is to channel capital to organizations that are overlooked by traditional capital markets and struggle to access financing. The financial performance data that we collect after we have closed a loan helps inform us on how the financial strength and sustainability of the borrower is growing.
This rigorous risk management ensures that all of our investments have mitigated financial risk and a high potential for impact. It is why our total borrower repayment rate has remained at over 99% since we first launched in 1995. And it is why our portfolio collectively has resulted in hundreds of healthcare facilities financed, thousands of affordable housing units created and/or preserved, thousands of new jobs, thousands of classroom seats financed, and millions of microloans disbursed to underserved communities around the world.