Using Finance to Fight Global Poverty. Global Conference 2010

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1 Using Finance to Fight Global Poverty Global Conference 2010

Using Finance to Fight Global Poverty Monday, April 26, 2010; 9:30-10:45 AM Moderator: Betsy Zeidman, Research Fellow and Director of the Center for Emerging Domestic Markets, Milken Institute

2 Using Finance to Fight Global Poverty Monday, April 26, 2010; 9:30-10:45 AM Moderator: Betsy Zeidman, Research Fellow and Director of the Center for Emerging Domestic Markets, Milken Institute Speakers: Frank Baxter, Former U.S. Ambassador to Uruguay; Chairman Emeritus, Jefferies & Company Inc. Shari Berenbach, President and CEO, Calvert Social Investment Foundation Alexander Friedman, Managing Partner, Asymmetry LLC Maureen Harrington, Director-Corporate and Investment Banking, Standard Bank, New York 2

3 C.K. Prahalad

4 Extreme poverty has decreased significantly Percent of people living on less than 2005 PPP $1.25 a day Percent 60% 50% 40% 30% 20% 10% 0% Source: World Bank. 52.2% 2% 25.3%

5 Poverty is still over 50% in Sub-Saharan Africa Percent of people living on less than 2005 PPP $1.25 a day Percent 80% East Asia and Pacific 70% Sub-Saharan Africa 60% 50% 40% South Asia 30% 20% Latin America and Caribbean 10% 0% Source: World Bank. 5

6 Poverty is still a problem for many Percent of people living on less than 2005 PPP $2 a day Percent 80% 69.9% 9% 70% 60% 47.3% 50% 40% 30% 20% 10% 0% Source: World Bank. 6

7 Number of people living on less than $2 a day has remained roughly level over time People living in poverty (billions) Source: World Bank. People living on $1.25 to less than $2.00 a day People living on less than $1.25 a day

8 Countries with the highest income inequality Gini index ( ) Namibia Comoros Botswana Haiti Angola Colombia Bolivia South Africa Honduras Brazil Source: United Nations Development Programme. Note: The Gini index lies between 0 and 100. A value of 0 represents absolute equality and 100 absolute inequality. 8

9 United Nations Millennium Development Goals Adopted by world leaders committing their nations to reduce extreme poverty by 2015 Eight goals: Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Source: United Nations. Improve maternal health Combat HIV/AIDS, malaria and other diseases Ensure environmental sustainability Develop a global partnership for development 9

10 Social finance has many names Impact investing Double (or triple) bottom line investing Mission-related investing Mission-based investing Mission investing Aligned investing Active investing Full value investing Environmental, social, and corporate governance (ESG) investing Sustainable investing Socially responsible investing (SRI) Ethical investing Targeted investing Blended value investing 10

11 The premise Investments can generate collateral benefits or costs in addition i to financial i returns Social, environmental and governance factors can positively (or negatively) affect the performance of the financial asset Investment decisions are better when based on financial returns and extra-financial impacts 11

12 Responsible investments toolbox BELOW-MARKET-RATE TOOLS Grants Recoverable grants Guarantees / credit enhancement Below-market loans Revolving loan funds Gap financing First-loss loans Community development venture capital MARKET-RATE TOOLS Cash (deposits) Public equity Loans Screened funds Senior Direct public equity Subordinated Shareholder Guarantees engagement Loan funds Alternative assets Line of credit Direct private equity Fixed income Private equity funds Bonds VC funds Bond funds Fund of funds Asset-backed securities Buyout funds Hedge funds Real estate Natural resources 12

13 Impact investing Definition Actively placing capital in businesses and funds that t generate social and/or environmental good and a range of returns, from principal to above market, to the investor Source: The Parthenon Group and Bridges Ventures. Investing for Impact: Case Studies Across Asset Classes (March 2010). 13

14 Impact investing could grow to $500 billion within the decade US$ billions $60,000 $40,000 $50, $20,000 $0 Global managed assets $6,990 Global social screening and shareholder advocacy $310 $500 U.S. philanthropy Source: Monitor Institute, Investing for Social & Environmental Impact: A Design for Catalyzing an Emerging Industry (2009). Impact investing (potential market size) 14

15 Impact investing Combining financial returns and impact Financial return Profitmaximizers Financial floor Impact investors Impact floo or Philanthropists Social/environmental impact Source: Adapted from Monitor Institute, Investing for Social & Environmental Impact: A Design for Catalyzing an Emerging Industry (2009). 15

16 Global Impact Investing Network (GIIN) Nonprofit dedicated to increasing the effectiveness of impact investing Goal: To help foster a coherent impact investing industry that channels investment capital efficiently to accelerate the development of solutions to pressing social and environmental problems Developing industry infrastructure, including Impact Reporting and Investment Standards (IRIS), a framework for measuring impact investments social and environmental performance Source: Global Impact Investing Network website. 16

