ImpactAlpha’s What’s Next series, produced in partnership with the Global Impact Investing Network, provides a platform for practitioners and experts to reflect on the future of impact investing.
ImpactAlpha, Jan. 27 – Capitalism must change to respond to climate change and widespread inequality. But how?
More than two-dozen Agents of Impact answered our call for ways to shift investor mindsets and behavior and drive systemic changes as part of ImpactAlpha’s What Next series with the Global Impact Investing Network.
Here’s Part 2 of the responses (see Part 1 here):
Educate institutions to drive portfolio shift to impact
Katheryn Witt, Common Future
We believe that moving money can be a tool for changing an investor’s mindset, and that changing perspectives can influence how capital flows. At Common Future, one of our aims is to shift institutional investment assets into initiatives that build community wealth while addressing racial and social inequities. The shift begins by building understanding that the wealth gap exists, and taking a systems-change approach by engaging stakeholders across the funding spectrum: from place-based impact investments, to foundation grants and seed funding for entrepreneurs of color.
- Impact audit. For foundation leaders, in particular, this means knowing what you own in your endowment, sitting down at a table with your grantmaking and investment committees to take a holistic look at your portfolio, and reflecting on the balance of investments in relation to the institution’s mission.
- Levers. Over the past six years, we’ve brought together three cohorts of foundation executives to deepen their institution’s understanding and integration of equity, and to provide equitable investing frameworks and peer support. To drive a shift out of extractive, “traditional” investments into community wealth-building initiatives, we’ve focused on levers of culture, strategy, capacity and opportunity flow.
- Shifting assets. “I now reject the status quo, but only because th[is] experience has helped me to be aware of the status quo in the first place,” says Jillian Rosen of the Ann Arbor Community Foundation, which created a new Impact Investing Policy Statement for 1% of endowed assets after working with Common Future. To date, we’ve catalyzed the shift of $220 million into equitable investments, but we can, and must, do more.
Tap cash assets with real impact
Catherine Berman, CNote
Engaging in impact investing is not a light lift and must be done with intention and care. We believe products that explicitly mitigate risks are the key to moving more investment dollars into impact, and we’ll start seeing those across asset classes.
Cash opportunity. Many people see cash as the final frontier, given that the options available have sacrificed either impact or returns, or not delivered true cash-like liquidity. And cash management is a particularly strong opportunity—there are billions of dollars on the table that we could be driving into impact.In general, for all types of investors, cash is an under-realized impact vehicle.
Community impact. A large percentage of the population has cash sitting around in accounts where it isn’t doing anything to solve problems, and we can work together to change that. From our experience working with community development financial institutions, we see opportunities to check all the right boxes, and attractive options are going to emerge.
Create long-term investment models
Shaun Paul, Ejido Verde
I’m excited to foster systemic investor behavior change toward impact by growing long term investment opportunities that offer perpetual dividends while greatly contributing to U.N. Sustainable Development Goals.
Patient capital. We need to evolve from the three-to-five year exit mentality and its antiquated nest of modern portfolio theory. Intergenerational investing can drive solutions to our greatest challenges: climate crisis and wealth inequality. Ejido Verde is leading the way with an innovative and scalable investment model.
Build trust with stakeholders
Dmitriy Ioselevich, 17 Communications
In order to evolve to a better and more inclusive form of capitalism, we must first address the growing skepticism and outright condemnation of capitalism. This requires not only changing people’s minds, but also their hearts. That’s why for impact investing to truly scale, the financial community needs to take proactive steps to rebuild trust with all stakeholders.
- Total transparency. To truly build trust, it’s necessary for financial firms to be transparent about everything, both good and bad. Asset owners can help hold financial firms (asset managers, banks, consultants, etc.) accountable by demanding that they regularly report on their alignment with industry frameworks like SASB, TCFD and the Paris Agreement, something which BlackRock recently announced it will ask all investee companies to do this year.
