4.1 Catalysing the Market of Socially-conscious Retail Investors
By Jennifer Pryce, President and Chief Executive Officer, and Katherine St. Onge, Senior Officer, Calvert Foundation
- To increase the participation of retail investors, impact investing firms should consider creating suitable products that will both resonate with investors’ values and be easily accessible for investors and their financial advisers.
- Online channels can be engaging platforms with lower investment minimums that automate many customer service needs.
- Given the operational challenges of raising capital from retail investors, strategic partnerships are needed to leverage capacity and efficiencies.
Increasing Demand for Impact Investing
Investor demographics are shifting and more investors want to put their money to work for causes they care about. A recent study of 5,000 millennials across 18 countries showed that the number one business priority of this generation is to improve society.4 The millennial generation is reaching an age where they are beginning to think more seriously about investing their money, and they are interested in investment options that are aligned with their values.
This shifting mindset is especially evident in women and millennials who are beginning to think critically about the effect their investments can have on society. Women control almost half of all US estates valued at more than $5 million5 and their investment power is estimated to grow. Over the next 40 years, estimates indicate women globally will inherit 70% of the $41 trillion in intergenerational wealth transfer.6 Roughly half of affluent women are interested in environmental or socially responsible investments as compared to only one-third of men.7
While demand for impact investing is increasing, many of the existing impact investing options are only available to accredited institutions and high net worth investors. This is largely due to significant barriers to entry for retail investment products. The “democratization” of impact investing is possible; it requires making investment opportunities more accessible to main-street investors and creating strong partnerships among firms to further scale the sector.
Calvert Foundation’s Community Investment Note
Calvert Foundation is a 501c(3) non-profit founded on the belief that underserved communities can improve their social and economic well-being when connected to sources of patient capital and, furthermore, that every day individuals want to meaningfully engage in social change. To accomplish this mission of enabling people to invest for social good, Calvert Foundation created the Community Investment Note (Note) in 1995 to be a vehicle between investors and communities. Since its creation, the Note has attracted more than 13,500 investors who have invested over $1 billion to support hundreds of non-profits and social enterprises. In addition to individual investors, more than a dozen corporations and hundreds of faith-based and non-profit institutions have invested with Calvert Foundation in amounts ranging from $20 to $25,000,000. Over 60% of investors are individuals making less than $100,000 a year, and they come from every state in the US.
How did Calvert Foundation create its Community Investment Note? It started with partnering with high-impact, local organizations working on critical social issues such as but not limited to affordable housing, education, and sustainable agriculture throughout the US and around the world that need access to capital to catalyse their work. Investors receive fixed financial returns of 0.5% to 3.0% that are based on fair rates to our borrowers. Investors are also provided with the social impact metrics of their investments, such as the number of jobs created, houses built, school slots enabled, women-led businesses created and farmers supported. While social impact metrics are important, our investors have signalled loud and clear that it is the narratives of the impact – the stories, photos and videos of how the capital is helping empower people and communities – that is more engaging for them.
Being able to attract a diverse array of investors was important to Calvert Foundation from day one. Some of the decisions we have made to accommodate that include making the Note a fixed-income product and focusing on risk mitigation for investors. While there is a strong need for equity in impact investment sectors, debt is seen to be more predictable and suitable for both investees and investors. Meticulous underwriting, credit monitoring and diversification strategies mitigate the risks the investors face. Our investors further benefit from over $30 million in net assets, loss reserves and security enhancements to protect them from potential portfolio losses. Over the past 20 years, Calvert Foundation has had solid portfolio performance with a 100% repayment rate to investors while lending to organizations serving low-income communities.
Creating retail products with stable returns and strong social impact is a necessary but not sufficient condition for the democratization of the impact investment sector – impact investment products must also be accessible to the average person. Beyond having a direct investment channel where investors fill out an application and send it in with a check, it is beneficial to offer impact investment products through brokerage accounts and online.
