Impact investing

Ruth Selby: 

This is the DAFgiving360 and Stanford PACS webinar, Effective Philanthropy for Advisors. Thanks so much for joining us today.  

Ruth Selby: 

This is part six in our six webinar series. Today's topic is impact investing. Jesse Simmons from CapShift will be taking us through today's content. We'll get started with that in just a minute. Right. Here's today's agenda. We'll do a brief welcome and introduction. Jesse will take us into impact investing, an overview and a look at the landscape of the field, and then we'll look at impact in private markets. Then we'll close out with some more words from DAFgiving360. Now, I'd like to pass the microphone to Nathan Falkner from DAFgiving360 to tell us more about our host today. Nathan? 

Nathan Falkner: 

Thanks, Ruth. Hi, everyone. Thanks for being here today. I'm thrilled to welcome you to our Advisor Webinar Education Series in partnership with the Stanford Center on Philanthropy and Civil Society. I'm Nate Falkner, Director of Charitable Consulting for DAFgiving360, where I lead our charitable consulting work for the Western United States. For those who may not be familiar with DAFgiving360, we're an independent 501(c)(3) public charity with a mission to increase charitable giving in the United States. We do this in a variety of ways by providing a range of support services, including simple tax smart solutions to donors and financial advisors. Before we dive in, a quick housekeeping note, if you're eligible to gain CE credit for participating in the webinar today, please be sure to stay with us for at least 50 minutes to qualify for credits. 

Today's session, as Ruth noted, will focus on impact investing. Investor demand for impact investing has surged in recent years as individuals and institutions increasingly seek to align their portfolios with their values. It's a shift that we at DAFgiving360 have been particularly focused on as we continue to innovate and expand our offering in order to meet the evolving needs of the advisors and the donors that we work with. Today we're joined by Vera Michalchik, who's the Director for the Effective Philanthropy Learning Initiative at the Stanford Center on Philanthropy and Civil Society. Vera, I'm going to pass it to you for some additional context and to introduce our speaker. 

Vera Michalchik: 

Just lovely. Thank you so much. Yeah, I direct the Philanthropy Research and Education Program at- 

Stanford Center on Philanthropy and Civil Society. A lot of words there, but we're known as Stanford PACS, and our goal is to enhance society through philanthropy and to help philanthropic giving strengthen civil society and affect social change. We also publish the Stanford Social Innovation Review. If you don't know it and have any interest in nonprofits, how they work, how the world is affected by the sector that's neither market nor governmental, but is really about nonprofits and associational life. Great, great magazine. I loved it long before I started working in the organization that publishes it. And yeah, I'm here with Ruth Selby, who's our program and education manager. 

together we run the Effective Philanthropy Learning Initiative, which is really dedicated to Using interdisciplinary skills and a variety of approaches to really help donors learn and accelerate the knowledge that donors and donor supporters bring to the work in this space. So we do education, develop tools and resources and do research as well. So with thatPassing it off to Jesse. Go, Jesse. Thank you so much for being here with us and being part of this series that we've been in collaboration with DAFgiving360. 

Jesse Simmons: 

Thanks. Thanks, everyone. Delighted to be with y'all today. We are going to dive into impact investing, values aligned investing, socially responsible investing, ESG investing, and everything in between. We will talk through some introductions and definitions. We'll dive into the underlying impact investing landscape. We'll talk about how to build impact investment portfolios, and then we'll talk through some sample impact investments. Over the course of the presentation, there will be some amount of surveys that will be pushed to you to help keep this engaging and make sure that we're on track. Would welcome, enthusiastically welcome questions, comments, other things that will be helpful to chat on. We want to make this as actionable a presentation for you all as possible. 

The most cringeworthy slide for me to present is of course about myself, so I'll try to make this very brief. I've spent the last 10 years working with families, their advisors, philanthropic institutions to build impact investment portfolios. We've seen an enormous growth in impact investing over the past 10 years to the point that the most critical first conversation with advisors has changed from a, "What is impact investing and why would I want to do it?" To a, "My clients and prospects are asking about this, how do I do it and how do I do it responsibly?" So we've been excited to see the growth. 

