Making our drop in the bucket count

The World Economic Forum's annual event in Davos kicks off 2018 with as many reasons to be hopeful as reasons to bury my head under a pillow. As has been the case over the last few years, the conference was buzzing with discussions around addressing the widening income gap and creating a more sustainable economy and world, but the scope of the challenges we face as a planet loom large. Despite the challenges, I'd like to choose the hopeful path that believes that individual actors can use their small drop in the bucket to make a splash.

A simple statement on the walls of our office reads: "We believe investing can make the world more equitable and sustainable." This summarizes the motivation for our work.

At the heart of this simple statement lies an ambitious goal: changing our global economic systems so that they work better for more people. We invest not only to create social and environmental value, but to help drive capital markets to adopt these values. We hope to push market systems to value resources within our society, internalizing the social and environmental costs that have too often been externalized.

Many impact investors are issuing a call to move beyond Modern Portfolio Theory, which assumes that market forces are beyond investors' influence and leads investors to evaluate portfolio decisions as if they have no impact on social and environmental systems. But we live in a world where the interconnectedness of the financial, social, and environmental systems becomes more obvious — and more intense — every day.

A simple statement on the walls of our office reads: "We believe investing can make the world more equitable and sustainable." This summarizes the motivation for our work.

One of the key ways that the need for systems change has been highlighted is through the United Nation's SDGs (Sustainable Development Goals), a universal call to action to "end poverty, protect the planet, and ensure prosperity for all." The 17 SDGs highlight the most pressing global challenges we face — or put another way, they highlight failures of our current systems to address these issues adequately. The SDGs were crafted with the understanding that without buy-in from the private sector and the $70 trillion in assets that it manages, these goals will not be achievable. They create a common language and standards to articulate and measure why we need to invest with intention. Over the past two years, they have been adopted by mainstream financial institutions like UBS as well as many smaller funds in the impact investing community.

Sustainable Development Goals chart.svg Grid of the UN Sustainable Development Goals

To reach the SDGs by the target date of 2030, the UN Commission on Trade and Development estimates that it will take $2.5 trillion of investment in the developing world and up to $7 trillion globally.

The sheer volume of capital required to achieve the SDGs has made it abundantly clear that all sectors — private, public, philanthropic — will need to play a role in achieving them. As a result, the impact investing field is acting with increased urgency, and with a recognition of and commitment to partnership. The SDGs have also helped to clarify the financial value chain and the role of various actors within it — in other words how a dollar gets from the savings account of an investor to a business providing health services, opening schools, or building cell towers in underserved regions.

Moving those dollars efficiently requires intermediation. We see two levels of intermediation that are most important to effectively channel capital. The first are market-serving intermediaries, who act as on-ramps for private capital to access investment opportunities that address the SDGs. They structure products that work within existing capital market systems, de-risking investments through diversification, volume, and liquidity. The second, community-serving intermediaries, receive money from market-serving intermediaries and design financial products that meet businesses' demand for capital. These community-serving intermediaries are closer to their communities and can actively adjust their products to meet local or sector-specific needs.

industry-position Calvert Impact Capital's role and impact as a market-serving intermediary

The role of intermediation is often underappreciated in impact investing because attention is hyper-focused on individual enterprises and detailed impact measurement. But without strong and effective intermediation, there's no hope of reaching the scale that is required to make progress towards the SDGs.

Our organization, Calvert Impact Capital, is one of many examples of a market-serving intermediary. Our flagship product, the Community Investment Note® (Note), is intentionally structured to tap the private capital markets through the distribution channels we have built over the past 25 years. The Note trades electronically through brokerage accounts and reaches individual investors (both retail and accredited), institutions, and financial advisors. We deploy the funds raised through the Community Investment Note to community-serving intermediaries that are innovating to meet market needs in their respective geographies and sectors, from a CDFI lender in Texas to renewable energy funds in Tanzania.

sunfunder A solar farm in Tanzania, financed by our portfolio client SunFunder

SunFunder is an example of a community-serving intermediary. They provide lines of credit and working capital for businesses in East Africa to expand distribution and installation of solar energy systems for homes and commercial properties in countries where more than 75% of people lack access to electricity.

In a visit to SunFunder this past spring, I spent two days with the management and sales team in the field. I had the opportunity to meet Adla, one of SunFunder's clients, who lives in a rural village. Adla's solar home system gives her security and enables opportunity for her children, who can now study at night thanks to a solar light in their common room.

While we, as a market-serving intermediary, don't often reach women like Adla directly, our capital provides the right source of flexible funds to increase SunFunder's capacity to serve their clients.

Today, there are 87 community-serving intermediaries in our portfolio that span nine sectors and 97 countries. Some, like SunFunder, are seeking their first non-philanthropic investment capital. Others are seasoned and looking for capital to scale. We leverage our expertise to intentionally build and strengthen financial value chains in markets and geographies that are left behind by mainstream capital providers. Our long-term goal is to help them evolve so they access the broader capital markets.

Collectively, these 87 entities made roughly five million investments in 2016, through which they deployed approximately $7.6 billion to individuals and organizations around the world dedicated to improving lives and creating a more sustainable planet.

$7.6 billion annually is only 0.3% of the $2.5 trillion needed annually to address the SDGs in developing countries (or around 0.1% of the global goal), but it is 22 times the roughly $350 million in assets that we manage. This leverage is made possible through the partnerships we have with our borrowers and the capacity they have built to grow with the challenges they are addressing.

We won't pretend that these dollar amounts are anything but a drop in the bucket when it comes to the activity in the global capital markets, but if we can prove that this business model works — and others replicate or learn from it — together, we can continue to chip away at the massive global bogey that we're all trying to meet.

The impact we seek as impact investors is a long-term play. It will require a nimble strategy, a relentless questioning of the status quo, and an unshakable commitment to collaboration. Ultimately, transforming why and how we invest is the path we must take to affect the structural changes required to achieve the SDGs and create a more sustainable and equitable world for everyone.

That's a reason to get up in the morning.