Brokerage Accounts: Where the Investment Dollars Are
Since the majority of investment dollars are managed within brokerage accounts, Calvert Foundation needed to overcome the hurdles of working with brokerage firms on impact investment to gain exposure to both retail investors and their financial advisers. First, we structured the Note to look more like a corporate bond and created additional protections for our investors so it would be easier to understand and distribute. Second, through a partnership8 with an underwriter and distributor of fixed-income securities, we gained distribution to hundreds of brokerage firms that enabled our Note to be held alongside other corporate notes/bonds in brokerage accounts.
While the Note is a fixed-income vehicle, which has provided many advantages, this path to acceptance has often been more like that of alternative products, which most other impact investments are. Once the Note was “wired into the brokerage firms”, many brokerage firms performed extensive due diligence before allowing financial advisers and their clients to access it. Each brokerage firm has a different due diligence process in assessing our creditworthiness, but common aspects include helping a firm understand all the features of our product, portfolio, investment decision-making process, sales goals, capitalization, liquidity, and other financial aspects related to assessing our ability to repay our investors. Given the uniqueness of our investment institution, the product, our portfolio and the lack of a standard credit rating, we work directly with the brokerage firms when they are conducting due diligence. The brokerage channel is fairly unique for Calvert Foundation today – with weekly sales of the Note of about $1 million.
What lessons have we learned in bringing new products to the retail market? First, building brokerage distribution takes considerable time as each firm does things a little differently – so it is best to prepare your team for the demands of this. At the same time, brokerage firms are closely watching what their competitors are doing. Relatedly, the brokerage firms themselves are interested in considering products that can take on significant capital and will be of interest to many of their clients. Having a national footprint and being available for sale throughout the US helps in this regard, and the ability to take on significant investment dollars can also not be understated. While $50 to $100 million capital raises are significant within impact investing, that is relatively small in the financial services industry, and brokerages generally focus on products capable of taking on $100+ million (ideally $500+ million).
Second, before due diligence begins, understanding the perspective of the financial advisers within each brokerage firm and identifying those who can be articulate champions of the product and the value it offers to their clients are key. Third, since many investors learn about new investment products from their financial adviser, educating advisers is critical to the growth of impact investing. While a growing number of advisers focus on sustainable and impact investing, for most, this is outside their area of expertise. Participating in select industry conferences is helpful on a high level and meeting one-on-one or in small groups with advisers is an important next step. It can take several conversations before the understanding of investment mechanics and the value proposition for the client clicks. The growing interest in impact investing helps, and it is useful to showcase how this knowledge is helpful to advisers, both for attracting new clients and building deeper relationships with existing ones.9
Online Investing: A More Engaging Future
Critical to the democratization of impact investing is providing online investment opportunities. In 2007, Calvert Foundation was the first security issuer on MicroPlace, the only online broker-dealer specializing in microfinance securities for retail investors. Through our partnership with MicroPlace, we were able to attract over 8,000 new investors and experienced a 30% growth in sales in 2008 alone, a year in which much of the economy was paralysed by the financial crisis. More recently, Calvert Foundation launched its own online investment platform10 to create an engaging medium through which investors can easily connect with the places and issues they care about. The platform distributes our Community Investment Note and investment initiatives and is not dependent on the pending crowdfunding legislation with the JOBS Act.11 The online channel is essential to our democratization mission because the online investment minimum is only $20, versus the standard minimum of $1,000 on brokerage platforms. It also automates much of the customer service needs for investors, from streamlined compliance and payment processing, to online account access and maintenance for investors. This not only creates efficiencies for us internally, it provides a more engaging platform for investors.
The online sales channel further expands the playing field by making impact investing more accessible to a wider range of people. While the brokerage channel brings access to larger dollar amounts, over half of Calvert Foundation’s investors have come online given the ease and low investment minimums. We see college students starting with $20, and years later investing more when they have more money to invest. We see the average online investment in our Note being around $200, but some of our online customers are investing more of their investment portfolio or retirement accounts through their brokerage accounts as discussed before. While it is still too early to understand the full potential for impact investments to raise significant capital online, we hope the positive trends we see from our experience and the increasing interest in crowdfunding continue to provide new, exciting ways to engage investors.
