The Economics of Sustainable and Impact Investing

Posted on by Amy Bennett

It’s an obvious point too many impact investing skeptics still miss.

Far from simply catering to progressive individuals looking to “invest their values,” environmental, social and governance (ESG) factors provide critical insight into a company’s viability and long-term economic performance. It’s not ancillary analysis, it’s critical fundamentals.

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This realization—that the basic discipline of investment research needed to change to include ESG—was a pivotal moment for Erika Karp (pictured above), and a key to success in developing a truly integrated research framework in her pursuit of sustainable and impact investing.

“Economics is a wonderful way to think about, and put a framework around, social constructs,” says Erika, founder and CEO of sustainable investment advisory firm Cornerstone Capital Group. “When you see business structures that are compelling, that kind of training is very important.”

Erika started out at Credit Suisse, and then moved on to lead the Global Sector Research team at UBS, where her interest in ESG analysis developed organically. During this time, she took on leadership of the socially responsible research team and became an early advocate for sustainable, impact investing.

“I got more and more excited about the possibilities of this new investing model, and started speaking not just internally, but outwardly as well.”

That advocacy and expertise led to impressive leadership roles at the top echelons of the impact movement, including a membership in the World Economic Forum, Erika’s work with the United Nations and her association with the Clinton Global Initiative, to name a few.

Operating at that level gives her a true insider’s perspective into impact investing, having established relationships in different areas of the capital markets—including corporations, non-governmental organizations, regulatory agencies, exchanges, wealth asset managers, investment banks, accountants and others.

“Sometimes people say ‘ESG investing,’ but that doesn’t make sense,” Erika argues. “ESG is a discipline, and once you have that discipline, then you can do impact or sustainable investing. It’s a form of enhanced analytical capability. Transparency, improvements in data, the nature of social media, the rapid movement of information; all those factors are at play, too. But ESG is a push towards a more conscious type of investing—and that’s the big deal.”

It all involves having a macro capital markets view. Erika notes it’s not about moving millions or even billions, but trillions of dollars towards impact, especially when considering ESG imperatives like climate change, women’s economic empowerment, animal welfare, education, ocean pollution, potable water and increasing broadband access.

“To give you a sense, in 2017 maybe $400 billion of venture money was moved towards alternative energy. We need to move $1.5 trillion a year if we’re going to achieve anything like the COP 21 [United Nations Framework Convention on Climate Change] objectives. And that’s just for alternative energy. If you can’t get the capital markets working and having money flow towards progress, we won’t be able to do it.”

That macro view is tied directly to the firm’s offerings. She specifically points to Cornerstone’s investment research credibility, on par with that of an institutional investment bank; corporate governance expertise in line with that of an asset manager; and the due diligence/client advisory perspective Cornerstone brings as a registered investment advisor.

“We put those all into one integrated firm, and that’s never been done before,” says Erika. “We don’t think of ESG or impact investing as an asset class. We think it should be completely integral to the investing process. We think it’s all investing, because all investing has an impact—you just don’t necessarily know what it is.” Given this philosophy, Cornerstone is 100% focused on sustainable and impact investing, with most of its clients also targeting competitive financial returns.

That said, donor advised funds and similar philanthropy-focused investment vehicles are critically important “portals” for wealth management clients to access impact investing, Karp adds.

“We are seeing a transformation of traditional philanthropy strategies towards impact investing, which makes sense. But ultimately, we’re going to move even further towards market return investing with social impact.”

As for successful entrepreneurs and business leaders looking to harness the power and size of capital markets to generate a measurable social/environmental benefit alongside a financial return, what advice does she offer?

“They need to combine their pragmatism with their ideology. It has to be both pragmatism and analytics, along with ideology and sensibility. Then you need to find people you really trust. It’s as simple as that.”

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Every Investment Has Impact. What’s Yours?

Posted on by Real Leaders

For Liesel Pritzker Simmons, there’s no shortcut to raising the bar on impact investment performance. 

