Understanding the true nature of impact investing, including the use of hurdle rates and evaluation scales, helps identify viable loans with potential for profitability and positive social or environmental impact.
1. According to Michael's presentation "Challenging Perspectives on Impact Investing," the following statements are true:
b. The hurdle rate is used to screen out unprofitable low impact loans.
c. Root Capital uses a 10-point expected impact rating scale to evaluate loans.
The hurdle rate is a minimum rate of return that an investment must meet in order to be considered viable. In the context of impact investing, the hurdle rate is used to identify loans that have the potential for both financial profitability and positive social or environmental impact. By using the hurdle rate, investors can screen out unprofitable low impact loans and focus on those that have the potential for significant impact.
Root Capital, as mentioned in the presentation, utilizes a 10-point expected impact rating scale to evaluate loans. This scale helps them assess the potential impact of the loan on various dimensions, such as poverty alleviation, environmental sustainability, and gender equality.
By evaluating loans based on their expected impact, Root Capital can prioritize investments that align with their mission and have the potential to create positive change.
On the other hand, the following statement is false:
a. The hurdle rate is used to eliminate loans with negative net income.
The hurdle rate is not used to eliminate loans with negative net income. Instead, it is used to assess the potential profitability and impact of investments. Loans with negative net income may still be considered if they have the potential to generate significant positive impact.
Regarding statement d, the presentation does not mention whether Root Capital makes venture capital investments. Therefore, we cannot determine its validity based on the information provided.
2. False. According to Michael McCreless' presentation "Toward the Efficient Impact Frontier Baruch College, April 2018," a "high additionality loan" is not a loan that all banks are willing to provide in the financial system.
The term "additionality" refers to the additional positive impact that an investment or loan can have beyond what would have occurred without it. A "high additionality loan" is one that is expected to generate significant positive impact that would not have been achieved otherwise.
These types of loans often target underserved or marginalized communities, support innovative solutions, or address pressing social and environmental challenges.
Since a "high additionality loan" focuses on generating significant positive impact beyond what traditional banks provide, it is not a loan that all banks are willing to offer in the financial system. It requires a specialized approach and understanding of the social and environmental dimensions of the investment.
Learn more about impact investing: