Investing for Sustainable Responsible Impact: Puerto Rico Case Study

Socially Responsible Investing (SRI) is evolving.  While investors following the SRI style still conduct positive and negative screens to include or exclude companies from their portfolios, new approaches now provide them with opportunities to be more proactive and comprehensive when investing for financial and social returns.  SRI driven investments offer a more dynamic approach considering factors that fall into the categories of environmental, social and governance (ESG) concerns.  In a well-diversified portfolio these investments can include a swath in the local scope of opportunities.
 
Adopting an impact investing style requires investors, managers and advisors to look into strategies and opportunities that incorporate ESG criteria to ensure social, environmental and financial returns.  The number of publicly available investment funds incorporating ESG criteria has grown exponentially over the past 20 years, rising 160 fold, from 55 in 1995 to 925 in 2014.  Both developed and developing countries offer opportunities for impact investing at the local level.  While these also incorporate ESG criteria, the social impact is augmented by the possibilities of job creation, an increased tax base, improvements to public infrastructure, and sustainable use of natural resources.
 
Similar to other industrialized economies, Puerto Rico, a Caribbean island under the jurisdiction of the United States since 1898, has great potential for local impact investing, also referred to as community investing or economically targeted investing.  With over $40 billion USD in public pension systems, credit unions, endowments, and other institutional funds invested in global portfolios, one has to wonder if the island’s capital is only producing financial returns and ignoring the possibilities to generate positive social and economic impacts locally.  While various strategies have been employed, many developed countries, including the U.S. and the U.K., have had success investing in debt, private equity and other vehicles that enable community development.
 
In 2006 the United Nations launched the Principles of Responsible Investment (PRI) initiative, to which 1,325 institutional investors around the world have pledged adherence.  The PRI promotes investments in socially responsible companies, but also in instruments that have impact at the local level, such as; loans for affordable housing, and venture capital for job creation.  As of 2014, there was $45 trillion USD in assets under management that follow the UN’s PRI.  Empirical studies show that responsible investments perform as well as conventional instruments, dispelling the notion that investors have to sacrifice financial returns or that spending needs will not be met.
 
The term “impact investing” was coined by the consulting firm The Monitor Group in 2009.  The most widely accepted definition is "those investments in companies or funds that generate social and / or environmental good, with financial returns to the investor".  Impact investors not only make responsible investments, they also seek a financial return through investment vehicles that can produce measurable social impacts.  The financial return and social impact are the main variables in the equation of impact investing and the weight given to each component defines the investor’s profile. 
 
There are two distinct investor trends in impact investing; those with a financial priority, and investors who prioritize on social and environmental impact.  The first group consists of commercial investors seeking financial vehicles that offer them market rate returns while meeting social and environmental objectives.  Pension funds, which have to meet spending requirements consistently, are a good example of this group.  The second group is composed of institutions that are willing to accept below market returns, or even a simple return of principal, in exchange for significant social and/or environmental impact.  Family foundations can be an example of this second trend.
 
No matter what combination of investment strategies are employed, impact investing departs from traditional philanthropic practices, because it can perpetuate the ability of capital to generate continuous social and economic returns.  Contributing to cement this practice, most of today’s institutional impact investors include social and environmental objectives in their investment policy, measure portfolio returns by including social performance metrics, and have made environmental, social and governance issues part of their due diligence process when evaluating investment vehicles and management options.
 
A scan of the island’s investment environment shows that despite the recent toxicity in the municipal bond market, institutional investors in Puerto Rico have opportunities for local impact:
 
Fixed-Income – Investing in debt instruments through banks, credit unions and other community-oriented financial institutions can make more commercial loans and mortgages available to start-ups and low-income residents, while benefitting from guarantees provided by the Small Business Administration and the Department of Housing and Urban Development, among other U.S. federal agencies.  Within a well-diversified portfolio, local investors can have local impact by investing in mortgage-backed securities that provide low and moderate income families home ownership opportunities.
 
Community Loan Funds – Many communities around the world have established loan funds to finance social enterprises, nonprofit organizations and small business development in their backyard.  Community Loan Funds offer notes to investors with varying duration and return.  The note issued by the loan fund may be reinvested after reaching maturity, and earnings can be procured or reinvested.  The Puerto Rico Community Foundation launched a Loan Fund in 2014 that seeks to provide this alternative to investors and it is currently offering notes with a US $1,000 minimum investment to raise $10,000,000 by the end of 2015.
 
Private Equity – Companies in early or growth stages require direct capital investments to acquire property, equipment and other expenses that are hard to finance through debt.  Patient capital can be provided through various private equity funds or through a funds-of-funds structure to allow for better management of risk associated with individual or direct investments.  Since 1996, Grupo Guayacán’s unique co-management of a private equity fund of funds has been an investment option with local impact for both institutional and individual investors.  The underlying investments of the Fund of Funds are distributed worldwide and some of them have a presence in Puerto Rico.  Most importantly, a portion of the Fund's income allows Grupo Guayacán to offer programs that promote entrepreneurship and small business creation.
 
From a financial return standpoint, various studies have demonstrated that Sustainable-Responsible-Impact Investment strategies perform as well as conventional approaches.  In practice, the MSCI World ESG Index, a capitalization weighted index that provides exposure to companies with high ESG performance in 23 developed market countries, shows that investment managers following this index have a chance to do as well as comparable portfolios while also achieving social returns. 
 
As one of Puerto Rico’s leading investment advisory firms, and as a signatory of the United Nations PRI and the Global Compact initiative, Consultiva Internacional, Inc. is committed to incorporating ESG issues and local impact investment opportunities into investment analysis, decision-making processes and, ultimately, portfolio construction with all clients.
 
Myrna M. Rivera, Founder and Chief Executive Officer, is a 30 year veteran in the field of investment management consulting. A Certified Investment Management Analyst ("CIMA® "), Ms. Rivera is a recognized pioneer in the industry, having contributed to developing standard investment management practices employed today for middle market endowments and foundations, pension funds, insurance companies, credit unions, Taft Hartley Benefit plans and individuals and families.
 
Ms. Rivera has received several recognitions for her leadership in financial services, including the John Ellis Excellence Award for her tenure in institutional investment consulting at Smith Barney and its predecessors,  the Joyce Johnson Award of the National Association of Securities Professionals (www.nasphq.org), for her contribution to the advancement of women and minorities in financial services, and the Highest Leaf Award from the Women’s Venture Fund of New York, for entrepreneurial excellence. Ms. Rivera appears in the “Top 100 Influential Hispanics” of the Hispanic Business Magazine (www.hispanicbusiness.com), Wealth Management’s 2012 and 2014 roster of Top 25 Women-owned RIAs (classified #9 in 2014). She has twice been awarded Consultant of the Year by Opal Financial Group’s Emerging Manager Summit.
 
Ms. Rivera Chairs the Lehman College Foundation of the City University of New York. She is a founding member of the Comisión de Ciudadanos al Rescate de Caimito, a community-based organization in San Juan and a board member of Pro-Arte Musical, a not-for-profit organization based in San Juan that promotes classical and world music concerts. She is a board member of BronxNet, an independent, not-for-profit organization established under the Cable Television Franchise Agreement between the City of New York and Cablevision of New York City. She also was appointed by the Governor of the Commonwealth of Puerto Rico as a member of the Consejo Asesor para el Desarrollo de Comunidades Especiales.
 
Ms. Rivera is an undergraduate of the University of Puerto Rico and a Masters Graduate from Lehman College of the City University of New York, both honors majors in Mathematics.