For background CapShift, I'll give you the 10 seconds. We work with financial advisors and philanthropic institutions who are seeking to bring impact investing to their underlying clients in whatever that means for them and for their underlying clients. So we start from sourcing, due diligence, post-investment management. We cover this process. So talking to advisors and educating around what is impact investing, what does this mean for your clients specifically, and what does this opportunity set looks like? It's something that we're doing on a day-to-day and week-to-week basis. So delighted to be with y'all. 

With definitions at the very front, impact investing is investing with the intent to generate measurable social and environmental returns alongside financial returns. So investments that are financial returns generating, as well as having some positive impact on people or planet. Impact investments are an interesting topic next to DAFs in that they combine philanthropic goals or the goals of clients and donors having agency on the world around them with their assets and investments, just like a donor-advised fund does. So very, very, very complimentary in that case. I'm interested in your input on this poll that we're just sharing right now to get a little sense of where you might be in this impact investing journey and where your clients are. 

Donor-advised funds end up being a natural place for impact investments as well as foundations because this is the assets that clients have already said, "These have left my estate. These are for the benefit of society. I have already donated these and designated them to impact the causes that I care about most that are beyond myself." And so is a natural place where we often see our partners doing their first sort of impact investments or starting to integrate this philanthropic or impact goals across the investment portfolio. 

As I mentioned, we've seen the growth of impact investments pretty profoundly across the marketplace over the last 10 years, to the point that just under half of all high net worth investors polled say that they are either already making impact investments or are interested in making impact investments. We'd expect this process to continue to accelerate due to two different wealth transfers that are pretty substantial going towards next gen and millennial investors, as well as to more and more women investors, both who have a higher propensity even than the broader market to want to make impact investing. 

So this is happening now. We expect it to continue to accelerate in the future, and we've seen more than a doubling of the marketplace even in the last three years, excuse me, and that's dovetailed with our experience as a firm. Advisors, as you know, are positioned to be the trusted expert in the room with their clients that are trusted to make decisions about how wealth is allocated, how investments are placed, and do that broad strategy piece, so we really emphasize and celebrate the role of the main trusted advisor as the person best suited to help clients ultimately discover the type of this marketplace that is the most appropriate for them. 

Impact investments cover asset classes, sectors, and geographies, and so for some definition setting, we see impact investments across public and cash equivalents that are accessible to many more and smaller clients. We see impact investments in private markets extensively across asset classes, sectors, and geographies, and then we see impact investments or recoverable grants in these nonprofit and catalytic categories. And then we see impact investments touching all 17 sustainable development goals and an extraordinary number of geographies, which can also be a critical place from which folks are starting with their impact investment goals. I want to have impact in a particular city or town or country that is most important to me, and we call those place-based impact investors is another big category of where we see this demand start to bubble up. 

For context, our database includes now 1,500 private impact investments and recoverable grants and hundreds more on the public side. We aim to source the marketplace, but we always try to contextualize this is a very large market. We know our advisor partners are often receiving specific products from clients who are saying, "I found the climate investment opportunity and I want to move forward with it," and being able to share that context of this is not a one of one, but a one of hundreds helps empower clients to trust their advisors to help them parse this very large landscape and not end up in one of the many products that might ultimately not be a fit. As with any market growth and growth and client interest, there are a huge diversity of quality of fund managers across the impact investing space, and we try to say that proactively and that not every impact fund is suitable for different client goals, and so parsing that space is a critical piece of the journey. 

I'll take the definitions one step deeper in these three buckets that we build to try to cut through all of the conversation around what is an impact investment, what is not; what is ESG, what is not; what is sustainable or values aligned or responsible into three big buckets that can we describe as align, build, and catalyze. So align market-rate public investment funds, liquid assets, often described as ESG. These can be investment opportunities that are tilting towards companies with lower carbon footprints, and so basically orienting the portfolio away from harmful actors and towards better actors, be them lower carbon companies, stronger board diversity companies, companies with better practices for their employees as a good business process and something to proactively use as a material factor in portfolio construction. 

And then second, the engagement piece, which we often think of the causal channel through which impact is generated in public markets. I am going to use my ownership of this company as a way to push them towards lower carbon emissions, better treatment of their workers, more diversity on their board, et cetera, and that's something that many of these public impact funds do very proactively with sustained long-term shareholder engagement campaigns, which we've seen to have moved company practices meaningfully over a long time. Really pulls together the collective ownership of many different owners towards these sort of engagement practices. 

