Young Global Leaders Lab Al igning values and capital to promote human
f lour ishing: the r ise of impact invest ing
Presentation by Sara Minard, PhD.
Executive Professor and Socio-economist D’Amore-McKim School of Business
Northeastern University
February 15, 2017
Agenda
• Introductions • Starting points:
• Capital Markets and Social Capital Markets • Trends in Responsible Investing (ESG/SRI/sustainable investing) • The rise of Impact Investing and what it offers
• Impact investing at NU • Research on impact investing and social enterprise in India • Questions and discussion
My goals for this session
• Learn about your respective interest areas • Provide background on social capital markets and trends
in ESG, SRI, Philanthropy that help to explain the rise of Impact Investing and Social Enterprise
• Share our current student-led activities, programs and initiatives at Northeastern on impact investing and ways to be involved
• Share my current research on impact investing and social enterprise in the context of the Summer India Dialogue
• Answer any questions and share additional resources
Starting points: Understanding capital markets
• Capital markets (as opposed to the capital exchanges) do not occur because a set of actors simply decide to be rational in their allocation of capital.
• Global, national, and regional capital markets have all evolved through complex interplay between governmental policy, private enterprise, individual entrepreneurship, and chance.
• The evolution of capital investment transpiring in three different forums:
• Specific or ad hoc deals, • Professionally managed funds • Increasingly organized marketplaces.
• Capital markets are intended to be voluntary where buyer and seller are able to veto any deal but their choices are not completely free – they are constrained by the rules of the marketplace.
• Markets fail for many reasons (monopolies, cartels, barriers to entry, other inefficiencies, imbalances in bargaining power), and social capital markets seek to remedy failures.
Mapping capital market flows
Source: World Economic Forum, Mainstream Impact Investing initiative
The term social capital has many definitions. Essentially two forms: Interactive (James Coleman, Robert Putnam): the norms, systems, institutions that maintain our sense of being part of a connected community with shared values and ideas Transactive: market enactments (non-financial and financial transactions) made possible by possible by our connections and networks which rely on cooperation (and sometimes trust). ü Bonding social capital: strong ties, low mobility ü Bridging social capital: weak ties, mobility ü Linking social capital: weaker ties, high mobility
Understanding social capital markets
Understanding social capital markets
• Historically, foundations and nonprofits have played key roles in addressing market failures by subsidizing goods, providing services, and delivering other functions that a market cannot efficiently offer.
• However, effects of market failures post-WW II, coupled with population growth, higher income and wealth accumulation, declining state power, and the emergence of sophisticated informal markets through technology have increased the supply and demand for social capital investment from public, private (institutions and individuals) and social sector organizations and communities.
• Social capital markets address how market forces may be harnessed to rectify and/or eliminate certain historical market failures, while simultaneously acknowledging blind adherence to markets will not solve our growing social and environmental challenges
New global actors & institutions
Source: Accelerating Impact, a report prepared by E.T. Jackson and Associates and commissioned by The Rockefeller Foundation 2012
State level ecosystem
Organizational level ecosystem
Impact Investing: New supply and demand for social finance
12
Impactinves-ng…makingvaluesmoreexplicit
ThreeGoodReasonsWhyImpactInves5ngisA9rac5ve:
1.Established:Investmentsintocompanies,organiza-ons,orfundswithscalablemodelsforsustainableimpact2.MenuforEveryone:Opportuni-esacrossallassetclasses(cash,fixed-income,structurednotes,realassets,privateequity,privatedebt,publicequity)3.MeasurableSocialandEnvironmentalImpact:throughoutthelifeoftheinvestment,withafocusonPay-for-Success(incen-vizeandrewardposi-veoutcomes)
Investmentsmadeintoorganiza-ons,projectsandfundsthatinten8onallygeneratemeasurable,posi-vesocialorenvironmental
impactinthepursuitofappropriatelevelsoffinancialreturn.
13
MenuforEveryone,AcrossAssetClasses
14
15
Differen-a-onBetweenApproaches
Millennials & Impact Investment Report 2016 12
iii. Millennials Are Investing Across the Impact Investing Spectrum
In which impact categories do you invest?
