Reflections on 2015, the Stewardship of Investment Capital and Social Impact
As we look back on 2015, and in particular on several major events and announcements since early July, it may just go down as the year in which socially oriented and impact investing finally entered the mainstream world of wealth and finance. Here's a quick scan:
- In mid-July, Goldman Sachs acquired Imprint Capital, an asset-management firm founded in 2007 that advises clients on investing based on their environmental, social and governance views. The San Francisco-based firm has more than $550 million of assets under advisement.
- On November, 19th, the New York Times reported that "Buffett's Grandson Seeks Own Investment Route: Social Change". Howard Warren Buffett, who keynoted the Wealth & Giving Forum's October 2013 "Seeking Impact" symposium, announced the formation of i(x)Investments to invest in ventures and undervalued companies that address clean energy, sustainable agriculture and water scarcity issues. Howard's move signals a significant generational shift that is well underway when it comes to money matters and the definition of "returns".
- Also back in July, Big Path Capital hosted its first Impact Capitalism Summit in Nantucket that gather some 150 thought leaders, fund companies and investors in a two-day interactive forum on the field. Deval Patrick, the former Massachusetts Governor who now spearheads Bain Capital impact investing, mingled among wife and husband team Liesel Pritzker and Ian Simmons of Blue Haven Initiative, Matthew Bishop, U.S. Business Editor of The Economist who coined he the term "Philanthrocapitalism" back in 2008, and Nancy Pfund of DBL Partners and Amelia Swan Baxter, Co-Founder of Whole Trees, to mention a few of several fund companies on hand.
- In mid-November, Ford Foundation CEO, Darren Walker, announced that the nation's second-largest private foundation would soon outline an impact investing policy for its $12 billion endowment, a move many signaled as a wake-up call for the $650 billion in philanthropic capital sitting in endowments. Walker weighed in with his personal conviction, stating that: "I no longer find it defensible to say that our investment strategy is only to maximize the value of our endowment - just as it's no longer defensible for a corporation to say its only responsibility is to maximize shareholder value."
- Perhaps the most significant signal of change came in mid-October when the Department of Labor announced that pension fund fiduciaries can consider ESG factors in their investment decisions without running afoul of Department's standard. This decision reversed the Labor Department's 2008 interpretative bulletin that discouraged plan fiduciaries from considering environmental, social and governance factors.
It is worth noting that in announcing the Labor Department's decision, Secretary Thomas Perez was careful to emphasize that "Changes in the financial markets since that time [2008}, particularly improved metrics and tools allowing for better analyses of investments, make this the right time to clarify our position." Under the new guidance, Interpretive Bulletin 2015-01, fiduciaries cannot accept lower expected returns or greater risks, but may take ESG benefits into account as "tiebreakers" when investments are otherwise equal. And the DOL went further by suggesting that when ESG factors have a direct relationship to the economic and financial value of an investment, "...these factors are more than just tiebreakers".
In this context, it is also worth heeding the observation and wisdom of the aforementioned Darren Walker, who opined in a December 17 New York Times piece "Why Giving Back Isn't Enough". In his Op/Ed, Walker outlined the shortcomings of classic philanthropy generally and specifically when it comes to addressing injustice and inequality in our society. Quoting Martin Luther King, Jr. -- "Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary" --Walker reminds us that philanthropy "... is, after all, an offspring of the free market; it is enabled by returns on capital." He also asks us to probe more deeply: "... philanthropy can no longer grapple simply with what is happening in the world, but also with how and why."
It is perhaps such probing that led the High Water Women (HWW) organization - which is comprised of 3,500 women professionals in the financial services and has a mission to promote volunteerism and philanthropic giving -- to begin organizing impact Investing conferences. The very same week as the DOL decision, HWW hosted its 3rd annual event at the City University of New York's Graduate Center in the heart of Manhattan. Some 300 professionals, academics and investors were on hand to exchange ideas and implementable practices in the brave new work of impact investing.
As a not so inconsequential aside, women are clearly out in front in adopting and even promoting the social and financial return virtues of impact investing. A recent survey found that over half of wealthy women in expressed an interest in social and environmental investing versus only one-third of wealthy men. With women poised to inherit some 70 percent of the $41 trillion to be inherited over the next four decades, impact investing's star should keep rising.
In that vain, it was revealing and even fascinating to hear the vigorous voices of leadership in the HWW conference's breakout sessions entitled "The Whole Portfolio Approach" in which five female professionals -- representing a full spectrum of financial and nonprofit perspectives -- presented a compelling case for a more expansive and creative use of a foundation's or endowment's assets to achieve an organization's mission. With conviction and mounds of data, the five panelists presented investments made in housing, clean energy and employment opportunities for at-risk populations that achieved significant measurable social outcomes that advanced fund or foundation's mission without sacrificing, and in some cased enhancing, investment returns.
While the panelists' passion for the "whole-portfolio" approach was evident, hard-knocks financials ruled the discussion. In fact, Preeti Bhattacharji of the FB Heron Foundation - a pioneer of mission-related investing with roughly $240 million in investable assets -- spoke about the Foundation's capital structure and sources and use of its cash with the fluency of the CFO of a Fortune 500 company or a classic hedge fund manager. And Laura Kind McKenna of the Patricia Kind Family Foundation was unequivocal in her view that fence sitters and even naysayers should "just do it". For Laura and her fellow panelists, there should be no hesitancy on the part of any mission directed organization or individual "values-based" investor to embrace the opportunity when one considers the evidence, available tools and the practical pathways to implementation.
It does then beg the question as to why and how fiduciaries of philanthropic capital could continue to justify excluding ESG or impact-oriented investments when one considers the tangible social and financial return potential of these options and the fiduciaries' own obligations as stewards of mission-driven assets. Indeed, this question was posed during the "Whole Portfolio" session and an unidentified participant in the room suggested that the explanation could be found within a "certain profile" of board trustees and investment committee members -- let's just say 50+ in age, non-female and a similar shade of skin. Tongue-in-cheek commenting aside, surely engrained thinking and patterns among an old guard coupled with simple inertia may explain the resistance to change.
Nonetheless, the resistance is puzzling when one considers the following: In the world of business and finance, no one in her of his rational economic mind would contemplate investing in a company that sub-optimized its use of capital, had a capital structure where the type of debt instrument did not match the time-horizon or risk of the initiative it was funding, or that under-budgeted and did not hold accountable a critical cost center. But it seems that when even the most "business savvy persons" venture onto nonprofit boards or investment committee, they immediately compartmentalize and are apt to accept the prevailing mode of nonprofit investment and cash management. Namely, they stay true to the mantra that the investment committee will invest the 95% corpus with the classic "highest possible risk-adjusted return" objective without regard for the investment's negative social externalities, sub-optimization of the organization's objectives, mission misalignment, and/or seriously undermining grants recently doled out. Meanwhile, the program department fulfills its grant making separately from investment decisions in strategically isolated offices that are most often on a separate floor.
As, Ms. McKenna, concluded the "Whole Portfolio" panel, there are no more excuses given the evidence and the multitude of impact investing vehicles and tools now available to investors. She also invited attendees to review PKF Foundation's investment policy statement on Foundation's website that posits: "We believe that by separating our invested assets from our grant making we will limit our ability to further our mission". Board trustees and investment committee members would be well-served by borrowing from PKF's ISP and exploring the potential of the Whole Portfolio Approach when fulfilling their fiduciary duty to advance a nonprofit's mission.
So as we approach the New Year, let us hope that more women and men will follow Mr. Walker's lead and explore "the how and why of what is happening in the world" and establish an impact investing policy for the institutional capital they steward, and perhaps for their own.