We take a dramatic step towards higher impact per dollar, but a whole lot fewer dollars when we enter the second category, which we call building solutions in private markets. This is market-rate private investment seeking a risk-adjusted market-rate return of financial return alongside material social or environmental impact. There's an enormous diversity of funds that are in this category, though the dollars, as you can imagine, are significantly smaller than those that we see flowing into the broader liquid markets aligned bucket. This can include education technology venture capital, affordable housing real estate, lending in private credit markets to underserved and underrepresented communities, and many other categories or types of products. We'll talk about some of those as we go through the process. 

Then third, we're taking another step in higher impact per dollar as we think about it closer to philanthropy, and then a step down in number of assets that we see moved here. This is by far the smallest category, which we think of as catalyzing deeper impact in private markets with impact-first private investments and recoverable grants. So these are offerings that are saying market-rate capital and the restrictions around risk-adjusted market-rate returns are not going to ultimately reach these beneficiaries or have these impact outcomes that we want. We are going to intentionally accept a lower financial nominal return, a higher risk or a longer liquidity timeline in order to have these outsized impacts. We do a fair amount of work with two different catalytic microfinance funds for smallholder environmental farmers in Sub-Saharan Africa, an example of a beneficiary group that's really difficult to reach with market-rate capital. Question? 

Yes, this is a great example of a question on these different categories here. So this third catalytic bucket is an example of a strategy that is used only from charitable assets that have already been designated for the benefit of society, or in some cases from clients who have made all of their money, have designated what they want for their lives and their inheritance and are saying, "I want to accelerate my philanthropy and give more away," because it is inherently accepting a lower rate of risk-adjusted return. 

So Logan, to your question, these first two categories align and build would be probably the best fit for clients who are in this 20 to 35-year-old range and are prioritizing the growth of their assets to support their lifestyles long-term. I won't go into portfolio construction and the benefits of private markets deeply, but just to share, there can often be benefits to a portfolio in bringing in addition to liquid assets, private investments across different asset classes, enhancing the overall risk-adjusted return profile of a portfolio. 

And I'll just share for a moment, there are powerful market reasons to be invested in some of these sectors as well, and so being aligned with forward-looking industries, industries that are more proximate or closer to and ultimately a lower carbon economy, companies that are performing better in the long-term because of higher diversity of their boards or better treatment of workers over the long-term we do see as material drivers of outperformance. And so there's the, "I want to have an impact, a positive impact on the world beyond me," argument or motivation for folks who come into impact investing. There's also the, "I want to align my portfolio to where the world is going and be ahead of this," and that being a financial motivation as well. 

This is a good segue to financial returns. So the vast majority of impact investors say their financial performance expectations were met and exceeded. Anytime we're looking at blended benchmarks with the entire impact investing universe, they're intentionally getting dragged down by that third bucket of catalytic intentionally impact-first investment opportunities. So we try to be very careful about segmenting out for market-rate investments and for those that are seeking risk-adjusted return profile. We've seen meaningful demonstration of the ability to achieve that. 

A little bit more richness that helps prove this point is the impact investing market can be clumsily split into two different categories of funds, established institutional fund managers that are rolling out an impact investment product, and then impact shops themselves that only offer impact investing funds, and the market-rate risk-adjusted bucket of impact investments is a combination of those two, both those emerging funds that were once raising their first, second, and third funds 5, 10, 15 years ago, and are now on their fourth and fifth funds, have demonstrated top quartile returns, have demonstrated the ability to generate a differentiated financial return track record and are now raising those more mature funds with the track records you would expect, and then the first bucket, which are billion dollar-plus investment platforms, hundred billion dollar-plus platforms that are offering a specific impact investment product. There's a huge diversity in impact orientation or impact fealty that we see across these different products even within those categories, but help sort of prove this point that a lot of these private market-rate impact investment opportunities are actually building on demonstrated track record, demonstrated investment teams and some leaders. 

Yeah, by market-rate investors, I'm talking about the first two categories here. So folks who are targeting risk-adjusted market-rate returns. It's the vast majority of all impact investors are doing that. And then particularly within charitable assets, you'll see folks saying, "I'm going to target impact-first or financially concessionary rates of returns," which was a good question from the audience. And we try to be very careful about segmenting those out. 

