Why track records matter in impact investing

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Deetken Impact is a Canadian impact investing firm. Its priority is delivering strong, uncorrelated stable returns to clients. 

It differs from other firms in two striking ways: Its focus is geographic and its mission is to make a social and environmental impact in the Americas. With a deeper focus on Latin America and the Caribbean, the region — like other emerging markets — is projected to grow at twice the rate of advanced economies in the next five years. Access to capital is necessary to capture and nurture this growth. 

Secondly, it focuses investments on businesses and social enterprises that promote entrepreneurship, provide or improve access to basic services and have a positive environmental impact. It seeks out untapped opportunities for growth in five sectors that positively affect communities in the Americas.

In this interview for Bard MBA’s podcast The Impact Report, Leigh Anne Statuto and Stephanie Lavallato speak with Alexa Blain, who is responsible for finance, operations and investor relations at Deetken Impact, and Fernando Alvarado, who leads as the General Partner and Investment Advisor of two clean energy and energy efficiency project finance and venture capital funds.

Leigh Anne Statuto: Impact investing has really become a buzzword in the past few years. I’m curious how Deetken Impact differentiates from other investing firms out there. Could you share a little bit more about your investment focus? And the untapped opportunities for growth that you seek out?

Fernando Alvarado: For us, it’s not so much about trying to differentiate ourselves as impact investors, [but] it’s more about being committed to consistently measuring, recording and communicating our impacts derived from our investor company. 

So from that point of view, we actually have rigorous procedures and tools that we use to develop our regular investment activity in the region. But I would say, how we stand before other impact investors in let’s say the clean energy space is that we actually focus in the Central American and Canadian regions — especially servicing the niche of what we would call the small and medium enterprises of the clean energy sector. 

We have been traditionally doing that for quite a long time already, and I would say that that’s perhaps our main differentiation when it comes to other impact investors that are also operating in the region. Alexa, do you want to add to that?

Alexa Blain: I might just add that impact investing is a lot like other types of investing. Track record really matters. The Deetken team has been investing this way since before it was called impact investing. 

We focus on high-quality businesses that operate sustainably without reliance on ongoing grant funding or subsidization. We look for businesses that are benefiting their communities by providing really important services. So, clean energy is a clear example, [as are] financial services for women building small businesses, or sustainable agriculture. 

We choose these businesses because they align with our values and contribute to more sustainable and equal economies but also because these sectors are resilient and offer good downside protection through cycles and through the unpredictability that can come with investing in emerging markets. 

These aren’t always the most exciting or cutting-edge businesses, but really backbone type services and I think our network in the region and our track record of identifying these kinds of opportunities and managing assets through economic cycles is something that we bring to the table as a team.

Statuto: Great, that’s fascinating. I’m curious if you could just speak a little bit more about the rigorous tools that you use to measure the impact.

Alvarado: So, we actually just did a webinar for our investing companies at the high level of the project sponsors in which we were firstly trying to emphasize on the importance of being really committed to impact monitoring, reporting and communicating and then how that can benefit the sustainability of their own businesses. 

Obviously, we were also showing how we account for that in our regular investment activities and why that is important to our investors and to us as fund managers. And lastly, in that webinar we then shared the tools that we have developed in-house to properly monitor and measure the impact. So, essentially what we have is a question divided by sustainable development goals.

Stephanie Lavallato: Deetken Impact’s areas of focus are women’s empowerment and sustainable energy. Can you explain more about what “gender-lens investing” is?

Blain: At Deetken Impact, we currently manage three funds: the two funds focused on sustainable energy in Central America and the Caribbean, and then one fund focused on gender-lens investing, which is the Ilu Women’s Empowerment Fund that I mentioned earlier. So gender-lens investing, at its most simple [terms], is taking gender into consideration when you are making investment decisions. So it’s analogous to ESG investing where you deliberately look at environmental and social characteristics of an investment when assessing potential risks and return.

We focus on high-quality businesses that operate sustainably without reliance on ongoing grant funding or subsidization. We look for businesses that are benefiting their communities by providing really important services.

When it comes to gender, there’s actually a lot of data now that shows women are key drivers of economic prosperity and equality. Also, increasing gender equality leads to poverty reduction and drives economic growth. That’s at the macro level, but there’s also evidence that at the individual business level, having gender equality in the workplace enhances business performance. So as gender-lens investors, we’re looking for ways to integrate gender into our investment decisions, because we believe it enhances returns and reduces risk. 

For the Ilu Women’s Empowerment Fund, we look at companies through four lenses: women in leadership; products and services that benefit women and girls; workplace equity; and value chain equity and advocacy. And we make a detailed assessment of how the companies are doing in each of those areas using what we call a “gender smart scorecard.” We are looking to invest in the ones that either show leadership in one or more of those areas, or show commitment to enhancing their practices and becoming a leader in one of those areas.

Gender-lens investing also means looking at our own practices and our own biases as investment managers. For example, if you look at the composition of our investment committee and our board of directors, we ask whether we are bringing a diverse set of perspectives to investment decisions. One statistic that absolutely floored me was an IFC study that found funds with gender-balanced senior management teams generated investment returns that were 10 to 20 percent higher than those of higher majority men or majority women leaders. I can’t believe hedge funds aren’t all over this, since it is an amazing way to enhance returns. 

Statuto: Who are the investors within your Women Empowerment Fund? Who is investing in this and what does that typical investor look like?

Blain: We started with a group of exclusively private sector investors. And because we were in Canada, we didn’t really have access to some of the large foundations and family offices that often seed impact funds in, in the states, in Europe. It was really a group of credit unions of a smaller size that found the office’s foundations and individuals that form the original kind of a body of the fund, and then most recently we brought in the U.S. International Development Finance Corporation (DFC), which was formerly called OPEC, as a senior lender to the fund and that was as part of the 2X Women’s Initiative, which is a global initiative to advance gender equality through rallying together all of the development finance institutions.

2X is interesting because it’s the female chromosome, but it’s also the multiplier effect of investing in women. And through the emphasis of 2X, we were able to access additional capital and we entered through the Innovative Financial Intermediaries Program that DFC offers. So we were really excited to bring them on as an investor which allows us to grow the fund and increase our impact.

Lavallato: Fernando, could you please share more about the importance of sustainable energy infrastructure in the communities where you work, which are often more susceptible to natural disasters, and where renewable energy investment comes into play to address those challenges.

Alvarado: Certainly. Modern and affordable electricity (or energy) is basic to almost any economic activity in the regions where we operate. Clean energy infrastructure is absolutely necessary. This is especially true and evident in the rural and economically deprived communities where our renewable energy projects are usually located. Small scale hydroelectric plans, solar farms and wind farms are not necessarily located in urban centers, but rather in the countryside. 

Our investments are not just addressing the provision of clean electricity to cope with the energy demand necessary for supporting economic growth. For except perhaps Costa Rica, where we generate all our electricity with renewable energy sources, most countries in the Latin American region are still relying on expensive and polluting thermal generation. So these countries need not just more installation capacity — and there is consensus to do this with renewable energy — they also need to gradually diversify their generation matrices to displace thermal generation and incorporate renewable energy. There is a lot of catching up to do. 

In addition to that, it is strategic to the economic stability of these countries [in the Americas]. They must take advantage of Indigenous resources rather than using the foreign currency of the U.S. dollar to pay for imported fuel to generate electricity. That is another concern these countries have.

Consider also that all of these countries in the region have made important Paris Agreement commitments to diversify their generation matrices. In most cases, especially in the Caribbean, they are still lagging behind. Certainly this COVID-19 pandemic is not helping the situation. So there is even more pressure to really go to action and start getting busy with the implementation of those additional generation plans … to diversify the generation matrices, to bring more resiliency and to make sure there is enough generation capacity to cope up with demand, both the demand due to economic growth, but also the demand due to demographic growth. 

Bringing more resiliency is especially important in the Caribbean countries, since we have seen in the last five years that they are quite vulnerable to natural disasters.

Now, with respect to rural communities, in many cases they do not have access to great electricity. So usually our projects, whether they focus on distributed generation or utility scale, bring electricity to communities that otherwise would not have access to electricity.

The Americas have abundant renewable energy resources. As I was mentioning before, in Central America we have an abundance of hydroelectric potential, in addition to wind and solar. In the Caribbean, it is mainly solar power with moderate wind potential. Moreover, with the development of new technologies, especially battery storage, we see many more opportunities.

The above Q&A is an edited excerpt from the Bard MBA’s Sept. 4 The Impact Report podcast. The Impact Report brings together students and faculty in Bard’s MBA in Sustainability program with leaders in business, sustainability and social entrepreneurship.