As Principal of Blue Haven Initiative, a family office she co-founded in 2012 with her husband Ian Simmons, this millennial is showing how investors of all ages can maximize the positive social and environmental impact of their investments while generating financial returns.

But it isn’t easy.

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Whether it is analyzing a portfolio company prospectus or visiting entrepreneurs in sub-Saharan Africa, Pritzker Simmons applies a rigorous portfolio-management lens to every investment—whether for-profit or philanthropic capital—with the goal of aligning financial performance and public benefit. There’s no magic bullet or “Top 10” list for impact investing, says Pritzker Simmons. “It’s a highly personal endeavor, requiring people to think deeply about how portfolios should reflect their values and concerns.”   

As one of the first family offices created with impact investing as its mission and focus, Pritzker Simmons and the Blue Haven team are careful to ensure that philanthropic efforts and investment efforts are coordinated and complementary.  And they are playing the long game. Whether investing in a social enterprise, supporting research and education, or regularly reviewing its public equity portfolio, Pritzker Simmons, her husband and their advisors believe the future of investing will be reshaped by more informed investors.

We recently caught up with Pritzker Simmons. An excerpt of our interview follows:

Amy Bennett: Liesel, thanks again for your time. Let’s jump right in. How do you define impact investing? 

At Blue Haven Initiative, we start from the premise that every investment has an impact—good, bad, social, environmental and financial. From there, we do extensive research and seek to maximize the positive social and environmental impact of our investments while earning a market return. As a result, impact investing requires us to ask a lot more questions and do more rigorous due diligence in assessing the long-term risks and returns of our investments.

We’re a family office and we take this approach because we’re long-term investors. If we don’t consider environmental and social risk and returns, we’re not only putting our financial investments at greater risk, we’re not being good stewards of wealth for future generations. We don’t want to make a mess our kids will eventually have to clean up.

How does your philanthropic giving fit into your impact investment strategy?   

Blue Haven takes a Total Portfolio Management approach to impact investing. That means looking across asset classes and capital types. Our philanthropic capital is an important resource that we use as effectively as possible. We look for opportunities that markets really cannot address—civic engagement in voting, disaster relief, research and education—things that traditional investing typically doesn’t value as much as we think it should.  We prioritize our philanthropic spending for those kinds of opportunities. 

Philanthropy is one tool in the tool belt for impact and we use it for grants as well as concessionary investments where the impact equates to a non-risk-adjusted return. And it is part of a holistic process. We want to make sure that our investment portfolio is not working against our philanthropic goals. There is absolutely no point in funding climate change initiatives with your philanthropic dollars if you’re not trying to reduce your carbon footprint in your investment portfolio.  It doesn’t make any sense. 

We hear a lot about how donor advised funds are growing in popularity and democratizing philanthropy. And we know each other because you use ImpactAssets’ offering, the Giving Fund. How has it played a role in your impact investing?

The Giving Fund is the vehicle through which we do our philanthropic grant making and our concessionary investing. We want to spend time finding great organizations and companies to support without devoting a lot of time on the complexities of philanthropic administration. There’s really a great range of tools that impact investors use these days—from debt to equity, recoverable grants, C4 strategies—and ImpactAssets knows how to help us implement them.

In addition, the organization plays an important role in the impact investing ecosystem. Clients of ImpactAssets are among the most active impact investors in the world.  It’s an innovative and risk-taking community and you can see that in the number of deals that are done and the kinds of funds that are on the platform. It’s inspiring to be a part of it. 

Can you tell us about one of your favorite impact investments that you made through the Giving Fund? 

One example is our support of PRIME Coalition, an intermediary that facilitates very early-stage investments into game-changing climate-change companies. They find companies, vet them, and structure early-stage investments into them.  We’ve supported PRIME through an operating grant as well as providing funding that PRIME used to place equity into another venture. And we’ve also supported them by directly investing convertible debt into RedWave, a company that is developing technology to convert waste heat into renewable electricity. 