Various organizations have created impact categories to help investors define and in many cases allocate their impact
investments. Within each category, levels of risk and financial return expectations can be considered. Impact categories have been published by various groups including the G8 Social Impact Investment Task Force,21 World Economic Forum,22 GIIN,23 Bridges Ventures24 and Sonen Capital.25 Following is an example from Sonen Capital.26
CLASSIC INVESTING
RESPONSIBLE SUSTAINABLE THEMATIC IMPACT FIRST
PHILANTHROPY
Emphasis on profit maximization without regard for ESG factors
Consideration of ESG risk
and, or personal
values across a range of factors to screen out
investments
Targeting investments
best positioned to benefit from the
integration of ESG factors and broad-
based macro trends
Focus on issue areas where
social or environmental
needs offer commercial
growth opportunities
for market- rate return
Emphasis on the
optimization of social or
environmental needs
(e.g. PRI**), which may
result in financial trade-off
Where social and, or
environmental needs
outweigh any consideration for financial
return
ESG* Risk Management
ESG Opportunities
Maximum-Impact Solutions
Competitive Returns
Adapted from Bridges Ventures and Clara Barby, June 2012 * ESG-Environmental, Social and Governance factors ** PRI - Program Related Investments available to US Foundations as defined by the Tax Reform Act of 1996
Sonen Capital’s Impact Investing Spectrum
21 G8 Social Impact Investment Task Force, Web. (http://www.socialimpactinvestment.org/)22 From the Margins to the Mainstream, World Economic Forum Investors Industries, 2013, September, Web. (http://www3.weforum.org/docs/WEF_II_FromMarginsMainstream_Report_2013.pdf)23 What You Need to Know About Impact Investing, Global Impact Investing Network, Web. (https://thegiin.org/impact-investing/need-to-know/#s1)24 Bridges IMPACT Report, Bridges Ventures, 2013, Web. (http://bridgesventures.com/wp-content/uploads/2015/03/IMPACT_REPORT_2013-spreads1.pdf)25 Sonen Capital is a dedicated impact investment management firm. (www.sonencapital.com)26 Sonen Capital’s Impact Investing Spectrum, Sonen Capital, 2013.
Compe--vereturns
16
ShiLingLandscape:RapidlyGrowingESGInves-ng
Source:FBHeronFounda-on,Pensions&Investments,2016
ESGinves5ngamongins-tu-onalasset
ownersjumpedto61%
between2012and2014to$4Trillion.
Retailinvestorsnowhaveover150public
mutualfundstochoosefromincorporatesomevalues-basedscreening
(USSIF)
17
ShiLingLandscape:Heron’sTotalImpactPor\olio
“afiduciarydutytounderstandtheimpactofallofourassets”
18
ShiLingLandscape:FromTrendtoEstablished
1.Post-2008ImpactPriori5esforMillennials(Deloi]e/Toniic/WEF)• 44%ofMillennialssay,ifgiventhechoice,theywouldliketoleavetheir
currentemployersinthenexttwoyears.• 36%ofMillennialsbelievepurposeofbusinessistoimprovesociety• $41TrillionwealthtransfertoMillennialsinnext25years.2.IndustryLeaders• 64%USPensionfundsexpecttomakeanimpactinvestment• JPM,StateStreet,UBS,Goldman,Bain,BlackRock,Ci-,Barclays,allhave
createdsocialimpactfundsinpast6years• MarketforGreenBondsskyrockets,$800Mto$42Bin8years3.GlobalImpactInves5ngIns5tu5ons• Va-canCouncil’sTwoGlobalConferencesonImpactInves-ng• OECD’sSocialImpactInvestment:BuildingtheEvidenceBase• G8SocialImpactInves-ngWorkingGroup• WhiteHouseRoundtableonImpactInves-ng,$2.5Billion
•
19
Mo-va-onforImpactInves-ng
• IncreaseddemandformeasurableESGoutcomes• Increaseddemandforblendedsocialand
environmentallyresponsiblestrategies• Dissa-sfac-onwithsustainabilityandimpactof
tradi-onalcharitablemodels(5%/95%)• Increaseddissa-sfac-onwithgapsandinefficiencyin
publicservicesfunding• Increasingdemandforpa5entventurecapitalinto
innova-vesocialbusinessesinemergingmarkets• Increaseddemandfortransparencyandaccountability
amongmillennials:realimpact.
Source:Santos,INSEAD
20
RevealingtheImplicitImpactBias
• Itiswrongtomakemoneyfromthepoor.......thisleadstotheimplica-onthatoneshouldmakelessmoneyservingthepoorthanservingtherich• Thepoorareweakerandshouldbeprotected......butwehavelearnedfromdecadesattheBaseofthePyramidthatpoorpeopleneedmarketaccess,wanttobetreatedasconsumerswithchoicesandpreferences,andhavetheabilitytopay• Theprofitmo5va5onwillleadtolowerimpact......thisisthemostdifficultissue…directinves8ngforsocialimpactassumesbothprofitandimpact.
Source:Santos,INSEAD
21
Fina
ncialperform
ance v SocialRiskmi5ga5on
Socialandenvironmentalchallengescanbecomerisksforcompanies.Forexamplesocialunrestandenvironmentaldegrada-oncausesupplychaindisrup-ons,legalprosecu-onorstakeholderprotests.Firmsthatnotonlyunderstandandmanagetheserisks,butsetouttocreateposi-veimpactsarelessriskyinvestmentsinthelong-run.
v Profitfromprovidingevidence-basedsolu5onsThereisahugedemandforsolu-onstocomplexsocialandenvironmentalchallenges.Firmsthatareabletooffersolu-onscouldbeveryprofitableinvestmentsofferinghighreturns.
v DeepvaluespreferenceManyinvestorsprefertoputtheirmoneywheretheirheartis,likeshoppingfair-tradeproducts.Millennialshoweveraredemandingmorefromcapitalmarkets.Theyseevalues-basedinves-ngassomethingthatshouldbetransformingsociety.Thisiswhatweall“impact”,whichisaboutmeasuringchange.
v Differen5a5onandtransparencyIns-tu-onsdecidethatitisimportanttoaligntheirinvestmentswiththeiroverallmission.Theabilitytotellthisblendedvalueimpactstorydifferen-atesthem.
Extra-fin
ancial
bene
fits
Thebasicra-onalesforImpactInves-ng
22
v Impactisinten-onalandmeasurable,whichisnotthecasewiththeotherSRIapproaches.Investorscantargetspecificallywhatisdeartothem.
v Incontrasttotradi-onalphilanthropicinvestments(noreturn)impactinves-ngcapitalcanbere-deployed,andthusachieveamul-pleofimpact.
v Impactinves-ngreturnsarenotstronglycorrelatedwithotherassetclasses(diversifica-onpoten-al!).
Advantages Challenges
v Narra-ve:Theconceptofachievingposi-ve,measurableimpactalongsidefinancialreturns,frombelowmarkettorisk-adjustedmarketrate,israthernewandcanleadtocontroversiessuchas“makingprofitsoffthepoor”.Measuringimpactwillcostmore.
v Liquidity:Longterminvestments,notavailableforlargecappublicequity.OLenprivateequityinvestmentsandthusratherilliquid.
v Data&Benchmarking:Newapproach,solimiteddataanaly-cs(outsideofGIINandWEF).Hardtoapplyonebenchmarktocomplexproblems.
Advantages&ChallengesofImpactInves-ng
23
EmpiricalFindingsfromGIIN/JPMStudy(n=145)
Risk:Businessmodelexecu5on&managementrisk
Focus:Housingleads,followedbymicrofinanceandotherfinancial
services
24
ExamplesofImpactInves-ngOpportuni-es
• ImpactAssetsü CommunityInvestmentPool(0-12months)ü DonorAdvisedFunds(DAFs)ü PrivateDebt&Equity“DirectImpact”(5-7years)ü ESGScreenedMutualFundsandExchangeTradedFunds(Equity,
Interna-onalEquity,FixedIncome,Thema-c)ü Newproduct:GlobalSustainableAgriculturalNote• 5-yearNote• Liquidityfeature• DTCEligible(holdinanapprovedinvestmentaccount)• $25,000minimuminvestment• Relaxedsuitability(investmentnottoexceed10%ofinvestor’s
liquidnetworth)*
• RootCapital• SeniorDebt:u-lizesdona-onsandinvestmentsinitsloanfundto
providecredittoruralsmallandgrowingbusinesses
25
WhenIsImpactInves-ngRelevant?
v Foradvisors,whenclientswantadeepervalues-driveninvestmentopportunity,andwanttotapintoallofresourcesoutthere.
v Forinvestorswhowanttomovebeyondsimplydemandingcompaniesdiscloseandmanagesustainabilityissuestoactuallyensuringtherearerigorouswaystomeasureimpact.
v Forinvestorswhocareaboutanissuetothepointtheywanttobecomeanexpertinit,buildarela-onshipwiththecompany,andunderstandthecommunitywherethecompanyistryingtoachievesocialorenvironmentalimpact.
v Forinvestorswhobelievetheyarethemarket,anditisuptothemtodefinetheappropriateriskandreturnoninvestmentwhendeployingtheircapitaltosolvesocialproblems,i.e.,Millennials,otherHNWIs,familyoffices,Founda-ons,governments,otherretailinvestorsinthefourthsector
v Forins-tu-onsofhigherlearning,whoholdthevaluecrea-onprocessasbeingfundamentallywholeandnon-divisible,wherethenatureofvalueisinherentlyablendofsocial,environmentalandfinancial.
26
NUCourses(ENTR3520&ENTR4520):“BuildinganImpactInves-ngPor\olio”
• Findinga“home”–earlystagesocialenterpriseswith3yeartrackrecord– Directcompanyinvestments(majority;debt,conver-bledebt;equity)– Fund-levelinvestments(RSFSocialFinance,Calvert,ImpactAssets)– Combina-on
• Developinganimpactthesis–basedonstudentsurveydataandresearch– Whatarethecausesandsolu-onsweshouldcareaboutandinvestin?– Por\oliomission(E.g.,Povertyallevia-onforgirlsinIndiathroughfinancialinclusionand
technicaltraining),Targetpopula-on,Targetmodel,Targetimpact• Seangperformanceparameters–aligningwithNU’sins5tu5onalmissionandmandate
– Sustainability,securityandhealth;globalexperiencewithlocalresponsibili-es– Geography,Sector,Instruments,Stage,Risk/Return/Impact,TimeHorizon
• Focusanddiversifica5on– Focusformeasurableimpactoutcomes;Diversifica-onforfinancialreturn
• Evalua5onFramework(foreachinvestment)– Impact+FinancialReturn–Risk(SocialandFinancial)– Student-ledduediligenceprocesswithhyperfocusonmanagementandcontext
• Benchmarking(withoutlosingimpactfocus)– ImpactcapitalVs.grants,forimpactVs.tradi-onalfinancialinvestments– Otherwaystostackcapital
27
NUStudentImpactInves-ngIni-a-ve:DMSBandLawSchoolCollabora-on
• LateMarch:Day-longImpactInves8ngBootCampforbusinessandnon-businessstudents
• Mid-March:DesignLabinENTR3520todesigntheimpactfundwithalumniandpro-bonoexper-se(UMichiganRossSchoolFundAdvisor
• Mid-March:LawSchoolcoursetodesigntheappropriatelegalstructure,leveraginguniquevalueproposi-onofNU
• March-April:Surveyofstudentsonimpactpriorityareas• Mid-April:ENTR3520studentpitchcompe88on• May:Collec-vedesignworkshopwithDMSBandLawSchool• Summer/Fall:AlumniBoardandInvestmentCommi]ee• Spring2018:Northeasterntohostregionalconferenceoninves-ng
forsocialimpact
An“OpenArchitectureInvestmentCommiHee”
• Commi]eeismadeupofStudents,Alumni,Trustees,andCommunityMemberswhoserveonarota-ngbasis;Fundismanagedbythird-partyaccreditedinvestor
• TheFund’sImpactStrategyalongwithlistofinvestmentopportuni-esgeneratedfromtheStudentIni-a-veismadeavailabletothepublicforcomment
• Delibera-onsanddecisionsbytheInvestmentCommi]eearesharedinanopenforumalongwithimpactreports.
“Thehallmarkofimpactinves8ngisthecommitmenttotheinvestortoshareinforma7onwiththeinvesteeonhowtomeasureandreportthesocialand
environmentalperformanceandprogressofunderllyinginvestments;toensuretransparencyandaccountability.”(GIIN,2015)
Naviga-ngImpactInves-ng
h]ps://sites.duke.edu/impactclasses/1-execu-ve-summary/
Impact Investing in the Indian context: Exploring the interactions between corporate spending through CSR and the
rise in impact investing for social enterprises
• Researchra8onale:Amajorques-onfordevelopmentagenciesandgovernmentsseekingtoadvanceprivatesectordevelopmentasthekeytosustainablegrowthishowtoeffec-velyscalesuccessfulsocialinnova-ons.Thisresearchstartsfromthefinancesideofthescalingdebatetoinves-gatewhatqualita-vedifferen-aleffectsexistforsocialenterprisesseekingfundingpartnershipswithimpactinvestorsascomparedtoreceivingthemandated2%CSRfundingfromcompanies.
• Deskresearch– LeadingfundswithofficesinIndia(Intellecap,UnitusCapitalFund)– Leadingsocialauditfirmsandmethodologiesformeasuringimpact– LeadingIndiancorpora8onsinCSRspendingandtheirkeythemes
• Ini8alfieldresearchMay-June2017– Demandandsupplyforimpactinves8ng
• 2%CSRruleforIndiancompanies• ProlificsubsidizedNGOculture• Extensivestatecorrup8oninsocialsectorspending• Limitedcapacityforsocialenterprisestoconductthird-partyimpactevalua8ons• IncreaseinFDItarge8ngevidence-drivensocialprograms• Socialenterprisemodelsarediversifying
QUESTIONS&DISCUSSION
32
ResourcesforFurtherExplora-on• Books• Theimpactinvestor,byClark,EmersonandThornley(2015)• Websites• GlobalImpactInves-ngNetwork(GIIN.org)• ImpactRepor-ngandInvestmentStandards(IRIS.org)• GIIRSRa-ngandAnaly-cs(b-analy-cs.net/giirs-ra-ngs)• Toniic,globalac-oncommunityforimpactinvestors• News/Reports• ImpactAssets50(h]p://impactassets.org/)• ImpactAlpha(impactalpha.com)• USSIF,UnlockingESGIntegra-on(h]p://www.ussif.org/files/Publica-ons/
UnlockingESGIntegra-on.pdf)• WEF,ShapingtheFutureofImpactInves-ng(
h]ps://www.weforum.org/projects/mainstreaming-sustainable-and-impact-inves-ng/)
• Contact me:SaraMinard,PhD,[email protected]
Addi-onalslidesontheurgencytoinvestinopportuni-estacklingthe
challengesofworkforcedevelopmentintheU.S.
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NoMoreToilinginthe
Fields!MovetoMore
Produc8veWork
New“Wants”ThatCreateNewJobs
PROBLEMOFRISINGUNEMPLOYMENT
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$1.50perdayGlobalPovertyratecon-nuestoplummet
“DrivenbyGDPgrowth”
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1982 2002
MoreProduc-ve
LessOpportunity
LessJoy?
“De-Skilled”
LowerWages
LowerPricesforEveryone
Else
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39confidential Copyright © SquadLocker, Inc. All Rights Reserved. Source:RajChe9y
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Non-Rou-neInterpersonal
Non-Rou-neManual
Rou-neCogni-ve
Non-Rou-neAnaly-c
Rou-neManual
Educa-onRoadblock
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Howdosocialenterprisesandimpactinvestorsrespond?
Newlegalframeworks:BCorpsandBenefitCorpora-ons(LaureateEduca-on,firstIPO)
Strengtheningexis5ngmodels:• Worker-ownedstructureswithdemocra-cdecision-making:
• “Capitalconstraintsandtheneedforinnova-ve,entrepreneurialapproacheshavereinforcedtheroleofsocialenterprises[inallfourcountries].”
• Stakeholders(mul-)valuecrea-on,notjustshareholders• “Differingbyvalueproposi-onandtargetedbeneficiariesinnewsustainable
businessmodels:the‘workintegrator’,the‘hiddenworkintegrator’,the‘entrepreneurialcoach’andthe‘skilldeveloper’
• Impact-maximizing,notprofit-maximizing(mission-driven)andtransparencyandaccountabilitythroughoutthevaluechain
• “Socialenterprisesacrossallofthesebusinessmodelshaveproventheireffec-venessintacklinglong-termunemployment;theydemonstratetheirsocialimpactthroughmeasurableoutputindicators(esp.iftheyarepubliccontractors).”
FromStephaniePetrick
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