AUGUST 2018

Exploring Faith-Based Investing at the Vatican Impact Investing Conference

Category: Impact Investing

By Alex Paul Managing Director, Portfolio Management

I attended the Vatican Conference on Impact Investing in Rome on July 8-11, 2018. The multi-day event brought together impact investing practitioners and investors, religious leaders, international development agencies and others to discuss the role that values-based and faith-based investing can play in addressing challenges important to both the Catholic Church and the global community. It was inspiring to see attendees from several continents, representing developed and emerging countries, included in the discussions. I had the pleasure of being accompanied by an Athena Capital client who actively aligns its family’s investment portfolio with their Catholic values.

The conference agenda was organized around four primary challenges: (1) scaling health care access for the poor, (2) increasing youth access to jobs, (3) financing SMEs (small-medium enterprises) owned or servicing migrants and refugees, and (4) mitigating climate change. Sessions explored the intersection of finance, business, philanthropy, and government to move capital toward the “base of the pyramid” (i.e., the several billion people around the world living on less than $2 per day). While the conference was led and organized by the Catholic community, attendees from a variety of religious and secular organizations fostered a spirit of inclusivity and common purpose to identify and explore innovative, scalable solutions that address a variety of global challenges. Key takeaways and next steps included:

  1. Impact Investing Opportunities Continue to Expand

There is a growing universe of impact investing opportunities, across a continuum of returns and issue areas, that  not only  address the four main challenges above but also advance progress toward the seventeen United Nations Sustainable Development Goals. For example, new impact investment opportunities respond to the plight of refugees, whose numbers are now at the highest level in history. There is also continued growth in the number of social impact bonds and development impact bonds—a total of more than 100 such bonds across more than 20 countries worldwide—that are tackling issues such as homelessness, health, and prison recidivism. Panelists and attendees agreed that creativity, collaboration, and technology are critical to expanding the impact investing opportunity set.

  1. Returns and Impact Can Be Compatible, Not Conflicting

Although impact investing funds have grown in number, it is widely agreed that a framework is needed to classify and categorize the broad spectrum of opportunities by expected financial return (including associated risk) and impact. One attractive solution, the “returns continuum framework,” was presented at the conference by Omidyar Network. The framework categorizes impact investments into: (A) commercial investments, (B) subcommercial investments, and (C) grants.

  1. Commercial investments are expected to achieve positive social impact and strong financial returns. Commercial returns were further defined as either market validated (A1) or not market validated (A2) in order to recognize that some investments (A1) have co-investors that validate a market expectation of commercial returns, while other investments (A2) have not yet attracted commercial return-oriented investors.
  2. Subcommercial investments accept the prospect of lower financial returns (i.e., concessionary returns) in exchange for the promise of significant social impact. Subcommercial investments generate either positive absolute returns (B1) or capital preservation (B2) with expectations of a higher level of impact relative to commercial impact investments.
  3. Grants are philanthropic in nature. There is no expectation of capital return; however, there is an expectation of significant social impact.

This framework can help impact investors choose where to focus along the continuum and conduct a more targeted search for investment opportunities. For example, when addressing extreme poverty, commercial investments may be limited and thus subcommercial and philanthropic dollars may be the best resources for the immediate needs of this population. In other circumstances, some business models may be attractive to commercial-oriented investors where the growth of the business and impact are intertwined.  Omidyar’s framework can help to move the debate from whether delivering impact requires concessionary returns to an understanding that there is a broad spectrum of impact investing opportunities with a variety of financial return and impact profiles.

  1. Impact Investing is Not a Panacea: Addressing Today’s Challenges Requires Coordinated Efforts From Many Stakeholders

It was widely accepted among conference participants that impact investing alone is not a panacea for solving the world’s most vexing social and environmental problems.  It cannot replace efforts by the public sector and philanthropic institutions. The scale of global social issues is enormous and will require active engagement by governments, NGOs, advocacy groups, philanthropic entities, and private capital. The hope is that substantial amounts of private capital will be invested in concert with these other entities in order to drive meaningful, sustainable change. Conference attendees were encouraged by the prospect of further collaboration among aid organizations, governments, and private capital to build new and innovative structures and solutions.

  1. “Everything Is Connected”

This excerpt from Pope Francis’s 2015 encyclical letter focused on the environment, Laudato Si’, was shared at the conference in the context of understanding the interrelatedness of global social and environmental problems. For example, investing in affordable solar energy in communities with unreliable, or no, access to electrical grids not only helps the environment, but also addresses other social needs such as education and employment. Mitigating climate change via sustainable agriculture investments may aid millions of expected “climate migrants” facing displacement due to crop failure, water scarcity, and rising sea levels. On the topic of health care access for the poor, a speaker noted “an investment in health is an investment in human capital,” which provides benefits to individuals and families as well as the overall economy through higher productivity.  Lastly, one speaker on job creation for low income youth noted, “talent is equally distributed; opportunity is not.”  Examples were given about how talent in underserved areas was connected with employment opportunities, resulting in meaningful social impact and the potential for financial return.

  1. Conclusion / Next Steps

The Vatican Impact Investing Conference should be commended for serving as a productive forum for knowledge sharing and relationship building across a diverse, global community of impact-minded investors. New partnerships were formed, advocacy and mentoring are underway, projects are advancing, and conference participants committed to further action and investment. Topics identified for future discussion include:  how to build consensus on divestment: how to measure impact; what are best practices for knowledge and investment idea sharing; and how to use blended finance to build sustainable, scalable businesses serving the base of the pyramid.  This is the early innings for impact investing with lots of hope and promise for the future.

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