Millennials are enthusiastic but often inexperienced when it comes to impact investing. What’s the most important lesson you have learned as a pioneering impact investor that you can pass along to your fellow millennials?

I’ve learned that you can’t expect that impact investing is going to be faster, easier or cheaper than traditional investing.  It’s more complicated, idiosyncratic and rigorous. And that’s okay. If it were easy, everybody would have already done it.  You have to put time and energy and effort into impact investing, but it’s where the most exciting conversations are happening. And I think millennials know that.    

It’s also important for millennial investors to just get started with something and learn as they go. Don’t try to find perfection in one single investment or in one single fund. Don’t try to look for a website that rates every company perfectly and makes impact investing just a click away. Start small, piggyback off of investors that you think are smart, and learn that way. 

If you could deliver one message to investors of any age, what would that message be?

I would appeal to investors to take more responsibility for the total impact of their investments. If an investment has a negative impact socially or environmentally, somebody is going to have to clean up that mess. If not you today, then your grandchildren tomorrow. 

Get into the mindset of long-termism because a thoughtful and rigorous consideration of the environmental and social impact of your investments in the long run is just more informed investing. 

And if you believe that a better understanding of risk is smart in the long term, then you’re more than halfway to being an impact investor.

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Impact Investing for the 99%: A New Path to Mainstreaming

Posted on by Socap

All investments have impact. But to-date, impact investing has been largely limited to small, private companies, and accessible only to accredited investors.

What if it were possible for normal folks to easily allocate their retirement portfolios in such a way that maximized the impact of their investments on issues they care about – e.g. climate change, gun control, gender diversity, etc? Such an innovation would unlock vast amounts of capital and consciousness, catalyzing the true mainstreaming of impact investing.

Individual investors are currently being left out of powerful movement. In public equities, over US $1 Trillion has moved into Socially Responsible Investing (SRI) strategies annually over the last 5 years [1]. Yet only a small fraction appears to be owned by retail investors. This despite the fact that according to Morgan Stanley, over 70% of individual investors now say they want their money to align with their values [2]. Given this chasm in even the most liquid and marketable asset classes, small wonder that impact investors have focused instead on getting big checks from Limited Partners (LPs).

But this “missing retail” segment – the amount of SRI assets individuals should hold if responsible investing had the same proportional ownership structure as the normal stock market – represents an approximate $3.6 Trillion opportunity in the U.S. alone.

Here’s how we can close the gap:
The first blockage to mainstreaming is lack of awareness. Most financial intermediaries have stood as a roadblock, with some statistics saying fewer than 10% of advisors, for example, are highly interested in sustainable investing solutions [3]. There is certainly no shortage of sustainable fund options and other tools for investors to start driving change. But the incentives of the Wall Street food chain generally militate against transparency and customization. Rather, they promote a “leave it to the experts” mentality, so that they can continue to sell preset portfolios that protect their margins.

Fortunately, technology makes it possible to dis-intermediate agents who are standing in the way, and to customize portfolios that invest in companies whose impact is consistent with each person’s values. This is our approach at OpenInvest. By bypassing the entire “fund” model and algorithmically constructing each user’s portfolio, investing once again becomes personal, transparent, and impactful. Users can now fully customize their investment portfolios and retirement accounts to support the things they care about.

But this is just the beginning. By vertically integrating and replacing middlemen with computing power, individual investors can now take new actions any time they want – in response to real-world events – while their portfolios always stay balanced and tracking the market. They can have full transparency into what they own, they can vote in their own shareholder resolutions, and they can see rigorous reporting of their real-time social and environmental impacts.

To mainstream, we need to make responsible investing easy, visceral, and social. That requires advanced technology, but then translating that technology into user experience. We can’t claim to have fully cracked that nut, but we’re making sufficient strides. OpenInvest has experienced nearly 20% week-over-week growth since our launch at SOCAP16 in September. It’s clear that the demand for impact investing is real and all around us.

