Collaborative Capitalism and the Rise of Impact Investing

Cathy Clark, Jed Emerson, Ben Thornley

• Publisher: Jossey-Bass
• Year: 2014
• Print ISBN: 9781118862995
• eBook ISBN: 9781118862544
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Investing with the explicit goal of creating financial returns alongside measurable social and environmental benefits is catching fire. Wall Street's biggest players are rushing to provide clients with access to new impact investing options, amid growing consumer demand and evidence that the approach can be successfully executed. Recent research on outstanding impact investing funds has revealed a mature practice, vibrant with commercial investors, providing stable, predictable returns to their investors as well as supporting the creation of millions of jobs and other tangible outcomes in markets overlooked by traditional asset managers.

And yet, the individuals and organizations committed to impact investing are just the tip of the iceberg in a larger movement. This includes the growing field of social enterprise, where market-based solutions can go beyond what government and philanthropy can do to directly address society's problems. And it includes institutional investors who have utilized impact screens and shareholder activism as a risk reduction strategy over the past 30 years.

Collaborative Capitalism and the Rise of Impact Investing sees these movements as signs of a much more fundamental shift, as finance as a whole responds to an increased consumer demand for market transparency—the need to know exactly what we are buying, where and how it was made, and who it affects. By putting a lens on the underlying practices that bridge impact investing and risk mitigation finance, the book outlines the transformation in finance itself, driven by more cross-sector, transparent relationships in the service of creating long-term value for multiple stakeholders, not just shareholders.

Chapter 1
Introduction

I get the same return from this fund that I could get elsewhere, but I get impact, too. It’s a win-win.

—Jackie Johnson, investor in the Calvert Foundation Community Investment Note

The younger generation is clearly signaling that when they take over the reins to family offices and their own inheritance, they will not invest the same way.

—Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investment and head of Morgan Stanley’s Global Sustainable Finance group

If you’re a long-term investor, thinking about some of the risks that get labeled as “sustainability-related risks” is essential—and just good investment practice.

—Janine Guillot, former chief operating investment officer, California Public Employees Retirement System (CalPERS)

As companies expand globally—especially into the developing world—it will no longer be profitable to exist without taking the community and the work force in which they work into consideration.

—Judith Rodin, president, Rockefeller Foundation

Investing with the explicit goal of creating financial returns alongside measurable social and environmental benefits is catching fire.

Wall Street’s biggest players are rushing to provide clients with access to new impact investing options, amid growing evidence that the approach can be successfully executed. Over the past two years, our own in-depth research of twelve outstanding impact investing funds has revealed a mature practice, vibrant with commercial investors, supporting the creation of millions of jobs in markets overlooked by traditional asset managers, through businesses that are often owned or managed by groups largely excluded from mainstream capital markets, including women and ethnic minorities.¹

Those with knowledge of this new terrain, which was christened “impact investing” in 2007, will point to the fields that are precursors to the impact investing trend—socially responsible investing (SRI); sustainable investing; environmental, social, and governance (ESG) integration; community finance; and microfinance—and may say, “We have been doing that for years.”

And certainly the same impulse underlies all of this activity—to maximize the value of capital by investing for good; to use capital to address entrenched social and environmental problems. And we know, by virtue of the millions of people and institutions working with this impulse, that it is intuitively possible and increasingly accessible around the world.

However, by bringing together what have previously been niche practices under a single unifying banner, impact investing signals that something much more significant has arrived: an evolved form of what we are calling Collaborative Capitalism.²

We see impact investing as the tip of the iceberg. Beneath the waterline in the Collaborative Capitalism ocean lie the CEOs, investors, suppliers, and Millennial workers choosing to fundamentally transform the way business and investment are done, to create a more environmentally sustainable, more humane, and more responsive system of capitalism. And the voices challenging the status quo are no longer just those of activists, but also those of some of the leading figures in the business and financial worlds.

“I truly believe that capitalism was created to help people live better lives, but sadly over the years it has lost its way a bit,” said Virgin’s Richard Branson in 2011.³ “The short-term focus on profit has driven most businesses to forget about the important long-term role they have in taking care of people and the planet.”

Dominic Barton, the global managing director at McKinsey, is another critic: “Capitalism, even 150 years ago, was more inclusive; there was more of a sense of social responsibility.” Today, trust in business is declining. “The system doesn’t seem to be as fair or as inclusive. It doesn’t seem to be helping broader society.”

Barton’s concern is shared by David Blood, former head of Goldman Sachs Asset Management, who cofounded Generation Investment Management with former Vice President Al Gore a decade ago. “Some people say income inequality doesn’t matter. I disagree,” Blood said. “We are creating a situation in which only the elite of the elite can be successful—and that is not sustainable.” Both men worry that if capitalism doesn’t deliver for the middle class, then the middle class will eventually opt for something else. Barton says that business needs what he calls “a license to operate,” and without a new approach, he fears, it risks losing that license.⁴

Indeed, as was explored in Impact Investing: Transforming How We Make Money While Making a Difference, what these and countless other trends create is a fundamental shift in our understanding of the nature of value creation itself. Previously, one did well and then sought to do good; worked and then volunteered; labored to live and then looked to the weekend for recreation. Today, companies recognize that to keep top talent, they must offer more than financial compensation alone, just as nonprofits realize there is no sustainable social mission without economic margin. These are just two examples of the blended approach to the management of our economics, community, and environment that is necessary if we are to live in a future that will continue to offer the promise of the past.

The field of impact investing is growing because it consummates this new vision. Impact investing represents a powerful, proactive idea: that we must scrutinize traditionally managed capital markets and the institutions operating within them and answer this compelling question:

Why do we not already, when we invest our capital, take into account the risks represented by social and environmental factors and expect that, when our money is put to work, it will have a net positive outcome for society and the planet we inhabit?

In effect, this is the coming together of two previously distinct investment practices.

The first practice is investing for outcomes. For decades, hundreds of individual asset owners, foundations, governmental actors, and others have been exploring how capital can be used to create positive social and environmental benefits. Government institutions have been doing this with grants and contracts; more recently, they also do it through investing. The U.S. government’s Overseas Private Investment Corporation (OPIC), for example, is authorized to operate in 150 developing nations around the world, and it invests in projects across a range of industries from energy to housing, agriculture, and financial services. It focuses its work on “regions where the need is greatest and in sectors that can have the greatest developmental impact.”⁵ Individuals and institutions wielding purpose-driven capital of this kind have invested billions of dollars through private philanthropic and public capital to drive social and environmental value creation in below-, near-, and market-rate return strategies. This explicit focus on outcomes is one of the key elements that defines an impact investment. You can inadvertently have impact (and all investments have outcomes, both positive and negative), but when you are explicit about managing to achieve the specific positive outcomes you’ve articulated, that’s impact investing.

The second practice is investing for risk mitigation. In the last two decades, investing in the mainstream financial markets, especially in publicly owned securities, has expanded to include consideration of how extra-financial factors affect an investor’s ability to generate profits. Climate change, education, water, pandemics, and a host of other issues traditionally viewed as the purview of government and the nonprofit sector are increasingly understood to be legitimate objects of effective business management and investor interest. These key elements are generally expressed as environmental, social, and governance factors. ESG factors are commonly included in the valuation of equity, real estate, corporations, and fixed-income investments. And many major global exchanges now require aspects of ESG reporting for listed securities.⁶

But the distinction between these two practices—investing for outcomes and investing for risk mitigation—is becoming theoretical at best. In practice, they are two sides of the same investment coin, as investors consider how to align more of their assets with the things they care about, and as the recipients of capital find themselves speaking to investors coming from both perspectives. The combination of these two prac...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Chapter 1: Introduction
• Chapter 2: Investing in Business as a Force for Good
• Chapter 3: Plain Good (Impact) Investing
• Chapter 4: The Integrated Institutional Response Takes Shape
• Chapter 5: From First Principles Comes Impact Investing
• About the Authors
• End User License Agreement