ImpactAlpha, Dec. 16 – The people are rising up. Protests erupted this year in cities around the globe, sparked by price hikes and service cuts, inequality and corruption, and affronts to human rights and democracy. Millions of young people demanded action in the face of the climate emergency. An awakened populace is demanding change. With this year’s uprisings, stakeholders put capitalism on notice. In 2020, they’re taking it back.
This week, ImpactAlpha will be rounding up our 2019 coverage as guides to the year to come. We’re not offering predictions per se, and we’ll (try to) temper our aspirations. Take these roundups – of local investing and alternative capital, the institutional shift to sustainable investing, the tipping point in climate finance, and the rising power of women in growth markets worldwide – as signals from a future that is already here, if not yet widely distributed (h/t William Gibson).
One such signal came in August, when 181 CEOs grudgingly acknowledged communities, customers, suppliers and workers as stakeholders, along with shareholders. But this uprising is bottom-up, not top-down. In the past few years, a “quiet revolution” has busted out in Baltimore, Louisville, Erie and hundreds of other cities and towns around the country and the world. Local Agents of Impact are tapping hometown love, underestimated talent and technological scale to build thriving businesses that serve local needs, create jobs and restore neighborhoods.
The local, can-do, get-sh*t-done attitude offers an alternative to division and paralysis, a new narrative for a time that sorely needs one. Best practices provide blueprints for a stakeholder economy that is bipartisan, post-partisan, or not partisan at all. The new tools of capitalism are giving communities a larger say, and a larger cut. The new structures of finance are backing a broader set of founders building a broader range of businesses. Long-term value creation may be the watchwords of this new capitalism. What’s really at stake is power. The people are rising up and they’re taking business and finance with them.
– Amy Cortese and Dennis Price
1. Going local.
Expect city leaders and local stakeholders to rapidly replicate successful “place-based” strategies. A vibrant, collaborative and inclusive form of economic development has grown far beyond a “buy local” push by grassroots advocates and anchor institutions. Cities and towns are creating startup hubs to foster connections, and blending capital to drive shared prosperity. In cities such as Oakland and Boston, community activists are partnering with local institutions to channel capital to entrepreneurs of color and preserve land for community use. “Neighborhood investment companies” are allowing residents to become financial stakeholders in their neighborhoods. Faith-based investors are fitting local investments into global portfolios. And public banks that serve the common good – an idea pioneered a century ago in North Dakota and embraced this year by California – could marshal more local resources for affordable housing, education and infrastructure.
- ImpactAlpha is watching for… Investment vehicles that allow residents and retail investors to place capital in neighborhood projects and local businesses.
- Big is not always better. “We can have democracy, or we can have power in the hands of a few, but not both,” as Supreme Court Justice Louis Brandeis once said and Ross Baird reminds us in his new review of Matt Stoller’s book, Goliath, on ImpactAlpha (see, “Small vs. big – not blue vs. red – is the great battle of the next American century”). Small is growing, as the B Corp and Zebra movements of diverse, sustainable-growth businesses gain currency and billion-dollar unicorns stumble.
2. Finding impact in Opportunity Zones.
Expect positive impact and community engagement to become indicators of investment quality and risk mitigation in underestimated neighborhoods across the country. Bad actors are grabbing headlines. Opportunity Zone “catalysts” are driving impact. From South Los Angeles to Lafayette, La., impact-led collaborations are showing that deep community engagement mitigates investment risk and accelerates project timelines. Many impact investors waited out the Opportunity Zone frenzy in 2019. Expect them to wade in as the rules, and potential for impact, come into clearer view. Impact is happening, Beeck Center’s Jen Collins reports in a new ImpactAlpha guest post. Read, “Opportunity Zone ‘catalysts’ are driving impact in America’s overlooked communities.”
- ImpactAlpha is watching for… Opportunity Fund models that generate real wealth for communities, not just investors. New federal regulations, expected as early as this week, “will enable some of the largest and more risk-averse investors … to finally get off of the sidelines and capitalize deals,” Develop’s Steve Glickman tells ImpactAlpha. [UPDATE: Treasury released final OZ regulations on Dec. 19 along with downloadable FAQs]
3. Sharing ownership.
Expect shared ownership to be on the table as a way to combat growing inequality and concentration of economic power. 2019 saw a remarkable profusion of innovation in power-shifting financial structures. Investors are using traditional structures (co-ops, ESOPs, REITs and holding companies) and emerging ones (steward ownership, democratically-governed funds and new community-driven “funds of funds“) to preserve mission and shift the balance of power and wealth. New laws, such as the Jumpstart Our Business Startups, or JOBS, Act, allow small-dollar investors to participate. These innovators will be challenged to evolve from small-scale experiments to institutional-grade investments in order to move the needle on wealth inequality and injustice.
- ImpactAlpha is watching for… Broader adoption of structures that truly share power. Rent-to-own models, neighborhood trusts and shared equity can help build local ownership and community wealth.
4. Going beyond equity and debt.
Expect financing structures that work better for businesses focused on sustainable growth – and positive impact. At least 83% of entrepreneurs do not access bank loans or venture capital, according to the Kauffman Foundation. Entrepreneurs and investors developing alternative business financing structures, such as revenue-based finance and worker ownership, began to break through the noise this year. Reality check: Such models represent a tiny fraction of the start-up funding market.
- ImpactAlpha is watching for… The hype to move to action, with a raft of “alternative VCs” building robust portfolios of Zebras (and Clydesdales).
5. Seeking returns on inclusion.
Expect the backing of diverse founders and efforts to combat bias in investing to be recognized as competitive advantages. Implicit racial bias is undermining returns, along with opportunity. By undervaluing fund managers and founders of color, investors are limiting their universe of investments. Big asset owners are beginning to evaluate their processes to scrub bias risk. Funds such as Harlem Capital, Kapor Capital and Impact America Fund are seeking an edge from the “lived experience” of underrepresented founders.
- ImpactAlpha is watching for… Ways to raise “mitigating bias risk” to the level of fiduciary duty.
6. Seeing opportunities through a new lens.
Expect a proliferation of investment “lenses” as fund managers seek capital gaps where specialized knowledge gives them an edge. “Gender lens” investing is the model for focusing the attention of markets on cross-cutting challenges and opportunities. Other problem-sets coming into focus include regenerative agriculture, creative economy, migrants and refugees, and racial equity.
- ImpactAlpha is watching for… Increased attention to specific challenges leading to meaningful capital allocations for solutions.
7. Investing in the future of workers.
Expect investors to broaden their search for technologies that complement rather than replace workers. Artificial intelligence, machine learning and other new technologies will certainly displace workers. Tech is also being harnessed to up-skill, train and recruit the workforce of the future. Startups using tech to deliver value for workers are gaining traction. A growing number of funds are investing with a “good jobs” thesis. Regions economically dependent on coal and other fossil fuels are leveraging tech and investing in people to accelerate an equitable transition to a new economy.
- ImpactAlpha is watching for… Impact tech investments that deliver on the promise of value for workers, not just investors and employers.