Impact investment challenge: modernising development finance

The adoption of the SDGs created a niche of joint interest between financial and charitable investors. The niche reflects the impact of SDGs on public awareness of development issues, and the willingness of people to see their savings and investments working not only for financial gain but also for the good of the world.

The majority of commercial investment managers today already allocate part of their portfolio to high risk investments with expected high impact in terms of Environmental, Social and Governance indicators, jointly referred to as ESG investments. Financing for impact investing, being part of the wider ESG landscape, is rising at a rate of over 15% per year, and in the assessment of the Global Impact Investing Network (GIIN) the main constraint is not the lack of financing, but the lack of sufficient number of projects and the need for effective management of projects receiving impact investments.

In the current financial markets the rates of return net of risk are at historical lows. The SDG focus of projects generated by the CFC meets the trend to make this low interest rate environment an opportunity for global sustainable development. The CIIF builds on the experience that projects identified by the CFC are financially sound at the capital preservation level after providing for operational, financial and other risks. CIIF projects will take advantage of this and deliver material outcomes in terms of sustainable development, while achieving capital preservation.

The CFC, due to its specific structure and experience can reach projects which are not otherwise accessible to the impact investment community. CIIF will make such commodity projects accessible to:

-      national development finance institutions;

-      multilateral development financing agencies adopting the SDG framework;

-      private foundations and individual investors meeting formal qualifications to participate in impact investing funds.

The Commodity Impact Investment Facility is an impact investment fund, established and advised by the Common Fund for Commodities (“CFC”) as a public-private partnership to invest in commodity value chains in developing countries for the purpose of advancing the sustainable development goals while achieving capital preservation or positive rates of return on its portfolio.

The CIIF basic rationale is to combine the CFC experience and expertise with funds from impact investors to address the fundamental issues affecting the development of successful SMEs in global commodity value chains (GVC). These include:

a.    financial viability and investability of commodity projects run by the SMEs;

b.    scalability of successful GVC projects after demonstrating a successful operational model;

c.     delivering consistent and robust impact measurement to impact investors, including information on sustainable livelihoods;

d.    applying the necessary mitigation measures to address social and environmental risks inherent in many of the global commodity value chains.

Commodity sector in developing countries is part of the essential global value chains, and offers a financially viable investment opportunity, while, at the same time, achieving significant development gains for the poor and vulnerable people in developing countries which frequently depend on commodities for a large part of their livelihood. [how we will do that, geographical area] The capital raised through CIIF will be deployed to projects meeting the criteria of capital preservation and significant measurable development impact driven by equitable distribution of added value generated in commodity value chains.

The Facility will focus on commodities which can be expected to, or currently make a significant contribution to the livelihoods of the vulnerable people in commodity value chains, with a measurable impact in terms of sustainable development goals. Examples of such high-impact commodity sectors include coffee, cocoa, maize, dairy, tropical fruits and nuts, fertilizer, leather etc.

The CFC takes advantage of its experience financing impact investing projects in commodities since 2014, achieving a net zero rate of risk adjusted return. The CIIF is designed as a facility to enable investment by a broad circle of impact investors into projects originated, developed, executed and managed by the CFC in the commodity sector in developing countries.

As a fund manager, currently undertaking direct investments in commodity sector in developing countries, the CFC expects CIIF to achieve significant synergies and economies by operating on the same project management infrastructure as had been built for CFC’s in-house portfolio. The CFC aims to invest up to USD20mln of its own assets in CIIF. 

The Executive Board in its 68th Meeting in October 2019 requested to develop the initiative towards the creation of an impact investment  facility under the management of the CFC. Such facility would target the specific areas of CFC competence, namely achieving substantive contribution towards the SDGs by investing in commodity value chains.