Partnerships to Advance the Impact Investing Field
While having a credible investment thesis and track record is critical, devoting organizational capacity to investment compliance, marketing, sales, customer service and administration can be a real stretch. Given the uniqueness of impact investing, and the resulting lack of efficiencies in our private markets, strategic partnerships that leverage complementary strengths will be important for further industry development.
Capital Raising Partnerships: In 1998, Calvert Foundation began creating capital-raising partnerships of our Note specifically for community development organizations. Organizations took the lead on marketing and introducing the investment opportunity to their networks, while leveraging Calvert Foundation’s administrative, legal, regulatory and distribution systems. This arrangement allowed organizations to test the water on retail capital raising, and for investors to get comfortable with organizations that had our backing, without the time and expense needed to create a new investment product. Calvert Foundation’s first such partnership was with Oikocredit, a worldwide financial cooperative that promotes global justice by empowering disadvantaged people with credit. That Note programme has raised over $10 million to support its portfolio and led it to create its own investment product once it realized the opportunity. Note programmes have also been created for other organizations, such as Habitat for Humanity and VisionFund International.
Advisory Services: To help build needed impact investing infrastructure, Calvert Foundation began a fee-for-service programme called Community Investment Partners in 1999 to provide due diligence, asset management, investor administration and other consulting services. We helped dozens of investors design their impact and programme-related investment programmes, provided due diligence to industry players and helped more than a dozen non-profits create their own investment products. In 2010, these services became formalized in a wholly-owned subsidiary and registered investment adviser, Community Investment Partners. The current focus is on managing impact investment portfolios for institutional investors, including the Communities at Work Fund, a $100+ million small business jobs fund with Citi.
Donor Advised Funds: Another business model was created out of the overwhelming amount of donations that Calvert Foundation received after the tragic events of 11 September 2001. The Calvert Foundation Giving Fund was one of the first socially responsible and community investment donor advised funds, offering many of the benefits of a personal foundation without the legal complications and expenses. A Donor Advised Fund can be opened with as little as $5,000 and allows donors to receive an immediate tax deduction and the confidence that their funds are generating positive social returns through the impact investments they select. In 2010, in an effort to transform it into something much bigger, Calvert Foundation spun off the donor advised programme into a separate non-profit called ImpactAssets. ImpactAssets enables philanthropists and individual investors to engage in impact investing through their donor advised fund, field-building resources and new investment products that are in development.12
Campaigns: We learnt that to increase participation of retail investors, it is essential to create investment opportunities in communities and issues they care about. In partnership with community organizations, we just launched the Ours to Own campaign13 to enable investors to support the cities they love, channelling their passion for their community into tangible investment action. We started these local investment initiatives in Denver and the Twin Cities and will expand to at least five cities in 2015. We’re also expanding the investment options people have through our Note to sectors like affordable housing, education, small business and fair trade. Calvert Foundation is seeking further partnerships to create initiatives around global health and engaging diaspora communities as well.
Impact Investing as a Collaborative Effort
Calvert Foundation serves as a connector for investors to support community development needs. There are significant barriers to entry to accessing retail investors and creating broad distribution, but we are helping to demonstrate the investment potential of multiple impact sectors to the financial services industry. For impact investment to reach its potential, partnerships among impact investment firms are needed to benefit from increased efficiencies, reduced risk and more growth opportunities. We stand ready to help other impact investment firms overcome the hurdles and gain access to investors and financial advisers in order to further democratize impact investing.
Calvert Social Investment Foundation, a 501(c)(3) non-profit, offers the Community Investment Note, which is subject to certain risks and is not a mutual fund, is not FDIC or SIPC insured, and should not be confused with any Calvert Investments-sponsored investment product. This is neither an offer to sell nor a solicitation of an offer to buy these securities; the offering is made only by the prospectus, which should be read before investing. Due to Blue Sky regulations, the current offering of the Community Investment Note may not be available in all states.