In late 2019, Marc Benioff, founder and CEO of US sales software company Salesforce.com wrote an op-ed in the New York Times with the strapline: “The current system has led to profound inequality. To fix it, we need businesses and executives to value purpose alongside profit.” In addition to other ‘stakeholder’ initiatives at the company, Salesforce.com launched an impact investment fund in 2017, and, a year after the op-ed, launched a second $100 million fund, part of Salesforce Ventures, the company’s global strategic investment arm.
While many Silicon Valley firms have foundations, set up for charitable purposes, for a software company to run an impact investment fund is uncommon to say the least. As stakeholderism and ‘purpose’ grow in influence, such funds are likely to grow among non-investment companies.
It is part of a burgeoning field of impact investors.
These include traditional asset management firms with impact investment teams such as RBC Asset Management, which are in turn picking up corporate impact allocations.
US software firm ServiceNow recently allocated $100m to a racial equity strategy run by the RBC impact team. It is designed to drive more sustainable wealth creation by funding homeownership, entrepreneurship and neighbourhood revitalisation within black communities in under-resourced areas across the US. RBC will back community loans to increase the lending capacity for local banks.
Other fund managers are also developing impact fund ranges such as US asset manager T. Rowe Price.
And then there are some financial firms, such as US insurer Prudential, that have been running impact funds for decades. Prudential first invested in an affordable housing project in Newark, New Jersey, its headquarters city, back in 1931. But its impact investment programme was not formally structured until 1976. In early 2020, it announced that it was now managing $1bn in impact-related assets.
RI takes a closer look at a couple of these impact fund approaches.
Lata Reddy, Senior Vice President of Inclusive Solutions at Prudential Financial says its current portfolio includes infrastructure and financial inclusion investments alongside insurance, savings, pensions, investment and other financial services products for businesses in developing countries. These include low-cost money transfers for immigrants, education, affordable housing and other sustainability projects. But, some priorities are changing, she says. For example, current education projects include an investment in the world’s first Career Impact Bond launched by impact technology education firm General Assembly and other partners.
“Historically, our investments in K-12 (kindergarten to 12th grade) education were focused on charter school loans,” she says, “including building the country’s first national charter school construction fund. As that sector has matured, we continue to invest where there are capital gaps, but we have expanded our investment thesis to the area of education technology where companies have the capability of democratizing access to high quality education.”
On affordable housing, she says that as America’s housing crisis has deepened many market actors have introduced innovative approaches to delivering or preserving affordability without direct subsidy: “Some of these approaches are becoming mature enough to be investable but may need an institutional partner like Prudential to get to scale.”
The Impact & Responsible Investments division at Prudential is part of its Inclusive Solutions arm. It is overseen by the CEO and the board as well as reporting to its investment committee. Inclusive Solutions also includes The Prudential Foundation (some of the Foundation’s funds are managed by the impact division), Strategic Partnerships, and Culture, and Diversity and Engagement among other functions, which all work to promote the company’s purpose and, according to its branding: “close the financial divide”.
“The portfolio is highly diversified across asset classes and strategies,” says Reddy. “Approximately 70% of investments are made directly and 30% through third-party managers.” Most of the portfolio is focused on market-rate returns in highly social impact sectors, while a much smaller proportion provides funds for early-stage projects that provide capital to riskier and untested investments.
“We recently implemented an impact management framework,” she continues. “It integrates impact throughout the investment process by operationalizing a set of activities and tools for consistent execution from initial due diligence to impact measurement during the investment through to exit. As part of the process, a set of impact KPIs (including the establishment of a baseline) are selected at inception which allows Prudential to assess ex-ante and ex-post impact performance.”
While Prudential’s impact fund is decades old, T.Rowe Price’s is in its infancy. As of the end of April, the fund had $9.8m in assets under management.
The T. Rowe Price Global Impact Equity Fund is a 40-Act mutual fund, with activities defined by the 1940 Investment Companies Act. It is available only to US investors.
As a 40-Act fund, it is not overseen directly by T. Rowe Price’s board, but must comply with the various regulations in the Act, including being governed by its own board of directors which is at least 75% independent; other directors have been employees of T. Rowe Price for five or more years. The board has direct responsibility over, for example, reviews of fund performance, as well as committees responsible for issues such as risk oversight.
“We launched the fund on March 17,” says Hari Balkrishna, the fund’s portfolio manager. “It is the first impact strategy to be launched by the firm, but we plan to introduce the strategy in other vehicles around the world as appropriate for investors in those countries/regions.”
The strategy includes an ‘exclusion list’ and an ‘impact framework’. Balkrishna says: “We exclude areas of the global economy that we do not believe can generate positive impact. These include adult entertainment, alcohol, fossil fuels, gambling, tobacco, for-profit prisons, weapons and stocks that screen poorly on conduct-based metrics.” He says the impact framework is based on three investment pillars: climate and resources; social equity and quality of life; and sustainable innovation and productivity. These, in turn, are aligned with eight sub-pillars based on the UN Sustainable Development Goals (SDGs). The result is an impact universe of approximately 600-700 companies.
To refine the universe into a focus list of 150-200 stocks, Balkrishna looks at product, industry, governance and growth potential: “Ultimately, we aim to construct a global portfolio of 55 to 85 of our highest conviction opportunities from the impact focus list, while managing risk exposure at both the individual name and portfolio level,” he says.
While the impact fund is only available in the US, the T. Rowe Price Responsible Funds range, which was launched in early 2020, is available in some European countries, with plans to add more in the future. In 2021, a responsible equity fund for clients in the UK was introduced. The firm says the funds are exclusions’ based and designed for clients “who elect to have their values goals supersede their financial goals”.