Also, a good segue to the next slide, I'll talk a little bit about what is impact-first investing. And so this is... Again, the minority of impact investments fit in this category, but is more common in charitable assets like donor-advised funds or foundations. So specifically saying we want to accept this lower rate of return in order to have outsized impact profiles. These are often referred to as program-related investments or PRIs, and the distinction there is that is a specific tax designation for these investments made out of a foundation's granting bucket where investments or these specific program-related investments can count towards the 5% annual spend from a foundation. PRIs out of donor-advised funds are just impact-first investments that are intentionally financially concessionary. 

There's three different types of reasons that we typically see folks taking on impact-first investment opportunities. So one, sustaining, addressing structural capital gaps on sectors, business models or populations or geographies often hardest to reach. I mentioned the example of smallholder farmers in the developing world. We see an example of large and tenured managers that lend and provide market access to some of these folks as a poverty alleviation strategy, conversion towards more regenerative practices as also an environmental strategy. We see some of the folks we work with love this as the highest impact on populations that are very underserved by broader markets and therefore market-rate products, and by allowing a sacrifice of some return, think low single digit return profile, able to reach folks that otherwise would not be reached by the investment universe. 

Scaling opportunities. So helping multiply the impact of early models to move from pilot to commercial viability. I mentioned the example of an emerging manager growing up to be a more market-rate tenured opportunity. There's a huge category that is helping wanting to bridge some of these managers from their early stages to more mature and being some of that catalytic capital, helping them grow, as well as existing in blended finance structures. Blended finance could be a whole other webinar, but the crux of it is funds that are raising multiple tranches of capital where there's a first loss protection or a subordinated tranche where a impact-first investor might say, "I will take on this higher risk protection lower in the capital stack to help crowd in more investors with a lower risk profile senior to me." 

And then finally seeding, so getting new things off the ground altogether. First dollars in for an emerging fund manager, early capital going into a transformative climate technology that needs help getting out of the lab and into the market and building their product in the first place. These are critical dollars that can have exponentially larger impact outcomes because they're willing to go early. Demand for impact-first investments is also growing. Please go ahead. 

Ruth Selby: 

Sorry, Jesse, to interrupt. I just wanted to surface two questions. There's one in the chat about how liquid impact-first investments are. Well, I'll let you answer that. And then another one in the Q&A about recoverable grants. 

Jesse Simmons: 

Love it. Impact-first investments and the market-rate impact investments span on a continuum from one year or less than one year liquidity up to 10-plus year traditional LPGP structure, private equity, venture capital, real asset funds where they're calling capital in, deploying them, and then harvesting the assets. The big difference that we can think of for those on the shorter duration side, those tend to be evergreen pools of assets that are either bringing investors in at quarterly gates, so allowing investors to buy in and then redeem their assets also on quarterly gates at the quarter of their choosing, which requires a liquidity management process and checkpoints on the fund manager's side, but does allow folks to come in and gain exposure and grow the size of evergreen portfolios that had assets in there before they came, have assets in there after they leave. 

We see a fair amount of this in the clean energy space with big infrastructure assets that are boring and easy to price and income-generating, as well as the real estate space with affordable housing assets that are boring and easy to value and income-generating, end up being a natural place where we see some of these evergreen vehicles. The other form of these evergreen pools where we see the ability to deliver the shorter liquidity is note programs. So CDFI notes, community development financial institutions, are an enormous category of domestic lenders to underserved and underrepresented communities that do a whole lot of community development work. They have large pools of lending capital lent out at all different tenures, and they accept capital in at all different tenures, so are often saying, "We'll give you one-year returns at low single digit with a strong downside protection, and you can help accelerate the path of capital at that shorter liquidity timeline." 

For folks in DAFs, this is highly relevant when these assets are going to be granted out a year from now, having something that can increase dramatically the impact profile of the assets from sitting in a money market fund or a public ESG portfolio to a one-year note to a CDFI with very strong downside protection is a very common use of these funds. Additionally, when folks are allocating to that longer lockup fund category with capital calls where they're saying, "We're going to go out and find a bunch of new things to invest in, invest in them over the course of four years, help grow them, and then sell them," that four-year period on which they're calling in capital is often we see impact motivated investors saying, "Okay, put me into some of these shorter lockup opportunities with the capital that's going to get called into these funds anyway." And we'll get into recoverable grants deeper later, so maybe I'll think the question and we'll talk a little bit more about RGs. 