An open-ended Working Group on Sustainable Fund Management was established to explore the establishment of the “Commodity Impact Investment Facility (CIIF)”. The first meeting of the WG-SFM was held by teleconference on 1 September 2020. Following that, and despite the challenges of the pandemic, the WG held 12 meetings by teleconference, most recently on 19 August 2021. The Working Group will report its recommendation for action on CIIF in October 2021.

Successful operation of the CIIF will be determined by the capacity of CFC as fund manager to deliver on these key issues.

a.    Financial viability of CIIF projects, achieved by investing in long term sustainability of the critical elements of GVCs at the level of the primary SMEs. This goes beyond environmental, social and governance (ESG) as it targets sustainability by securing equitable distribution of benefits from production and trade of commodities to all actors in GVC. It is expected that such global value chains will show greater resilience against a commodity price cycle and natural disruptions, thus providing investment returns aligned with the development impact.

b.    Scalability and replicability of CIIF projects after a model has been successfully demonstrated. A successful project can scale up with new impact investments, and could also serve as model for replication of success in other locations or sectors. Given the diversity of the commodity sector and GVCs, such replication can take advantage of technologies, operational models or custom designed financial instruments which enhance the capacity of SMEs to operate successfully in the global value chains.

c.     Delivering consistent and robust impact measurement. Credible measurement and attribution of development impact. The CFC follows an increasingly systematic impact assessment approach with a dedicated impact assessment function included in the project management cycle. This includes impact evaluation at the project consideration stage, and, in the case of approval, impact reporting in accordance with the agreed impact indicators based on the GIIN IRIS framework. Two important considerations in formulating the relevant impact indicators will be:

-      the overhead burden on the projects to report on these indicators should not itself become an undue risk and impediment to the implementation of the projects; and

-      the indicators should be comparable across projects so as to enable integrated reporting of the impact of the Programme on portfolio basis.

d.    applying the necessary mitigation measures to address social and environmental risks inherent in many of the global commodity value chains. The CFC has in place a Social and Environmental Management System (SEMS) which was developed with support from the International Labour Organization for the context of the CFC operations. Stakeholder ownership and acceptance of international development projects is an important consideration and risk factor in the context of sustainable development. The CFC recognizes socioeconomic sustainability as a significant risk to project models which may be operationally sustainable but falling short of the expectations of stakeholders at the project implementation sites.

Neither the Common Fund for Commodities nor any of its Member Countries, nor associated companies make any representation or warranty as to the accuracy or completeness of the information contained in the CIIF Placement Documents and nothing contained in the Placement Documents is, or should be relied upon as a promise or forecast as to the future. Any prospective investor should rely solely on its own due diligence, judgement and business analysis in evaluating subscription to Participations in CIIF.

The Placement Documents do not constitute an offer to sell, or the solicitation of an offer to buy Participations in any jurisdiction neither by any person to whom it is unlawful to make such offer or solicitation in such jurisdiction.

Nothing in this document may be considered to constitute legal or tax advice and each prospective investor should consult with their own legal counsel and advisors as to all matters concerning an investment in the Participations. Each investor must rely on its own evaluation of the investment and the terms of the offering, including the merits and risks involved, in making an investment decision with respect to the Participations.

Nothing in this document constitutes a waiver of immunity with regard to the assets of the CFC and the assets of Member Countries held by the CFC as stipulated in the Agreement Establishing the CFC. Therefore, no claims can, inter alia, be made to the Share Capital of the CFC, including promissory notes of the CFC, or against any Member States of the CFC, or against the provident fund moneys, if any, held by the CFC for its staff members, or against any other resources held by the CFC not explicitly allocated to CIIF, by any party nor for any reason on the basis of, or in connection with the Placement Documents.

Neither the CIIF nor the Participations have been registered in The Netherlands, The European Union or in any other jurisdiction. Specifically, any (future) offer of Participations would be exempt from the Netherlands Financial Supervision Act (Wet op het Financieel Toezicht, Wft) and would accordingly not be subject to supervision by the Netherlands Financial Supervising Authority (Stichting Autoriteit Financiële Markten, AFM).