Originally published in Philanthropy News, Issue #73, May 2018.
Impact investing is gaining momentum around the world as a way to help address social and environmental concerns while generating a financial return at the same time. CE Alastair Rhodes offers insights and advice from BayTrust’s impact investment journey.
BayTrust, which serves communities in Tauranga, Whakatane, Rotorua and Taupo regions, is one of the leaders in this field in New Zealand, having started their impact investment portfolio five years ago.
This year approximately $12 million (6% of their $215 million investment portfolio) has been set aside to help drive social change in their region as well as delivering economic returns.
BayTrust Chief Executive Alastair Rhodes is a big advocate of this investment approach.
“It gives us the ability to maximise impact — above and beyond our grants budget, which is ultimately what all foundations and trusts like ourselves are trying to achieve.”
Alastair says that selecting impact investment opportunities starts with BayTrust focussing on their vision of ensuring the ‘Bay of Plenty is the greatest place to be’. The Trust regularly consults with their community on priorities which helps determine where they might invest both from a granting and an impact investment perspective.
Five years ago (amid an emerging housing crisis) the 12 Trustees and BayTrust’s Senior Community Investment Advisor, Terri Eggleton, realised that grantmaking alone was insufficient to address pressing community needs.
“For example, trying to make a difference in housing with granting just wasn’t going to cut it. We needed to think differently,” Alastair says.
“The Bay of Plenty has been experiencing significant housing issues over the last 5 – 10 years and based on our research and consultations, one of the major issues is around housing affordability and a lack of social or public housing in the Bay of Plenty which we could really only help to address by using our balance sheet.”
BayTrust provides low interest loans on favourable terms to community housing providers. This has helped those providers build size and scale to address the demand for more social and affordable housing in the region.
Alastair says focussing on social housing was a relatively low-risk approach to start their impact investment journey.
The low interest rate impact loans are backed by first-ranking mortgages and secured over the property. It was a secure investment which allowed BayTrust to develop their impact investment thinking, processes and policy from a staff and Trustee perspective.
“It was a way to ensure we had the right organisational structure and staff on hand to support it as we continued to explore more diverse impact investments,” says Alastair.
Since then, BayTrust have further identified two other areas that have good potential for impact investment opportunities.
They are currently considering a ‘private equity type structure’ where investors help provide the up-front costs to develop horticulture on underutilised Māori land in exchange for a commercial return. The Māori land owners will ultimately own a fully developed horticulture business once a targeted return had been met while gaining skills in horticulture, management and governance on the way. The orchards will also provide local employment opportunities to the land owners and their whānau.
“We are exploring two or three other impact investment opportunities at the moment, and with a current allocation for impact investments of 6% of our $215 million investment portfolio — we have effectively $12 million set aside [with $4m already committed] to drive social and economic returns within the Bay of Plenty alongside our current grants budget of $6 – 7m a year.”
Revenue generating projects that also address environmental impacts are also of interest to BayTrust, and BayTrust is always interested to hear from any group who would like to discuss impact investment opportunities which are likely to result in positive social outcomes for the Bay of Plenty region.
Alastair understands that some investors who have a mindset of maximising investments may see impact investing as a risk to achieving their financial returns. However, he is quick to point out that although the overarching objective of BayTrust is to have a positive impact in the Bay of Plenty, it isn’t attempted at the expense of sound financial philosophy.
He says the proposed change to the Trustee Act (currently before the Select Committee) which clarifies that Trustees can consider the mission of the Trust when they are considering their financial fiduciary obligations has been a long-held view of BayTrust Trustees.
“We’re trying to get the best financial returns we can but we’re always going to consider that in the context of what we’re here to do — which is to positively benefit the Bay of Plenty.”
Alastair explains that like any investment portfolio, the risk can be spread with BayTrust taking a ‘balanced approach’ to its impact investments in a similar way to how it operates its overall investment portfolio. Of the 6%, half is allocated towards low risk impact investments such as BayTrust’s social loans to community housing providers, while the other half is set aside for higher risk and higher return nonconcessionary impact investing.
“The way we look at it, is that by ensuring we have balance in that portfolio we are treating impact investments like our other commercial investments in practising sound risk/ return criteria.
“For us to take an above market financial risk or accept a below market financial return on any impact investments, we need to see measurable impact to the Bay of Plenty region that aligns with the overall mission of BayTrust,” Alastair says.
“We are looking for directly attributable social impact in terms of those impact investments and as a perpetual trust with a perpetual investment horizon we should be trying to do good in the world as well as making good financial returns.”
Identifying and measuring impact is fraught with difficulties (as it is with any grant made). But an element of intentionality needs to be evident i.e. the impact cannot be a ‘by-product’ of the investment; it needs to be intentionally sought from the outset to ensure that achieving impact remains a priority throughout the investment period and isn’t reprioritised if the going gets tough.
For BayTrust, Alastair says measuring the social impact of an investment is done in a similar way to how BayTrust works with groups to evaluate the effectiveness of its grants programme. That is, using robust analysis to determine whether the shortfall in investment returns or increased risk is acceptable in order to deliver on the desired social outcomes from the investments.
“Effectively we are seeking a balanced impact investment portfolio. Balance in relation to risk, return and impact means some investments will generate lower returns but have lower risk and high impact, while others may have higher returns, higher risk and the impact is not so certain.”
Overall, Alastair says the financial return on BayTrust’s impact investment portfolio is expected to match its overall portfolio and provide added benefits of attributable social outcomes and non-market correlated financial returns.
Alastair is looking forward to sharing his insights and experience in developing an impact investment strategy with others at the upcoming workshop event.
Starting with smaller low risk impact investments is critical, he says.
Organisations who are serious about impact investing should also review their organisational structure and capacity to ensure the right staff with the right investment skills are in place.
This might involve recruiting staff with more of a commercial, private equity type skill set, who have experience in seeking out investment opportunities and analysing the investment decisions in terms of risk and return.
He believes that reviewing staff skill sets is also necessary from the perspective of community groups who are pitching impact investing opportunities. Investment specialists (if they do not have them in-house) need to be engaged to help develop a prospectus outlining the impact investing opportunity, the structure, the exit plan and risk and return equation.
Alastair says he sees significant gaps in such roles in New Zealand, and he believes that a strengthening impact investment network will increasingly allow organisations to work more closely together within our communities to address social issues.
“If we connect all these people together, we can develop an ecosystem so that if a group is looking to do something, they can go and talk to another group down the road that’s got expertise in the area or come talk to organisations like us — and make sure everything is in place.”