ServiceNow: An impact fund thinks outside the box

There are times when events beyond the economic cycle cause not only individuals but also companies to take a stand. For ServiceNow, one of those moments happened earlier this year.

In January, after months of protests against racial injustice across the United States, the company spear a $ 100 million racial equity fund to help black communities and black-owned businesses in 10 regions of the United States. The fund buys loans from local community banks, allowing them to extend more credit to members of minority communities and minority-owned businesses that are too often overlooked by the financial system.

So far, ServiceNow has deployed around $ 86 million and plans to tap the entire fund by the end of the year. Tim Muindi, vice president and treasurer of ServiceNow, explains that the company seeks to fund homeownership, neighborhood revitalization and entrepreneurship in the cities where ServiceNow employees live and work.

We have to get off the sidelines. We need to stop monitoring rabies and get active.

Projects in ServiceNow’s portfolio of funds include 314 affordable home loans, 1,126 affordable rental units in Chicago, New York and Washington, DC, as well as 15 small businesses across the country, including a construction company in Florida and a rehabilitation for military veterans in San Diego.

Muindi emphasizes that loans should generate at least average market returns. The results so far have been encouraging, he says. Depending on the social and financial results of the company’s initial $ 100 million investment, ServiceNow may replenish the current racial equity fund or launch new funds.

Influx of money from businesses

Following the Black Lives Matter protests across the United States last year, sparked by the murder of George Floyd by a police officer in Minneapolis, companies have launched initiatives to tackle racial inequalities and promote social justice .

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

“There has been a significant increase in impact investing over the past 18 months,” says Mindy Frye, Institutional Portfolio Manager for RBC Global Asset Management, known as RBC GAM, the management division of assets of the Royal Bank of Canada which administers the ServiceNow fund.

While philanthropic organizations and other charitable groups have historically focused on racial equity initiatives, companies are now directly responsible for this increase in investment, Frye said.

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

“2020 has also emerged as a moment of opportunity, a possible inflection point to tackle inequality in a profound way,” according to a McKinsey report. “The global protests following the murder of George Floyd have demonstrated the widespread awareness of inequalities and the will to do something. ”

“It looks different”

As Muindi watched the protests against Floyd’s murder, something stirred in him and he felt compelled to act.

Every Saturday from June to December of last year, he joined a local BLM protest. But that was not enough.

“It looks different,” Muindi recalled at a corporate Zoom event earlier this year to mark Juneteenth, a federal holiday that commemorates the emancipation of African-American slaves. “We have to get off the sidelines,” he said. “We have to stop looking at the rage and be active.”

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As ServiceNow’s Senior Deputy Chief Financial Officer Gina Mastantuono, Muindi helps oversee the company’s $ 4 billion investment portfolio. He pitched the idea of ​​the racial equity fund to Mastantuono, saying ServiceNow’s investment in racial justice should generate measurable results. One way to maintain the honesty of the program would be to ensure that the company’s racial equity loan portfolio has achieved a market-based return.

As CFO, Mastantuono is responsible not only for ensuring the financial well-being of ServiceNow, but also for leading and measuring its financial impact. In this sense, it guarantees the company’s commitment to invest in communities and funds in a way that helps people create positive change.

“Our investors, customers and employees expect us to make an impact on our company and our world in a way that goes far beyond simple quarterly profits,” said Mastantuono. “I am proud to be part of an organization that is ready to put its money where its heart is.”

Capital inequity

The need is great. Minority-owned businesses are less likely to receive loans and receive smaller amounts than non-minority businesses, according to research of the Minority Business Development Agency of the United States Department of Commerce. Minority-owned businesses are also more likely to be turned down for loans and more likely to face higher interest rates.

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

Experts say, however, that this is not enough. On the one hand, banks can only have a limited number of deposits before they need to raise additional capital. Even so, there is no guarantee that the capital and deposits will be used to finance business loans in the targeted communities.

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

“To strengthen the balance sheets of financial intermediaries, private investors should… provide capital to support the net assets of loan funds,” the report said.

In other words, companies can help banks make riskier loans by acquiring the loans themselves. Banks can protect their balance sheets and raise additional capital to make more loans without having to touch their deposits.

“We have to allow the whole system to move capital,” Muindi said. “We want to be part of their financial supply chain. We want to plant the seeds of the next Black Wall Street by connecting small black banks to bigger financial institutions.”

Partnership with RBC

As Muindi began to structure his fund, he ran into another problem. There was a shortage of community banks with the experience to provide targeted loans to benefit minority communities.

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

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

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

RBC GAM’s Access Capital Community Investment Fund currently manages $ 1.9 billion in assets and expects to double in five years. Last year, the AAA-rated fund achieved a gross market return of 5.53% by investing in projects offering affordable rental housing, housing for low- and moderate-income buyers, small business loans and nursing home beds.

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

The challenge is to attract more businesses and high net worth individuals to these funds, Frye says. “Everyone will need to increase impact investing. ”

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