An impact fund gets ‘off the sidelines’

In the wake of Black Lives Matter protests across the United States last year, prompted by the murder of George Floyd by a police officer in Minneapolis, corporations launched initiatives to address racial inequality and promote social justice.

Netflix pledged up to $100 million, or 2% of its cash holdings, to financial institutions and organizations that benefit Black communities. Target said it will spend more than $2 billion on Black-owned businesses by 2025. The Minneapolis-based retailer also formed an organization called OneTen, a coalition of 37 companies that seek to train, hire, and advance one million Black Americans without a four-year college degree into “family sustaining jobs” over the next decade.

“There has been a significant uptick in impact investment over the past 18 months,” says Mindy Frye, an institutional portfolio manager for RBC Global Asset Management, known as RBC GAM, the asset management division of Royal Bank of Canada that administers ServiceNow’s fund.

Whereas philanthropic organizations and other charitable groups historically focused on racial equity initiatives, corporations are now directly driving this surge in investments, Frye says.

From November 2020 to May 2021, companies committed $134 billion to racial equity causes, including affordable housing, lending, and community development, according to McKinsey research.

“2020 has also emerged as a moment of opportunity, a possible inflection point for addressing inequity in a profound way,” according to a McKinsey report. “The global protests following the killing of George Floyd demonstrated the widespread awareness of inequity and a willingness to do something about it.”

As Muindi watched the protests over Floyd’s murder, something stirred inside him and he felt compelled to take action.

Every Saturday from June to December last year, he joined a local BLM protest. But that wasn’t enough.

“This feels different,” Muindi recalled during a company Zoom event earlier this year to mark Juneteenth, a federal holiday that commemorates the emancipation of African-American slaves. “We’ve got to get off of the sidelines,” he said. “We’ve got to stop rage-watching and be active.”

As a top deputy to ServiceNow’s chief financial officer, Gina Mastantuono, Muindi helps oversee the company’s $4 billion investment portfolio. He pitched the racial equity fund idea to Mastantuono, arguing that ServiceNow’s investment in racial justice should generate measurable outcomes. One way to keep the program honest would be to ensure the company’s racial equity loan portfolio earned a market-based return.

As CFO, Mastantuono is responsible for ensuring not only ServiceNow’s financial well-being but also directing and measuring its financial impact. In that sense, she’s a keeper of the company’s commitment to investing in communities and funds in ways that can help people create positive change.

“Our investors, our customers, and our employees expect us to impact our society and our world in ways that go well beyond just quarterly earnings,” Mastantuono says. “I’m proud to be part of an organization that is willing to put its money where its heart is.”

The need is great. Minority-owned firms are less likely to receive loans and receive lesser amounts than non-minority firms, according to research from the U.S. Commerce Department’s Minority Business Development Agency. Minority-owned firms are also more likely to be rejected for loans and more likely to face higher interest rates.

But how can companies convince banks to lend to these communities and businesses? One is to deposit cash into the banks themselves.

Experts however say that’s not enough. For one thing, banks can only carry so many deposits before they need to raise additional capital. Even so, there is no guarantee that the capital and deposits will be used to fund loans to businesses in the intended communities.

“While many community investing practitioners and advocates have applauded corporate deposits into Black-owned banks, there is also a growing consensus that more needs to be done to truly fortify these institutions,” according to a recent report by the Federal Reserve Bank of New York.

“To strengthen the balance sheets of financial intermediaries, corporate investors should … grant capital to support net assets for loan funds,” the report says.

In other words, companies can make it easier for banks to make riskier loans by acquiring those loans themselves. Banks can protect their asset sheets and obtain additional capital to make more loans without having to touch their deposits.

“We need to enable the whole system of capital movement,” Muindi says. “We want to be a part of their financial supply chain. We want to plant the seeds of the next Black Wall Street by connecting small Black banks to larger financial institutions.”

As Muindi started to structure his fund, he ran into another problem. There was a dearth of community banks with the necessary experience to make targeted loans that benefit minority communities.

Since 2008, the number of Black-owned banks has fallen by 49%, while the number of banks overall decreased 38% to 5,116, according to a study by the Urban Institute. In the first quarter of 2020, there were just 21 Black-owned banks, a 9% drop from 2018.

So ServiceNow decided to partner with RBC GAM, which has 20 years of experience with impact investing.

“We lie at the intersection of generating both competitive returns and social impact,” says Frye, the investment portfolio manager.

RBC GAM’s Access Capital Community Investment Fund currently has $1.9 billion in assets under management with plans to double in five years. Last year, the AAA-rated fund earned a gross market return of 5.53% from investing in projects that provided affordable rental units, housing for low- to moderate-income buyers, small business loans, and nursing home beds.

Frye says that some people think such funds are risky. In reality, they are “very liquid, fixed income solutions that don’t have to be complex or difficult,” she says.

The challenge is to attract more corporations and high net worth individuals to these funds, Frye says. “It’s going to take everybody to scale impact investment.”