Great. So we see a fair amount of impact for first investments in DAFs sort of tying it all together, just showing a very simple illustrative risk return continuum with impact-first opportunities above the line, market-rate opportunities above the line to give you a little bit of a flavor of where we might see managers intentionally taking on either higher risk or lower return in order for higher, deeper impact additionality, and then there at the bottom of the line, you would imagine follows that a typical diagonal approach of every unit of additional risk that we're accepting, we're expecting a higher rate of return for market-rate opportunities. 

Another poll that we're interested in, because we're going to get into some specific themes right now of sample impact investments and talk a little bit about some of the more common themes where we see impact investment demand. I'll start with climate change. So impact investing in climate, this market we break down into mitigation alpha and resiliency. So climate change mitigation, clients who are focused on slowing the pace of climate change and as sort of the core set of climate-focused investors. So early stage clean energy investing, clean technology funds, green infrastructure, et cetera, there's a huge number of investments that sit across this mitigation. 

Resiliency or adaptation is the second category on the bottom left where we see investors saying climate change is already happening and is having disproportionate effects on underserved communities around the world, how do we build resilience and adaptation to the effects of climate change that we're already seeing? And even if we go net-zero tomorrow, we're going to see growing for some decades. And then finally, alpha, which I referred to before as I want my portfolio to be resilient itself to the effects of climate change. So as legacy assets become less and less used or risk comes up due to more severe storms, coastal flooding, drought, fire risk, all different risks of climate change, I want my portfolio to be resilient to those, so really a de-risking of the portfolio. And then conversely, I want to take advantage of solutions that are going to be, yes, help slow the path of climate change, yes, boost resiliency, but also be positioned to benefit from increased transitions towards lower carbon economies or some of these changes. 

I'll share an example. We just brought to our investment committee a wildfire-focused fund that is investing in technologies that help firefighters better identify and fight forest fires, technologies that help work with the soil microbiome to help forests become more resilient to forest fires, GIS and geospatial technology to better monitor and assess risks of fires before they start. An example of all venture capital-like technology investments that look structurally just like a venture capital technology fund, but are all oriented around fire risk and wildfire risk. Similarly, in the climate space, we have one on biodiversity that is all thinking about biodiversity, but with all different types of plugins, both we would see as poised to benefit and see advantages financially while also participating in these solutions as well. 

And then again, you'll see the aligned build catalyze framework that we have here that we introduced before of across all different portions of the portfolio, you'll see the whole alpha bucket is this two lighter shades of green. So because this is a market-rate portfolio or market-rate category of investments, these would be both the public investments that are market-rate, the private investments that are market-rate, and then everything outside of that would be the catalytic or impact-first in the darkest green on the outside, layering a couple of frameworks on top of each other. 

And then we see a similar climate landscape set across example portfolio. So an example portfolio looking at public markets and where we would see those assets, types of assets and how they would be working to divest from bad climate actors, invest for and push for better climate adoption of public companies, public fixed income, and then private equity, real assets, venture capital, and program-related investments or recoverable grants, that third catalytic bucket. I won't go too much deeper in here for a sense of time, but just to share a real richness of different types of opportunities, even just on the private side, a semi-liquid evergreen portfolio of solar and wind farms we see with high liquidity for the prior question, high downside protection and relatively lower upside versus a agricultural technology venture fund doing genetic soil, microbiome, and food waste. 

I'm just seeing a question in the chat. Thank you. Do you all have viewpoints on public equity investments that can compliment the private equity in particular themes? We see two different big buckets of public investments. We see the sort of core and satellite. This is obviously normal parlance on the financial side. Also within impact investments, there's a category of broadly diversified broad impact or broad climate impact funds that are doing shareholder engagement and active screening and end up looking like the core of most portfolios. We often lean in with advisors to support on specific thematic public equity and fixed income, but more public equity funds that have the more thematic, more niche impact profile that we would expect to see typically in private markets that are saying we are going to hold often a smaller basket of securities, target specific sub-sectors of the impact space, and invest very intentionally in that space, engage very intentionally in the space and push for that higher type of impact orientation or higher impact causality with that more niche or specialized focus. 