17 B Corporations A certification system designating socially responsible businesses Companies are independently assessed on their level of social responsibility. Requires that a business rewrite its articles of incorporation to state that it considers stakeholders interests, in addition to shareholders 246 companies in 28 states have become B corporations since B Lab's creation in Maryland signed legislation in April 2010 creating B corporations as a legal structure. Source: B Lab website. 17

Alliance for a Green Revolution in Africa (AGRA) Launched in 2006 by the Bill & Melinda Gates Foundation and the Rockefeller Foundation Goal is to sustainably increase the productivity and

18 Alliance for a Green Revolution in Africa (AGRA) Launched in 2006 by the Bill & Melinda Gates Foundation and the Rockefeller Foundation Goal is to sustainably increase the productivity and profitability of small-scale farms throughout Africa Activities include: Improving access to finance for smallholder farmers, agro-dealers and agricultural businesses in African countries Improving access to seeds that produce higher, more stable yields Promoting soil health and productivity Building more efficient local, national and regional, agriculture markets 18

19 Spectrum of investors Traditional philanthropy Venture philanthropy Community debt financing Community development equity / venture capital Angel investors / social venture capital Socially responsible investment funds Traditional institutional capital (e.g., banks, mutual funds) Social equity investors Private equity investors Source: Jed Emerson, based on the work of Shari Berenbach and Timothy Freundlich,

20 Program-related investing (PRI) Definition 1. A concessionary investment for a charitable purpose. 2. PRI has a legal definition for private foundations, which can use PRIs toward their payout requirement. In this case, PRIs must meet three criteria: a. The investment s primary purpose is to advance the foundation s charitable objectives; b. Neither the production of income nor appreciation of property can be a significant purpose; and c. The funds cannot be used directly or indirectly to lobby or for political purposes. 20

21 Number of program-related investments Source: The Foundation Center. 21

22 Dollar amount of program-related investments US$ millions $400 $350 $300 $250 $200 $150 $100 $50 $ Source: The Foundation Center. 22

23 PRIs are mostly in the form of loans PRI amount Type of financial vehicles (US$ millions) No. of PRIs Loans $ Equity investments $ Business startups/expansion $ Loan guarantees $9.7 4 Linked deposits (usually CDs) $ Lines of credit $7.2 7 Charitable use assets $3.6 5 PRIs, unspecified $ Source: The Foundation Center. 23

24 Types of PRIs as a percent of total PRIs Other 5% Equity investments 4% Unspecified 9% Loans 82% Source: The Foundation Center. 24

25 Largest PRI providers Rank Foundation name State PRI amount (in millions) % 1 ALSAM Foundation UT $ John D. and Catherine T. MacArthur Foundation IL $ David and Lucile Packard Foundation CA $ Ford Foundation NY $ Bill & Melinda Gates Foundation WA $ Walton Family Foundation AR $ Marty and Dorothy Silverman Foundation NY $ AVI CHAI Foundation NY $ Kalamazoo Community Foundation MI $ Marisla Foundation CA $ Source: The Foundation Center. 25

26 Gates Foundation s innovative financing of charter schools Will provide a $30 million credit support agreement to help secure $300 million in tax-exempt empt bond issuance to further high-quality public charter school expansion in Houston Represents the first time a private foundation has backed charter school facility bonds at this scale Marks the foundation s first U.S. investment as part of an initiative announced in early 2009 that commits $400 million in programrelated investments (PRIs) over a two-year period Source: Bill & Melinda Gates Foundation website. 26

27 International Finance Facility for Immunisation (IFFIm) Launched in 2006 by the U.K. government. Supported by France, Italy, Spain, Sweden, Norway, and South Africa. Donors pledged $5.3 billion to IFFIm over 20 years. IFFIm issues bonds in the capital markets backed by the long-term government e pledges. Since inception, IFFIm has disbursed over $1.2 billion to support vaccine purchase and delivery to 70 developing countries. 27

28 International Finance Facility for Immunisation (IFFIm) The GAVI Fund Affiliate Disbursements for approved programs Specified countries Grant agreements (assigned to IFFIm) Disbursement requests Disbursements Note proceeds Grantors IFFIm Note issues Noteholders Grant payments Treasury management services Repayment of principal p and payment of interest Treasury manager (World Bank) Source: IFFIm website. 28

29 Microfinance Definition Provision of banking services by poverty-focused financial institutions (microfinance institutions) to poor parts of the population that are not being served by mainstream financial services providers Source: Deutsche Bank. 29

30 Total volume of microloans has grown substantially over the last decade Volume of microloans (US$ billions) Source: Deutsche Bank