Innovating in public equities is the obvious first step to engaging individual, unaccredited investors. But it’s also the way to build a sufficient demand pipeline to incentivize the impact investing community to open up. Starting this year, we will begin swapping out pieces of portfolios with alternative, impact investing products that we know users care about.

There are already impact products in the retail market – from new crowdfunding equity platforms to Calvert Community Notes. But for the motivated individuals who buy these, what does it mean for their diversification? Are you overweight solar, Indonesia, your local community? We believe the key to liberating unaccredited impact investors is to start from the top-down, with a fully balanced responsible portfolio. We can then offer to replace slices with deeper impact products, while always maintaining portfolio-level diversification. As such, we welcome partners from the SOCAP community to help get products onto our platform for our growing base.

To be clear: retail investors of the future will enjoy similar performance and diversification as their parents. But their holdings will cut across impact asset classes, as they see and feel where their money is going and how they are shaping the world every day.

Following Trump’s election and his subsequent actions, there’s more demand than ever to find new channels to drive change. Yet while they picket in the streets and write monologues on Facebook, individuals are letting their most powerful weapon – their assets – collect dust. The key is to start by giving public markets back to the public. Then we can create a pipeline of capital to help scale impact investing, while in turn restructuring personal portfolios to truly engage our communities and the world. Through a combination of technology and psychology, we now have the tools to democratize capital. Let’s cross that tipping point together.

Leveraging Technology for Social and Environmental Impact with Geunbae

Posted on by Net Impact

Geunbae Lee is an Impact Design Fellow activating around human-computer interaction.

He, along with his team members Jayanth Mohana Krishna, Jessica Tsui, and Nishant Panchal are working on a project focused on home automation. They are creating a web platform for people to manage their connected devices through the Internet of Things. This project will reduce energy by helping people tailor their energy use to exact needs and will impact the old or disabled who run physical risks by forgetting to turn off stoves or feeling for switches in the dark. 

Learn more about his journey to designing for impact:

Why did you first decide to take action around impact design?
The reason I got into HCI and UX is because I wanted to make change in my community. Most of my previous and current projects revolve around trying to create a better user experience and to discover potential solutions that are far better than the ones that currently exist. I believe that the moment I put my feet forward into this field, I start to make an impact to the community and to individuals who value the products I shape. I thought applying for the Impact Design Fellowship was the next step for me. 

How did you know this was the right project for you to work on?
Frankly, I don’t think there’s any right or wrong projects to begin with as long as there’s purpose and problems that we want to tackle. I think it’s very important to have a clearly defined area and topic that the team is going for because without it, it’s like sailing a boat without a compass in your hands. In order for me and my teammates to figure out what kind of impact we should make in the community, we went through numerous brainstorming and team meeting sessions which helped out a lot. 

What do you think is the most critical issue facing the world today?
One of the critical issues I’ve personally discovered is cultural issues. There are cultural discriminations and gaps between the people in the community which are some of the issues that I’m very interested in solving. As an international student growing up in Canada, South Korea, and the United States I’ve experienced these problems, which led me to become more thoughtful about the issues. 

What advice would you give to someone launching their own project at school?
This really depends on what kind of project you and your most focused team members are trying to accomplish. For me, I initially wanted to make a project with 4 people in my team who could really focus and craft a good solution. To be honest, it made us stronger, more united, and definitely helped us to focus on each of our tasks as a team. I recommend to people looking to launch a project to first find out what kind of project they want to do. As you and your initial members brainstorm, you will definitely see what you need, who you will need, and why.

If you were given an extra hour every day, what would you do with it?
If I was given an extra hour every day, I would write blogs about my experience in the design world and spread my knowledge to others who are working hard like I am. I often write on Medium and so far I’ve gotten great feedback from students and designers all over the world. Writing is something that I don’t feel confident with because English is my second language, but I believe it’s an important skill to have. By practicing through writing blog posts, it will help me get to know more people and help for my own career development. 

Original Story: Net Impact

 

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