So yes, for advisor partners of ours with clients that have the most sophisticated impact theories of change and strategies, it's normal to see more allocation to some of these more thematic or niche public managers as well. Similarly, for clients that are too small to make private investments, but still want to see a more thematic orientation of their portfolio than just the broad general impact ESG funds, some of these more thematic public funds are a great fit to help drive that customization and making it feel like it really reflects the goals of the clients rather than anything else. 

I'll share a little bit of our view on the market from a specific product standpoint. So the Research Engine, forgive the parlance, is our platform of sourced impact investment opportunities. These are exclusively private market impact investment opportunities and recoverable grants. You're seeing almost a thousand different climate opportunities across the target financial return profile across asset classes and geographies. So it's a very large set of opportunities that we're seeing in climate, maybe the most common theme. Another very common theme we're seeing in the market today is food and agriculture. Regenerative, sustainable food and agriculture, both in food systems, agricultural systems, nature-based capital, and so we put together a primer to show how different impact investors are approaching this space. We segmented these approaches to people, planet and animals. So people looking to achieve planetary impacts through the food system, impacts on underserved and underrepresented communities through the food system, and then animals as well. You're seeing similarly a strong intersection of types of approaches that have impacts on all three different beneficiaries, and then some that fit really cleanly within one or the other. 

We also segmented this food and agriculture space through the value chain, and so from farming at the very beginning to processing and distribution, to point of sale, so restaurants and groceries, and then finally to post-consumption, recovery, and recycling. And just bringing back to whenever there's an individual client that's asking... There might be three clients who have some interest in food and agriculture, they might all be talking about different portions of this beneficiary groups, which I shared at the last slide, or parts of the value chain, so we try to be very intentional about saying, "Let's be specific about where you want to achieve impact and what is most meaningful for you," and then help link those impact areas to the portfolio or financial return profile that that client is looking for and is suitable for that client. 

So just to give some examples, we mentioned the smallholder rural farmers, the transition to sustainable and regenerative farming is a big pool of these impact investments where farmers that are using traditional farming and agricultural means are looking to transition to organic or regenerative ag and need capital to help finance that transition. We see a fair amount of that. In processing and distribution, so vertically integrated sustainable food businesses on the closer to buyout and later stage investment sides or supply chain technologies where we'll see venture innovations for more sustainable and equitable supply chain innovations. 

Restaurants and groceries, sustainable food brands, so investing in the genesis and scaling of direct-to-consumer brands, as well as underserved or underrepresented food businesses. There's a whole category of lending to food businesses in underserved communities or by proprietors that are underserved by capital markets traditionally. And then finally, access to food and food deserts, it's a whole other category of more equitable access to healthy food in places that have not had that. And then finally, consumption and post-consumption recovery and recycling. So biogas digesters, helping manage methane emissions on a farm, composting infrastructure, food waste is a huge category of investments that we see as well, and so really an ability to impact this important set of sectors across many different types of businesses and many different funds. 

As you can imagine, as we've talked about at the portfolio side, these different, whether you're private equity buyout or private credit or venture capital type innovations, all of which are bringing very different types of risk return liquidity profiles to the portfolio, so really something that is for whatever risk return liquidity profile a client might have trying to right size the appropriate types of products there. And then similarly to the climate example, I share this just to share a perspective on what at the big picture of the market looks like. We've tracked over 500 opportunities in food and agriculture, overwhelmingly market-rate first, so about 70% market-rate and split across all different asset classes, but a higher concentration in private equity and venture capital. 

A final theme I'll talk about briefly is the social justice theme. These are three of what is many more themes. The motivation here for investors is helping create a more fair and inclusive economy. A very, very diverse landscape of social justice focused investments and often the most personal to the investors. So we try to do some probing around, what does success look like for you, the client? What are you ultimately hoping to achieve with these assets? But a common theme here is creating benefits for underserved communities, expanding access and driving long-term systemic change as three different sort of tiers of impact that we might see across here. We see lots of investments in the education space, so affordable education, skills attainment, workforce training and development, improving the pedagogy for underserved and underrepresented students. 