- Embedding impact. Financial firms should take proactive stances about their role in society, and incorporate ESG considerations into every business and investment decision. Asset owners can lead by purchasing carbon offsets for all business travel and fostering a more diverse talent pool – and requiring their external managers to do the same.
- Collaboration. Asset owners should embrace collaboration over competition by working together on shareholder engagement campaigns, demanding more sustainability-oriented funds and strategies and influencing policy decisions to help create a world that works for everyone.
Support new managers and vehicles
Brian Jones, Windmill Capital Management
Global capital markets, while highly effective in allocating to large, liquid asset classes, do a poor job with respect to capital formation in new asset classes. Building a new asset class will require asset owners to:
- Make direct investments. Rather than looking to public markets for sustainable investments, asset owners and managers must pursue direct investments.
- Back emerging managers. Because sustainable direct investment asset classes are still relatively small and underserved, asset owners and managers must work be willing to work with new and emerging managers.
- Invest through new vehicles. As sustainable asset classes evolve and grow, democratization of direct investments will require either the creation of new capital markets vehicles or the adaptation of existing vehicles (eg, REITs, MLPs, etc).
Make impact-based compensation models public
Anuj Shah, KKS Advisors
Current standards and norms in the investment community mean industry-wide compensation incentives are based almost entirely on financial performance in order to align interests between asset owners and asset managers. The ongoing maturation of the impact investing marketplace (including increased sophistication in impact measurement tools and processes) has enabled the consideration of impact performance in the investment decision-making process.
- Reward impact. The alignment of impact incentives between asset owners and asset managers can and should happen through updated compensation models that not only reward asset managers for the financial performance of the investments they make, but also on the impact that these investments achieve. Aligning financial incentives with impact objectives will increase demand for impact investments and move more capital toward investment solutions seeking to produce positive impact outcomes.
- Compensation frameworks. I believe creating open-source, impact-aligned compensation frameworks (“IACFs”) would help catalyse new capital, that’s currently sitting on the sidelines, towards impact. By leveraging and building upon the work that’s already been done in this field, including gaining insights from best-practices and lessons learned from those that have already implemented impact-based compensation models (e.g., Vox Capital, MDIF, GAWA Capital Partners, Aureos Capital, Core Innovation Capital), and then making IACFs available to the public, my hope is that both asset owners and asset managers will have the opportunity to use them and drive widespread adoption.
Focus on purpose
Astrid Scholz, Sphaera
While the article talks about launching (presumably new) campaigns, there is already a lot of great work being done to popularize new metaphors that capture the kind of economy we all want and need to thrive in the 21st century.
- Purpose-driven. A focus purpose results in businesses that have positive social and environmental impacts and it would be great to see the GIIN partner with these existing efforts. Zebras Unite is taking on the myths of Silicon Valley in a playful but fierce way. The evocative Builder Capitalism, coined by Nathalie Molina Nino, resonates with a new crop of private equity investors who are taking a hands-on approach to building companies for the long term. The New Mittelstand out of Germany is reframing the traditional family values of small business in terms of a proactive, purpose driven entrepreneurship for the 21st century.
- Alternative capital. The second Alternative Capital Summit, hosted by the Kauffman Foundation, this week is oversubscribed, with more GPs and LPs trying to pile in. Zebras Unite’s DazzleCamp in May will bring together more investors and entrepreneurs who are actively advancing these new mindsets.
David Lynn, Mission Driven Finance
In one fell swoop, impact audits could drive systemic change.
- Expect more from audit firms. Begin training and then requiring audit firms to identify potential deficiencies related to whether the entity is accounting for risks due to climate, wage inequality, pollution, etc. Just like today an audit firm may note a “going concern” for a lack of financial controls or an upcoming fiscal cliff, a firm that isn’t appropriately paying attention to how climate change or how they treat their community or employees could negatively impact returns won’t have a clean audit.
- Clean audits. And every entity – from foundations to endowments to pension plans to investment firms to both public and private companies to government agencies – wants a clean audit.