Q&A with Eleni D. Janis of Equivico by NCRC

Small businesses, especially those with 100 employees or less, are a significant part of our economy. 1 in 3 private sector jobs in the US are created by this group; they reflect a significant financial opportunity wedded to social impact.

There is an estimated unmet demand of about $87 billion of loan financing to such businesses, a gap that has been created over the last two decades as large commercial banks have stepped away, especially after the 2007-2008 time period.

Others have tried to fill the gap, but we see more opportunity.

In the last decade, online lenders, following community lenders, have jumped in. The rise and evolution of tech-powered underwriting and online lending presents a great opportunity to tap that gap.

People of color and women face a greater obstacle in accessing financing and establishing credit. Mystery shopper studies through NCRC have documented that women and people of color are treated differently at banks/by loan officers and are largely discouraged, in explicit and implicit ways. There are returns to be gathered from an economic point of view, and the follow on job creation provides a positive social impact beyond the clear impact of providing lending opportunities to ambitious entrepreneurs to fuel individual enterprise growth.

We finance non-usury loans to underserved businesses for all of these reasons.

Investing for returns and social or environmental impact has been around and on the sidelines for several decades, often named differently.

Some people claim that one of the original forms was facilitated by the Community Reinvestment Act (CRA) in 1977, which is a mandate for retail banks to serve underserved communities. However, social impact or ESG-focused investment has evolved in a more dynamic form in the past 15 years, with innovative investment professionals entering the field and creating the field, and working to bring products to the mainstream. This is an investment philosophy that couples returns with impact, and impact becomes both an objective but also an opportunity. When looking for social impact, what you also find are untapped markets. In investing, that’s a competitive proposition, as long as you know how to do it well.

To do impact investing profitably and generally, an investment firm needs to have more than just investing knowledge. One needs to be able to identify the opportunity and understand intrinsic complexities of the economy and how those ultimately may impact your investment, from labor laws to systemic problems such as discrimination.

The change of talent is a major part of the evolution, correlated with increased attention and awareness of the socio-economic conditions around us, initiated by the consumer, including millennials who are more socially and environmentally conscious. Activist shareholders impose certain demands on corporate boards. Asset holders, for example high net worth individuals coming into financial power now due to the greatest generational transfer of wealth ever, happening at this time, are evolving the conversation. There are more women and young people looking to invest differently and asking their financial advisors for impactful investments beyond charity efforts.

The three primary inputs to the evolution of impact investing are: (1) new savvy financial talent, (2) consumer and shareholder pressure, and (3) the state of the economy marked by increased inequality, making the idea of ‘turning a blind eye’ impossible.

We must address unfair economic and systemic imbalances if we want to stay competitive as a country. This is the perfect storm.

In a way, the returns can be immeasurable, particularly when you are investing in ways that enhance people’s lives, but with respect to metrics, there is a double bottom line approach for social impact investments: the financial return on investment (ROI) and the social impact return on investment or (SROI).

You can measure social impact; it takes additional infrastructure and expertise to do it.

Measuring SROI is important as the investing world is numbers driven. The qualitative way is the easiest. While this may not encompass every social good, we need to start somewhere. There are quantitative, evidence based ways to measure as well. At Equivico, our impact measurement is heavily driven by well-established Economic Impact Analysis methods.

Investment managers often develop philosophies and proprietary approaches, and educate investors on their methodologies. The impact we are looking to facilitate has to match with investor expectations around reporting, and often, existing proprietary models are evolved compilations of investor queries that compound over time into a framework.

This dynamic requires an LP with high level thoughts around the type of impact they want to see, and then a GP who is willing to educate an allocator.

People like me who have deep expertise in both, are able to address both fiscal and social measures.

Equivico has developed a proprietary returns framework based on economic development experts and firms use and knowledge of the markets.

Industry standards in measuring impact are being sought more actively, with the goal of comparing apples to apples, although it can be difficult to compare investments across different social impact sectors. There have amazing centralized attempts to consolidate reporting methods.

The GIIN IRIS+ framework is the most broadly applicable framework, with regard to certain types of investing. It’s a good framework for lending and venture capital, for example. IRIS+ is a comprehensive guide around how to design, define and measure impact.

The PRI, a UN-supported network of investors, and the UN SDGs (Sustainable Development Goals) for investors, ask them to declare publicly their commitment to investing responsibly. UN PRI is not a framework for defining or measuring impact though. It’s a tool for mobilizing investors behind the cause of responsible investing.

Some large private equity shops have signed on to the UN PRIs, but there is very little accountability for impact.

I worked with New York City to help them catalyze industry standards for impact measurement. The financial center is here, and so if we can evolve business understanding here, there will be a follow on effect.