The affordable housing space is another big category of impact investments where just like in another real estate investment, you might have a set of multifamily housing properties. Same idea that you're buying into, but they're affordable housing properties. Taking advantage of lower income housing tax credits or other public incentives, monetizing those and bringing them back into a blended return stream for the investor so that you can achieve market-rate risk-adjusted returns alongside being a provider of affordable housing for communities that need it. Healthcare, there's many different types of healthcare investments from healthcare technology to provision of services and underserved community to healthy food and healthier neighborhoods. Affordable credits, so providing access to capital and lending in communities that have been historically underserved or redlined, and then funding to help get new businesses off the ground. 

If you're interested in any of these areas that I've talked about, we have full primers that will go all the way in on our website. Feel free to check them out. There's a lot of depth here and a lot of different ways to meet clients of all different interests. And then similarly, a large set of opportunities that we see. A little bit more on the impact-first side. So still majority market-rate, but we see a fair amount of impact-first opportunities in the social justice space and across asset classes, sectors, and geographies as well. 

I'll pause there for any more questions before diving into recoverable grants and then finally finishing with how to build impact portfolios. Love it. Okay. What is a recoverable grant? A recoverable grant can often look something like an impact investment, but is structurally different in that it is a grant or a gift to a nonprofit organization without the protections of an investment security, but the intention to recover some of these assets over time. These may look like an impact investment in that there is a underlying revenue model for the nonprofit that is being granted to that is able to generate a return or recovery of assets just like an investment does, but they are not structured as an investment security. So that means they're not regulated as an investment security, not feed on like an investment security, and for different donor-advised funds, different investment committees, all different types of institutions can be a easier first path to approving the allocation of assets towards particular impact-first or higher risk, deeper impact opportunities that otherwise are not suitable for an investment. 

Recoverable grants help do this recycling of capital just like an investment were, but sit in a grant structure and are always in this final sort of catalytic bucket of impact-first opportunities. And the justification here is simple. It's, I'm making grants to an organization that is doing something that I care about and meaningful, but is itself generating some revenue model or returns on its activities. If I can make a recoverable grant, I can give them the same sort of impact orientation, but then recycle that capital to redeploy either to the same organization, to different organizations. And as often a clients are interested or willing to make larger recoverable grants than just individual grants because there's a potential recovery of capital. So an example, donor provides a recoverable grant to a nonprofit to help provide seeds and agricultural impacts to farmers. Farmers use those seeds, plant their annual harvest, repay the nonprofit at the end of the harvest season, then those dollars from that repayment are recycled in the recoverable grant back to the advisor. 

Recoverable grants leave the balance sheet when they go out, but they're tracked on the backend and then rejoin the balance sheet when they are returned or recovered. Again, these resemble in some ways a program-related investment or an impact-first investment, but they're governed by an LOI, or a letter of intent, to repay rather... And if there's a workout or a default, there's no standing or seniority of recoverable grant holders. So intentionally looks more like a grant in a case of default, but in the case that things go very well, the ability to recover those capitals. 

Thanks for the question in the chat. How often do you all see clients redeploy to the same organizations versus using for new or different organization opportunities? It depends dramatically on both the development of these organizations, as well as the development of the either impact strategy or just liquidity profile of the client. So we had the example of... For portfolios that are ultimately getting deployed into longer lockup private investments, or the example of portfolios that are maturing from longer lockup private investments, maybe in a wind down situation, you might see redeployment to the same organization a few times, and then as there's needs for that liquidity elsewhere in the portfolio, redeployment out to longer lockup opportunities, pure grants, or just other recoverable grants or impact-first investments. 

For recoverable grants specifically, it's pretty normal that we'll see clients have a long-term relationship with individual nonprofits that are putting their capital to work, but this is really where the pairing of impact reporting in a portfolio is critical as they'll see the... If the type of impact meets their criteria and what they're looking for, they can redeploy, if it's falling short or drifting into another type of outcomes that doesn't feel like it resonates as much, there's the option to redeploy to other opportunities. We add 30 to 40 impact investments or recoverable grants to our platform per month and are doing diligence on about 10% of those, 10 to 20% of those, and so there's a fair amount of flow of new products that come into market, old products that wind down. So can be an opportunity often on a quarterly or annual basis to say, "These are the returns coming back. There's the option to redeploy into the same one or here are some other new options that might be a better fit for your strategy depending on what you, the client are interested in." 

A few different examples of recoverable grants here. Blue forest conservation. So this is very different from the other wildfire venture capital fund I talked about earlier. This is a nonprofit financing ecological restoration projects that reduce wildfire risk and improve landscape resilience. So this is a bullseye climate resilience and adaptation approach. There's a revenue model here, which is in state and local governments are often offering payment for this enhanced resilience of forests in their domiciles, and so posts after these projects are implemented and the returns might repayment from the state and local governments come back into blue forest conservation, that will be the funding that essentially allows them to provide recovery to the recoverable grant holders. 

International rescue committees support refugee families on their path to financial sustainability in the US through economic empowerment tools and loans. This is both technical assistance as well as access to lower cost capital for some very underserved refugees here in the US. And that is another example of there's... It's a higher risk, it's a lower rate of return ultimately, but a really interesting impact profile for folks who care about refugees and does have some return or recovery of capital. And then finally, root capital. So small holder farmers in some of the world's more vulnerable communities, providing that upfront capital to help increase yields, technical assistance, as well as linking to markets and storage of produce to help complete that full cycle for what is international product chains, but really driving some of the benefits and returns of that back to the local providers at the local level. 

I will spend just the last couple of minutes diving into how to build impact portfolios. This will be a quick section. How to build impact portfolios. This should look very familiar to how you run your client practice anyway, goal setting, strategy development, and then implementation really. So set financial and impact goals. So just like we identify financial risk, return, liquidity needs, and other diversification goals of the financial portfolio, we do so the same thing with impact investment themes. This does not need to be a highly technical process, but can be a, tell me what you're interested in, what are you granting towards? If you could change anything about the world or impact anything about the world, what might it be? 

Tends to be a very delightful conversation to have with clients. One that we tell advisors all the time, "You don't need to have the solution in mind when you're inviting the conversation, but that inviting that conversation is both a way to deepen relationships with clients directly, as well as meet the 45% of high net worth clients who are either already doing this on their own or looking for their advisor to help bring this conversation to them." From those goals, just like in financial asset allocation, we build an asset allocation framework. We can overlay that asset allocation with the products, the opportunity set in the market. So let's narrow from these hundreds of impact investment opportunities out there to those that are really sitting at the intersection of my financial asset allocation goals and the impact or outcomes goals that I want to have on the world. And then finally, implementation. So deployment, managing the portfolio, monitoring the assets post-investments for their impact, for their financial performance and performance, as well as their impact performance and how we'll see them evolve. 

For impact investments, they look like traditional financial investment due diligence, traditional investment operational due diligence or ODD, and then finally with impact due diligence as another piece of this puzzle with the core areas that we're digging into in each of these different categories outlined on the right, but really trying to get a holistic picture of what are the strengths, weaknesses, and risks in all of these categories. 

And then finally, impact reporting. So annual impact reporting, which is when impact data typically comes from managers and companies, trying to drive towards the so what of all of this. What are the types of outcomes that the impact investments might be driving? How does it resonate? How does it impact strategy for the client moving forward to really make that a full circle and closed loop? With just a minute left, I'll pause there. That is impact investing in a nutshell. Happy to take any final questions or touch on anything else. 

Nathan Falkner: 

Terrific. Thanks all and thank you for joining us today, everyone. I hope that this session was informative and that I hope that it will help you navigate conversations with your clients. Please feel free to reach out to us or to your local DAFgiving360 charitable consultants if you have follow-up questions that were addressed today or if it would be helpful to go deeper on anything that was referenced this morning. If you've not had a chance to interact with DAFgiving360, we do have a business development team that can be a great resource. Feel free to reach out to them also, and thank you, everyone. Thank you for the time. 

Ruth Selby: 

I just want to echo the thanks. Jesse, this has been a super informative hour. We do lots of things on impact investing at Stanford PACS, but this is a new level of granularity that prompts lots of questions, so thanks very much. We really appreciate it. And for our participants, thank you for engaging with that quiz and we will stay on if folks have additional questions they would like to ask, but otherwise, thank you very much for joining us- 

Vera Michalchik: 

I'd like to squeeze on a big thank you to DAFgiving360 for their partnership in this work. They've been immensely generous and kind and interesting to work with in every regard. 

Nathan Falkner: 

Our pleasure. Thank you all. 

Ruth Selby: 

Great. Thanks very much. Take care, everyone. 

Nathan Falkner: 

Thanks, everyone.