31 Microfinance institutions, borrowers and gross loan portfolio 2008 Number of Gross loan Number of borrowers portfolio MFIs (millions) (US$ millions) Sub-Saharan Africa ,335 East Asia and Pacific ,185 Eastern Europe and Central Asia ,065 Latin America ,739 Middle East and North Africa ,178 South Asia ,697 All regions 1, ,199 Source: MicroFinance Information exchange, Inc. 31

32 Earnings inequality in OECD countries Ratio of the 90th to 10th percentile earnings Source: OECD, Employment Outlook 2007 How does the United States compare?. 32

33 Social Impact Bonds Contract between a public sector body and investors, who commit funds which are used to pay for interventions to improve a social outcome First Social Impact Bond was launched in March 2010 by Social Finance and the U.K. Ministry of Justice Will fund organizations working to reduce the reoffending rates of shortsentence male prisoners leaving Peterborough Prison Ministry of Justice will make payments to investors in the event that reoffending is reduced by 7.5% or more Source: Social Finance. 33

34 Social Impact Bonds Public sector Makes payment based on defined outcomes Social Impact Bond Delivery Agency Financial returns dependent on outcomes Investors Improved social outcomes Reduced public-sector costs Wider benefits to society Service providers Target population Source: Social Finance. Towards a new social economy: Blended value creation through Social Impact Bonds. (March 2010). Funds Services Information 34

35 Panelist slides 35

36 Shari Berenbach President & CEO Calvert Foundation 36

Calvert Foundation at a glance Mission: Maximizing the flow of

Recent statistics as of YE09: Total assets CCI Notes Portfolio $198

borrowers Three distribution modalities: definitive, iti book-entry,

37 Calvert Foundation at a glance Mission: Maximizing the flow of capital to disadvantaged communities Calvert Foundation growth Recent statistics as of YE09: Total assets CCI Notes Portfolio $198 million in Note sales 6,600 investors $168 million in portfolio 200 borrowers Three distribution modalities: definitive, iti book-entry, and online Portfolio growth rate of 18.4% p.a. in past 5 years Loss rate < 0.30% 37

38 Our three main programs Social enterprises Statistics Description 1.Community 1995 launch Low-risk, soft-return security Investment Note ( CCI Note ) 6,600 investors Assets: $198mm Available nationally to individuals and institutions, CCI Note used to provide financing for community development intermediaries on flexible terms 2.Community Investment Partners ( CIP ) 3.Calvert Foundation Giving Fund ( CGF ) 1998 launch 27 clients Assets: $77mm 2001 fall launch 430 donors Assets: $29mm Core capabilities on fee basis Due diligence/asset admin services Investor note administration on behalf of other issuers CIN-like securities registrations Structuring/underwriting for direct investments from foundations and social investors Donor advised funds Offers a mix of socially responsible community investment options (e.g., CCI Note) and web-based flexibility for giving and investing options. 38

CCI Note model Investors Individuals CCI Note Partners Foundations $168 million Affordable Faith-based portfolio housing Investor capital Nonprofits Diversified and Microfinance

39 CCI Note model Investors Individuals CCI Note Partners Foundations $168 million Affordable Faith-based portfolio housing Investor capital Nonprofits Diversified and Microfinance High net worth professionally Corporations managed Community Institutional Sr. sub debt development investors Jr. sub debt Capital support Donor capital Net assets Charter schools 39

CCI Note details Minimum investment $1,000 (or $20 online) Investment t term 1-1010 years; investor s choice Interest rates Targeting Ways to invest 0-3%; investor s choice based on term, can limit

40 CCI Note details Minimum investment $1,000 (or $20 online) Investment t term years; investor s choice Interest rates Targeting Ways to invest 0-3%; investor s choice based on term, can limit returns for specific targets 8 geographic regions in the U.S. International microfinance, MicroPlace specific MFIs Special initiatives, e.g., green strategies to fight poverty Custom targeting for $50,000+ investments In a Paper Note directly through Foundation with an application, in DTC Note through brokerage accounts using CUSIPs, or online via MicroPlace 40

41 F.B. Heron Foundation s mission-related investing 2004 Mission-related investment opportunity continuum 41

Calvert Foundation s Social Capital Market Quadrants 2010 Quad I Risk-adjusted returns and low risk Fixed income funds CRA funds CDs issued by regulated CDFIs Below-market returns and low risk (fixed

42 Calvert Foundation s Social Capital Market Quadrants 2010 Quad I Risk-adjusted returns and low risk Fixed income funds CRA funds CDs issued by regulated CDFIs Below-market returns and low risk (fixed income) Returns Quad II Risk-adjusted returns and capital at risk Green equity funds Microfinance equity funds Below-market returns and capital at risk Risk Credit union CDs Community Investment Notes Quad III E&Co Acumen Fund Quad IV 42

Impact investing Definition

Impact investing Definition Actively placing capital in businesses and funds that generate social and/or environmental good and a range of returns, from principal to above market, to the investor Source: