Podcasts | April 29, 2020

A disruption big enough to drive private capital for public good – or not

The team at


The COVID crisis has seen an outpouring of public capital for public good. And trillions of dollars in ‘stimulus,’ ‘bailouts,’ ‘liquidity’ and ‘easing’ represents public capital for private good. Investors (including some senators) are playing the volatile markets and pocketing the profits – that’s private capital for private good.

Impact investing has posited the role of private capital for public good. How is that position faring through the crisis?

As ImpactAlpha has searched for examples of such private capital for public good, frankly, we’ve felt like we were scrounging for morsels. We’ve watched the scramble by emerging market by fund managers to keep their entrepreneurs and enterprises afloat, the heroic community development financial institutions who are mobilizing loan channels, the quick pivots of portfolio companies to pandemic response and the rapid emergence of social bonds to tap the capital markets for countries and companies.

To try to raise the collective ambitions, we put forth a ‘10x challenge.’ Going from billions to trillions represents an increase of several orders of magnitude. Could impact investing demonstrate growth of just one order of magnitude? (Join ImpactAlpha’s Agents of Impact Call No. 16: Impact Step Up, on Thursday, April 30 at 10 am PT / 1 pm PT / 6 pm London. RSVP now.)

“As the recovery ensues, the channels to get capital out have to be 10x, 100x, 1000x bigger than they are now,” I said on ImpactAlpha’s latest Returns on Investment podcast. 

Stakeholder primacy: CEOs redefine the role of business in society

Everything needs to be refinanced, I continued. The banking opportunities, the investment opportunities and the social-design opportunities to direct that investment will all be immense. Those are the opportunities impact investors have been eyeing for decades, and incubating solutions. 

“I’m saying, ‘If they don’t take advantage of this opportunity now, it ain’t coming back again.’ The money is going to be gone. The communities will be in dire straits, to say the least. And everybody will say, ‘You had your shot,’” I argued. “This is almost a do-or-die moment for folks who say they have a better plan, because the old plan didn’t work. The world is open to solutions. The money is flowing. It’s not like there’s a shortage of money. There is more stimulus money than has ever been imagined. This is the time to act.”

Not surprisingly, roundtable regular Imogen Rose-Smith, a veteran of both Institutional Investor and the University of California’s investment office, disagreed. 

“The scale of the problem is so large and the deals that impact investors talk about are still so small,” she said. “It’s not resonating any longer. ‘Is KKR launching an impact fund?’ Woo-hoo. Nobody cares.”

Institutional investors are talking about risks in their portfolio, what’s going on with oil prices, the repo market for raising short-term capital. “They’re not talking about what some loan is doing in inner-city Chicago,” Rose-Smith said. “It’s not that that loan isn’t important and doing vital work in communities. But it’s not relevant to the larger conversation.”

The institutional reassessment of risk was in fact one of the four planks of an agenda for change in a recent column I wrote about so-called “universal owners” – the largest pension, sovereign and insurance funds around the world – taking responsibility not only for the sustainability of their portfolios, but the sustainability of the financial system itself. 

“Are they going to look at global risk differently? Yes,” Rose-Smith said. “Are they going to address the fundamental underlying problems? No.”

Stakeholder primacy: CEOs redefine the role of business in society

Rose-Smith made short shrift of my other planks as well. A ‘new social contract’ in which corporations (and the government) recognize human capital and labor as an asset and invest to optimize that asset with worker protection, paid sick leave, better wages and benefits? 

“The American model of capitalism believes that the business of corporations is to make money for their shareholders,” Rose-Smith pointed out.

“I thought we got rid of shareholder primacy and were now in the age of ‘stakeholder capitalism’ – ” I tried.

“You were wrong,” retorted Imogen. “Until unions step up as stakeholders and they say, ‘We don’t want our pension money going to things that undermine labor,’ you’re not going to see meaningful change.”

My third plank involved corporate accountability. ImpactAlpha’s Amy Cortese this week explored the new landscape of shareholder engagement as the annual general meeting season gets underway. 

Podcast host Brian Walsh suggested the new ‘stakeholder’ pledges were really a ruse to undermine pesky shareholders and further entrench CEOs. 

“But doesn’t the crisis change that?” I asked. “Haven’t stakeholders become that much more essential to any enterprise? To the extent that we don’t make the case that it has changed, we’ll slip back into status quo all too quickly.”

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My final foray, admittedly, is something of a Hail Mary pass. “What if investors made a bet that we are going to muddle through and get to the other side, not only of the pandemic, but of the climate crisis, and the sustainability and environmental crisis more generally, and the social dislocations that have roiled the world? That on the other side is something like the sustainable, inclusive future we all dream about in our fevered imagination. And that they wanted to be part of that future because it’s not only better for the world, but better for business.”

Instead of just hedging their bets, they’d go all in. Political leaders would also go all in. The smart money would be saying, “That’s where you want to be. That’s where the world is going.”

Food, electric mobility and healthcare next up in ‘sustainability revolution’

No dice. “Their job is not to be forward-looking,” Rose-Smith said. “You would have to force that change through regulation.” 

Or a change to the indexes that guide passive investments, which now make up more than half of managed assets worldwide. “Change the indexes, change the markets,” ImpactAlpha has written.

“You’re asking for a systemic shift to change the indices,” Rose-Smith said. “Institutional investors haven’t shifted.”

Walsh pointed out that one obstacle to change was the nature of the crisis. Unlike the Great Financial Crisis of 2008, the COVID crash was caused by an external event, sometimes thought of as a “black swan,” that need not force reform of financial systems. 

I was ready for that one. “Take a gift when you get it,” I argued. “If the green movement said, ‘We have to shut down the global economy in order to shift off of fossil fuels and change from an oil economy because the climate crisis is so severe,’ do you think that could fly in any political environment we’ve ever existed in? No.”

“So it couldn’t be done as a green thing. And you wouldn’t want the entire world blaming the green movement for shutting down the economy. But lo and behold something did happen that did do exactly that. So now, you don’t have to be blamed for it, but the global economy got shut down. So take that and run with it and put into place the plans you had for the other side. And run like hell while the window is open for a brief second before it slams shut again.”

The roundtable did find agreement in the end. Change won’t come from the investment office. “It will come from stakeholders, voters, organized labor, consumers, forcing the change we want to see in the world,” Rose-Smith argued. “It’s finding new heroes and new ways of doing things.”

“But a lot of people in power, including people in impact investing, don’t want to change the status quo,” she said. 

“Now, you’re getting to the heart of the matter,” I agreed. 

But that’s a topic for another podcast. 

Local, inclusive and entrepreneurial: How stakeholders are taking back capitalism in 2020

Catch up on all of ImpactAlpha’s Returns on Investment podcasts, and subscribe, on iTunesSpotifySoundCloud or Stitcher.