IN PURSUIT OF DEEP IMPACT AND MARKET-RATE RETURNS: KL FELICITAS FOUNDATION’S JOURNEY Plum Lomax, Anoushka Kenley, Abigail Rotheroe and Sarah Denselow April 2018 ACKNOWLEDGMENTS We are extremely grateful to all those who contributed their time, knowledge, and experience to this work. The report is very much a joint effort between NPC and Sonen Capital, and we particularly thank Raúl Pomares and Will Morgan from Sonen, along with the rest of their team, for their work on the financial performance data. We would like to thank Olivia Prentice from the Impact Management Project for her valuable advice and input, providing the voice of over 700 practitioners in the impact investing field. And we are grateful to Dario Parziale from Toniic for his work on the impact portfolio tool which we have incorporated within this report. It is also important to mention the support and guidance we have received from our colleagues at NPC—particularly Dan Corry, Tris Lumley, Rosie McLeod, Satdeep Grewal and Katy Murray. Disclaimer For the avoidance of doubt, NPC presents this report for information and education only. The information in this report is not intended to provide, and should not be construed as, financial, investment, tax, or legal advice. Readers of this report should consult suitable regulated advisors for such advice. References to specific investments, portfolios, or securities do not constitute investment recommendations. Designed by www.supersonicplayground.com 2 | IN PURSUIT OF DEEP IMPACT AND MARKET-RATE RETURNS: KL FELICITAS FOUNDATION’S JOURNEY CONTENTS ABOUT THIS REPORT 4 KEY FINDINGS 5 Social impact 5 Financial performance 8 Field building 9 Insights from the investees 10 ABOUT THE KL FELICITAS FOUNDATION 11 The Foundation’s theory of change 12 Snapshot of the Foundation’s investment portfolio 14 APPROACH AND TOOLS USED FOR THIS REPORT 16 Approach 16 Tools 18 SOCIAL IMPACT OF THE KLF INVESTMENT PORTFOLIO 23 Impact by Sustainable Development Goal 23 Impact practice across the portfolio 36 Investor contribution 41 Impact of individual investments—six case studies 45 FINANCIAL PERFORMANCE OF THE PORTFOLIO 58 FIELD BUILDING 61 Outcome: more effective social entrepreneurs 62 Outcome: more effective impact investing intermediaries 63 Outcome: more effective impact investors 64 LEARNING FROM THE INVESTEES 67 REVIEWING EXITS, WORKAROUNDS, AND WRITE-DOWNS 70 LOOKING FORWARD: KLF 3.0 73 APPENDICES 74 Appendix 1: Complete list of KLF investments and grants as of 31 December 2016 74 Appendix 2: The KLF portfolio, impact goals and investor contribution 78 Appendix 3: Additional disclosures 80 GLOSSARY 81 REFERENCES 83 IN PURSUIT OF DEEP IMPACT AND MARKET-RATE RETURNS: KL FELICITAS FOUNDATION’S JOURNEY | 3 ABOUT THIS REPORT Impact investing—investment whose goals are simultaneously and measurably both social and financial, aiming for private return as well as public good—is now a very significant asset pool. By some estimates,1 in 2016, over $10 trillion of global assets were using sustainable strategies—including environmental, social, and corporate governance (ESG) factors, impact and community investing, and sustainably themed investing. Even more significant is the rate at which sustainable This review of KLF’s social impact, combined with eleven investment is growing—up 41% from 2014.2 As years of financial performance data of their portfolio, interest from individuals, institutions, and foundations is just one element in achieving their mission. To gathers pace, so too has the involvement of global respond to the increasing demand for open datasets on blue chip financial institutions, normally best known impact-investing portfolios, the Kleissners have devoted for a relentless focus on the single bottom line of pure significant time and resources to the Toniic Institute’s financial return: BlackRock, UBS, Goldman Sachs, Bain T100 project—a multi-year study aggregating 76 impact Capital, and TPG are just a few of the institutions that investment portfolios (representing over $3.5bn of now offer impact investment solutions to their clients. assets)—so that others can understand the intentions, impact, and financial risk and returns of impact investors. If we are to ensure that this growing pool of assets has measurable and relevant impact—and as a result is able to NPC is delighted to have been KLF’s impact partner for continue to attract further flows of capital—then it is vital, almost three years. We work together, along with its now more than ever, that we do our very best to assess the investment manager, Sonen Capital, to understand the social and environmental outcomes of those investments and impact of KLF’s investments. Our work has shed light on get a handle on the likely impact of that capital. These efforts two fundamental lessons: need to be transparently measured and widely reported. Without such transparency, the risk is that impact falls short 1. Despite challenges for investors and investees, it is of expectations, investors are disappointed, and the field fails possible to measure the outcomes of a wide spectrum to grow, loses momentum, or worse. Fund managers such of investments across different asset classes and those illustrated in the report—that are setting the pace in impact categories. demonstrating impact—are to be applauded. 