Investee banks represent a significant, growing, positive-money movement and play a key role in meeting human needs and advancing essential segments of real economies in their communities. Initiated by the Global Alliance for Banking on Values (GABV) in 2014, the role of fund management was taken over by Triodos Investment Management on 1 January 2018. The fund is 75% equity and 25% senior debt and at the end of 2018 had five investments.
We sat down with Fund Manager Justina Alders-Sheya to talk about the fund’s performance during 2018 and her outlook for the coming year.
Serving the real economy
SFRE Fund invests in values-based banks that finance and strengthen the real economy. Their products and services are designed for small and medium sized enterprises within local communities, as opposed to the interbank transactions of systemic banks.
“With interbank transactions, banks are trading with each other, but values-based banks sell their financial products to the real economy. They lend to their local organic farmer, or a local low-cost housing project. They service real people and real businesses in their local communities,” explains Alders-Sheya.
According to the theory of change that underpins the fund, values-based banks are far more economically resilient because they’re not at risk of other banks defaulting or failing. This is evidenced in research on this topic that is published annually by the GABV. “We’re helping create a resilient real economy, and we’re doing that by being part of it. We’re supporting job creation, low cost housing and entrepreneurship, but we’re also providing a good value proposition for investors because the volatility of returns is much lower.”
Selecting and connecting investees
To select potential investees SFRE Fund uses an investment scorecard that was developed by the GABV, whose members are all values-based banks themselves. Ideally investees score 100 points, with key points allocated for real economy and triple bottom line criteria. Some are still transitioning so SFRE Fund has set a baseline of 50 points and tracks their performance and progress annually.
Alders-Sheya explains: “The scorecard is unique quantitative and qualitative analysis. Investees must have been operating for more than three years, be profit-making and have very clear objectives that focus on the triple bottom line and the real economy.”
Elaborating further she says: “Each investee has its own strategic focus. For some it may be gender equality, for others its job creation or affordable housing. But we don’t only look at the potential impact of their products and services, we also look at their leadership and culture.”
SFRE Fund also actively connects the investees and during the year ran a series of webinars. Describing the sessions Alders-Sheya tells: “They reviewed scorecards, shared their learnings and exchanged ideas. We are building a society of banks that can share their experiences and learn from each other. It was eye-opening for everyone who participated.”
Developed and emerging markets
The fund has a mandate to invest global 75% in emerging markets and 25% in developed markets, which differs to most funds that tend to focus on one or the other.
“I often get asked why the fund invests in developed economies, especially when a lot of our investee banks could easily get debt finance; there seems to be this premise that emerging economies require more assistance than developed economies. What we provide is mission aligned patient capital, which is often unavailable. The real economy gap is everywhere,” says Alders-Sheya. “Our theory of change is equally relevant in both markets.”
Alders-Sheya explains: “Investees in emerging markets have been more dramatically hit by the effects of climate change so they look at the environmental impacts of their clients in a far more sophisticated way. They tend to calculate impact that supports reduced climate deterioration. Countries that haven’t been as affected, or those that are not supported by political sentiment, do far less. We actually have a lot more discussion with investees in developed markets on how they can assess their clients’ impacts and how they can motivate action.”
Recalibrating focus and balance
When Triodos Investment Management took over the fund’s management in January 2018, it had three investments, all of which were in emerging markets, but it had only deployed around USD 14 million of the USD 44 million it had raised. So a key priority for Alders-Sheya during the year was to rebalance the fund towards its mandate. By year-end she had invested a total of USD 16 million in two banks in the United States and the United Kingdom and was closing the next investment in India. This ensured that, taking liquidity levels into consideration, SFRE Fund no longer had idle uninvested capital.
The first investment in 2018 was in Southern Bancorp. Based in Little Rock, Arkansas (US), it provides financial products and services to businesses and communities working in the Mississippi Delta, a region with high poverty and unemployment rates. It focuses on job creation, social empowerment of woman, social housing and affordable homes. The second investment during the same year was Unity Bank in Birmingham (UK), which focuses on SME financing, entrepreneurship and social housing. They also provide financial education and are helping underserved communities grow stronger.
Alders-Sheya has ambitious plans for the fund’s future and tells: “I am hoping to double the portfolio, and by the end of the year have nine or ten investments in the portfolio,” she says. “We will focus more on emerging markets this year, where the tickets are often lower, but the number of people and number of lives affected are far more.”
Explore SFRE Fund’s impact report that presents the fund’s 2018 results in a context of numbers and stories and showcases its mission to finance change by changing finance.