Background
The General Treasurer of the Society of Jesus (SOJ) is involved in the management of a Fund that benefits the various missions of the Jesuit order. As a Fund of an entity within the Catholic Church, socially responsible criteria should be a factor in the fund’s administration. In determining a strategy, the Fund elected to pursue a positive impact strategy, as opposed to negative screening or advocacy programs. The Fund itself has an investment structure in which it holds portions of actively managed funds as opposed to separately managed accounts. As such, the Fund cannot dictate terms to fund managers.
Impact Investing Policy
Initially, the impact investing goals of the Fund were more informal and reflective of where the impact investing industry was at that time. However, as the industry matured and the investment options grew in terms of breadth and depth, the Fund formalized an allocation to positive Impact Investing through their investment policy statement. As such, the Fund aspires to dedicate 10% of assets to Impact Funds which seek to invest in entities which aid the disadvantaged / underserved (poor) or contribute to the improvement of the environment.
Strategy & Sourcing
In order to best position the Fund to achieve success around impact investments, the guiding principles for potential impact investments were both flexible and evolutionary. Importantly, these principles were developed with the assistance of an Investment Committee, Staff and the Investment Consultant so that different perspectives were considered. Flexibility was perhaps the most important principle as the Fund did not want to force an allocation simply to meet the 10% target to impact investments. The group believed that building the allocation would be a multi-year process that should show progress, but not be bound by time constraints in terms of implementation. Flexibility was also critical regarding geography, liquidity and other arbitrary hurdles (e.g. assets under management, track record length). By relaxing these constraints, the universe of opportunies became much wider, but in some cases required a different approach to the due diligence process. Also of note, the impact investments would target market rates of return or better, in line with all investments in the portfolio.
The process of identifying and investing in impact funds has taken place over many years and has been the product of continuous dialogue with Peers, Investment Managers, Staff, the Investment Committee and the Investment Consultant.
Investing
Some of the highlights of the fund’s journey are detailed below:
The Fund made its first impact investment in 2011 with a global equity fund focused on companies active in the growing Resource Efficiency and Environmental Markets (e.g. energy efficiency, sustainable food and agriculture). These investments address many long term macro-economic themes: growing populations, rising living standards, increasing urbanization, rising consumption, and depletion of limited natural resources.
In 2014, a second impact investment was made in a green bond fund. The fund primarily invested in World Bank issued sovereign bonds designed to support projects that seek to mitigate climate change or help affected people adapt to it.
2016, there were two additional investments to impact oriented funds. The first was a global equity manager with a focus on long term sustainability and a heavy emphasis on ESG integration. The second was a private real assets manager focused on renewable energy in the emerging and frontier markets.
Results
Results of the impact investing allocation are evaluated in two ways. The first metric is whether or not the investments are being made in in the appropriate areas. To help in evaluating this, a review of the investment managers annual impact reports serves to confirm that the capital is being used in a manner that is consistent with its original intent. The second metric for evaluation is the investment performance of the fund. Perhaps the biggest challenge has been the benchmarking of impact strategies as some of these funds are fairly concentrated in terms of their areas of focus and therefore experience a fair amount of tracking error (i.e. deviation compared to common market benchmarks). To address this issue, the fund uses two benchmarks for these impact investments. One of the benchmarks is more traditional (e.g. MSCI World) and designed to be the long-term goal. The other benchmark is more focused (e.g. green bonds) and is designed to help evaluate short and intermediate term performance. Ultimately, the managers are expected to meet or exceed both benchmarks over the long term.
Evaluation and Progress
Because impact investing is growing rapidly, both in terms of assets and strategies, the Fund’s oversight includes regular evaluation of both its existing impact investments and new impact investments with an eye towards improving the portfolio and developing a pipeline of potential investments to further diversify the allocation.
The remaining challenges are twofold. First and more important, would be to determine appropriate metrics to evaluate whether the investments of the fund do actually affect positive change. Without such, impact investing programs would be only valuated in terms of financial profitability, which is only one part of the goal of positive impact investments. The second challenge is to motivate other market participants (asset owners, consultants, fund managers) to realize the potential of the impact investment market and create funds attractive to socially responsible entities such as the Society of Jesus, other religious congregations, and value-oriented investors.
