Why Many Faith-based Organizations are Shifting to Impact Investing
Faith-based organizations are increasingly investing in socially and environmentally responsible causes. A 2010 global study of faith institutions showed that 77% of 103 respondents practice impact investing. At the Franciscan Sisters of Mary, or FSM, a Roman Catholic group based in St. Louis, Mo., its CEO and CFO John O’Shaughnessy is finding that such impact investing also generates attractive returns. The organization is “geared toward reversing the devastating effects of climate change, advancing sustainable land management, and providing clean energy access in places where power generation typically does not exist,” it says on its website.
FSM traces its origins to six women who fled religious persecution in Europe 146 years ago and landed on the St. Louis riverfront and formed a faith-based community. “Back then, FSM served the sick, the poor and other vulnerable sections in their community,” said O’Shaughnessy. “We had been doing socially responsible investing by screening out companies that were not aligned with our mission, voting proxies, some shareholder engagement, some investment in community development and housing loan funds, but we really weren’t measuring up to what our guidelines said we should be doing.”
FSM had an epiphany of sorts in 2009 when it went looking to see how it could “be doing more positive things.” O’Shaughnessy said FSM “discovered that there was this burgeoning space out there with people who were doing impact and mission-related investing well beyond what we were doing.” He shared insights about impact investing with Knowledge@Wharton for its podcast series “From Back Street to Wall Street.” The series is being produced in partnership with Impact Investment Exchange (IIX), a Singapore-based organization that serves as a bridge between investors and development goals in Asia. (Listen to this episode using the player at the top of this page. Here are links to the first, second, third, fourth, fifth and sixth episodes.)
Impact Investing Strokes
FSM went about its new investment philosophy with deliberate moves. In 2012, it began investing in helping build capacity for clean energy such as renewables and energy efficiency. Two years later, inspired by the University of Dayton, it joined the “DivestInvest” pledge, a global investor movement towards sustainable energy. Investors who take that pledge divest from companies with fossil fuel reserves such as ExxonMobil or Chevron; at last count, it had investments of some $7.2 trillion committed to its cause. “For us it made perfect sense,” said O’Shaughnessy. “We no longer wanted to invest in things that were adding to the problem, in terms of climate change, greenhouse gas emissions, and so forth.” By the end of 2014, FSM had divested fully from companies that had fossil fuel reserves.
“This can be systemic change. This is capitalism at its best.”
Next, FSM joined the Midwest Coalition for Responsible Investing, a group of religious communities based in St. Louis that aims to invest in companies that take their environmental, social and governance (ESG) responsibilities seriously. Through the coalition, FSM finds opportunities to move joint shareholder resolutions at the companies they invest in.
Today, FSM’s investment canvas extends beyond the U.S. to Latin America and in Sub-Saharan Africa. It works with an advisor that identifies the potential investments and conducts due diligence checks before making the investments.
“We have carved out 15% of our overall portfolio – about $10 million – and directed that towards impact investing,” said O’Shaughnessy. He added that FSM ensures consistency with its values in any other investments it makes in companies that are not strictly within the ambit of impact investing. FSM has made 17 impact investments thus far, including in funds focused on clean energy and low-income populations worldwide. Among its investments are those in sustainable timber operations, conservation forestry and detoxing of the environment.
Fruits of Impact Investing
One such investment FSM made was $250,000 in M-KOPA, a consumer lending company based in Nairobi, Kenya, which uses an innovative SIM-card-based payment system to help off-grid consumers buy solar home lighting systems. Since its commercial launch in October 2012, M-KOPA has connected more than 375,000 homes in Kenya, Uganda and Tanzania to solar power, FSM says on its website. That quantum of renewable energy helped save some 110 million liters of kerosene last year. Households use the solar energy also to recharge their cell phones and power radios and TVs, said O’Shaughnessy. “So that is a win-win – reducing greenhouse gases and a total improvement in terms of lifestyle. They now have access to some of the basic things that we take for granted.”
FSM’s portfolio includes a direct investment of $500,000 in Midwestern Bio-Ag of Madison, Wis., a company that works toward sustainable agriculture by improving soil health. It adheres to a practice called “biological farming” that helps boost the yields and quality of the food and forage grown. “It is terrific in terms of reducing greenhouse gas effects, reducing pollution runoff, and it increases yield significantly,” O’Shaughnessy noted.
Does FSM’s impact investing mean it has to give up on lucrative returns it could find elsewhere in the capital markets? “It’s hard to believe, but … we’re actually improving our overall risk-return profile after having moved into this space,” said O’Shaughnessy. “Set aside the impacts, and set aside the benefits for society and the environment, we are better off now as investors.” Emboldened by that experience, FSM is now planning to diversify into private investments in businesses aligned with its goals, he added.
“Set aside the impacts, and set aside the benefits for society and the environment, we are better off now as investors.”
Spreading the Word
FSM’s returns from its “market-rate, risk-adjusted investments” may not serve as “a model for everybody,” and each institution’s circumstances are different and call for different solutions, O’Shaughnessy pointed out. At the same time, he noted that more and more opportunities are available to faith-based organizations to invest in companies that adhere to ESG values. He cited the Catholic Impact Investing Collaborative, a Washington, D.C.-based organization within the Catholic faith community whose members control investments totaling $50 billion; the collaborative serves as a forum to share learnings and experiences.
It also helps that Pope Francis has encouraged Catholic churches to engage in impact investing. Since 2014, the Vatican has held three impact investing conferences “aimed at helping Catholic institutions understand how private capital can help the poor,” according to a CNN report. “There is definitely momentum around impact investing, certainly within the Catholic community globally,” O’Shaughnessy said of the impact of the Pope’s messages on the subject.
FSM measures the impact and tangible financial returns from its investments using rigorous risk-return measurements, said O’Shaughnessy. Its advisors generate annual reports on the impact metrics by specific investments, he added. Impact investing also brings intangible returns in that it is “a new way to do mission” for the men and women in the Catholic faith, he said.
Impact investing also bridges a gap that philanthropy typically does not fill, according to O’Shaughnessy. The capital that enterprises need “to build out a solution, and scale solutions that are good for society and for the environment, can’t be done with just philanthropy,” he explained. At the same time, FSM makes philanthropic contributions to organizations like 350.org, an organization that campaigns globally for clean energy, and the Global Catholic Climate Movement, which includes Catholic individuals and organizations.
In his attempts to spread the word on FSM’s success with impact investing, O’Shaughnessy has of course encountered those who have “lukewarm” responses, but also others who found a “deep sense of calling” to follow the underlying philosophy. “This can be systemic change,” he said of the potential of impact investing. “This is capitalism at its best. We are seeing more and more young people, including investment professionals, who are all about this. They are not in the business just to make money; they are in the business to make this work and develop and see it happen.”
O’Shaughnessy sees the impact investing movement picking up momentum with more collaboration among its practitioners, and by showing decision makers that it could work to meet their investment objectives. Meanwhile, he is patient with those who are not yet on board. “Some people just don’t get it; don’t judge them,” he said. “It’s just not where they’re at, and they will follow eventually, probably.”