2. Impact (of varying degrees) can be achieved while Charly and Lisa Kleissner are an important part of this gaining a financial return (of varying levels). growing movement. Through their KL Felicitas Foundation (KLF), managed by Sonen Capital, they now have over 13 years of experience in investing their $10m of foundation Throughout this document, we use the word assets for impact. From day one, transparency—both on ‘impact’ in relatively broad terms. We understand the financial returns and the social and environmental that in its truest sense, impact refers to the impact achieved by their investments—has been long-term difference achieved for individuals, paramount. Learning from, and sharing, their failures as families, communities, or the planet. But this is well as their achievements matters to them deeply; their often extremely hard to measure, and more so for mission is to transform the global financial system so enterprises in the impact investment space where that, one day, every investment made by any individual data is patchy and of varying quality—where we or institution accounts for its social and environmental often must make do with proxies for impact such impact—positive or negative. They see their role as as outputs or number of people reached. challengers of traditional investment approaches, encouraging and enabling investors by building evidence, creating powerful tools, and co-creating support networks. 4 | IN PURSUIT OF DEEP IMPACT AND MARKET-RATE RETURNS: KL FELICITAS FOUNDATION’S JOURNEY KEY FINDINGS The Kleissners’ goal with their foundation has been twofold: to create a 100% impact portfolio, with the deepest possible impact while achieving market-rate returns for the portfolio as a whole; and to build the impact investment field. They do this by: making transparent the contents have over 300,000 active borrowers, compared to under and performance of their portfolio; and by providing 200,000 in 2014. And by 2016, Better Ventures, through its financial and non-financial support to cultivate networks, investees, had cumulatively enabled 3.2 million individuals catalyse the work of others in the field, and develop new to access essential services (such as energy and healthcare), organisations and programmes where gaps are identified. compared to less than half a million in 2014. These are just a few examples of some of KLF’s thematic investments. This report is an update of our 2015 review of the KL Felicitas Foundation, Investing for impact: Practical The sustainable elements of the fund are achieving social tools, lessons and results.3 We have amended our and environmental impact. For example, the portfolio approach—focusing on financial returns as well as companies of Sonen Capital’s Global Equity Strategy (public social impact, building on Sonen Capital’s publication of market investments selected for best-in-class ESG practices) KLF’s financial returns, Evolution of an impact portfolio: demonstrate better social and environmental performance From implementation to results.4 than the benchmark†: significantly lower (43%) water use and slightly lower (3%) water intensity than the benchmark, We have assessed a wider spectrum of investments while the carbon emissions of the portfolio were more than including publicly listed investments, considered five times lower than the benchmark.8 their contribution towards the UN’s Sustainable Development Goals (SDGs)5, and engaged with Impact First investments can be higher risk. There are investees on their data. We also updated our Impact some investments within the portfolio that have not Risk Classification framework6 to align with the latest succeeded in becoming viable enterprises—despite very thinking in the impact-investing field, particularly drawing strong impact propositions. For example, SMV Wheels, a on the work of the Impact Management Project.7 social enterprise providing a rent-to-own service for bicycle rickshaw drivers in India, is no longer in business due to a challenging business environment and inadequately skilled For reasons discussed in our previous report, we do management. FAIM, which uses modern plant propagation not uniquely attribute impact to KLF; instead, in all techniques to improve the productivity of Rwandan farmers, cases, we say that KLF’s investment, often as one struggled to achieve a sustainable business model. And Living among many investors, contributed towards the Forest, an eco-development of forestland, lost its land in social impact outlined below.* foreclosure. These failures are limited within the portfolio, mainly apply to Program-Related Investments (PRIs)‡ or other Impact First investments, and reflect the risk-taking approach of KLF. Indeed, we would suggest that an impact investor Social impact that does not have failures among their investments may not be reaching for hard-to-achieve impact.