GIIN: How does Triodos incorporate impact investing into its banking model?
MvGB: It's the reason for our existence. We started this bank in 1980, and there was already a group of investors who wanted to use their money in different ways. We use that money to finance businesses and projects which have a positive impact on society, either in social terms or environmental terms. In 1994 we started a special subsidiary of Triodos Bank, Triodos Investment Management. In that group, we manage SRI funds and different themed funds. We focus on climate and energy, sustainable real estate, microfinance, and fair trade. These funds are open for retail investors, and also institutional investors, family offices, and foundations. So impact investing is our core business. Today, Triodos Group oversees a total of USD 7 billion, USD 4.3 billion of which is overseen by Triodos Bank, and USD 2.7 billion is under Triodos Investment Management.

What types of impact investors are investing with Triodos today? Are their interests different?
MvGB: Overall, we find there is an increasing group of retail investors who want to invest their money in an impactful way. Retail investors have very different requirements than institutional investors. It's not as easy to get institutional investors into this space, unless you have an investment product that meets their standards and is comparable to other things they do. But if it is slightly different, because of all the requirements - and I can understand these because they have fiduciary responsibility as well - it's more difficult for them to invest in these alternative asset classes, as they call it. So, it's harder work to find solutions so that institutional investors can get in.

Geographically, where are you investing?
MvGB: With the microfinance and the fair trade funds, we're working all over the world. With sustainable real estate, and climate and energy funds, it's more in Europe.

What are some of the challenges Triodos has faced as a financial institution focused on impact investing?
MvGB: We see a huge demand from investors for this type of investing but in some sectors still the main challenge is to find projects, that are ready for (sizeable) investment. For example, last year, we were working on setting up a fund to invest in renewable energy in developing countries. There, we do see a number of smaller size projects, but it's a bit of a chicken-and-egg situation. You need to get started and hopefully projects will scale up. But, it's not easy to find projects that are already so far advanced that it's easy to finance them with sizeable amounts of money.

What do you think are the best ways to address this?
MvGB: There are a number of sectors now in developing countries where it's simply not enough to have private capital available. You also need grant money to finance technical assistance to get the projects to a certain scale. In 1994, when microfinance was still in a very early phase, we started a co-operation with two Dutch foundations, DOEN Foundation and Hivos. Through these partnerships we could finance small and high-risk microfinance institutions, which was very helpful to enter and develop the microfinance sector. Now the industry has grown and it is very different. Renewable energy in developing countries is now where microfinance was 15 years ago. Setting up a fund in partnership with an NGO or with a foundation is still a valid model for sectors still in an early phase of development.

Tell us a bit about the projects you fund with the Triodos Sustainable Trade fund.
KJ: We are financing the export of fair trade and organic agricultural products from developing countries to Western countries in the European Union or the United States or Japan. As an example, a coffee cooperative engages in a fair trade or organic sustainable value chain. In order to commit in this chain, the cooperative has to sign an export contract, and has to make sure that it will actually get the coffee to fulfill those contracts. This is where finance becomes crucial because the members of the cooperative, the farmers, especially small-hold farmers, cannot afford to wait for their payment until the European or American buyer has transferred the money to the cooperative. Farmers need to get paid as they deliver their product. Now, to bridge that cash flow intensive period - from harvest time to processing, cleaning, packaging, shipping, and final payment of the buyer - we provide what you call "trade finance" or "pre-export finance."

What are the export products that rely on your fund for financing, and where are they grown?
KJ:We offer this financing for a lot of different products and commodities-coffee, cacao, sugar, herbs and spices, fruits, sesame seeds, cotton - with average loans of EUR 500,000 to 700,000. Roughly speaking, 60% of our investments from this fund are in South and Central America. Almost all the rest are in Africa. There are a few exceptions. One is a cotton project in Kyrgyzstan. We are also about to disperse a loan to a project in Palestine for fair trade olive oil.

What is the financing structure for these deals?
KJ: Our funding structure is a bit different from classical investment funds. Triodos Bank provides the fund - the fund is a separate legal entity - with a line of credit which the fund uses to make loans. But, of course, as you can imagine, this type of business is high risk - working in developing countries, in Africa and Latin-America, and in trade situations where real collateral is not at all or hardly available. Therefore, Triodos Bank requests that the fund provide them with guarantees, which we get from foundations and development organizations. We raise one-third of the total value of the credit line as a security for this loan, which is then physically deposited in a Triodos bank account and receives around 3% interest. So, Triodos Bank takes two-thirds of the risk for the credit line, and one-third is secured by external guarantors.

Do you think this model, in which two-thirds of the risk is held by a commercial entity and one-third is held by socially-minded investors making a 3% return, is accurately valuing risk in trade financing? Is this structure a standard model for this type of trade financing?
KJ: I think we are already advancing with this fund, compared to how this has been done in the past and is still done by some of our peers. Typically, the funding for this type of fund is 100% social funding or grants, whereas in our case two-thirds is commercial, this being the risk that Triodos Bank is taking. One-third is still social, although these people also get a return. Of course, 3% for this type of venture is not compensating the risk profile. But this is a step forward.

What do you see in the future for trade financing?
KJ: 5-10 years from now, I do expect that more local banks will take this up, especially in commodities like coffee and cotton. I think that the risk perception will change as we demonstrate that even if you finance without having fixed assets as a collateral, it can be pretty good business. Over the last 7-8 years, we have a loan loss of less than a percent, calculated over what we disburse in a year. That's not something that many of the local banks would expect. It's still a shame that we have to do this from a European country. So, I think - and I hope actually, because that's the end objective, to make ourselves redundant - that the local countries will pick this up.