The Impact Investor. Clark Cathy

of “Impact Investing 1.0” to the next level of informed execution.

      It is no accident that Morgan Stanley, Goldman Sachs, UBS, Deutsche Bank, RBC, Bank of America, National Australia Bank, all of the High Street banks in the United Kingdom, and dozens of other major financial institutions throughout the globe are making strong plays in the impact investing arena. Other investors should take heed:

      The train has left the station.

      The tremors are being felt.

      Mainstream investors are reframing assumptions governing traditional investing just as traditional philanthropists and socially responsible investors are reconnecting with their initial motivations to effectively manage assets and make use of capital to create a changed world – at the levels of individual, community, company, and market.

      The rise of impact investing takes place against a larger backdrop of innovation within mainstream capital markets and newly emerging visions of the future of business. And much of this is now being driven by shifts in “consumer” demand, whether at the neighborhood level of individuals seeking to better the possibilities before them; the customer level of those seeking to align the power of their dollars with the world they seek to create; or the consumers of investment strategies and vehicles who are demanding greater transparency, less financial leverage, and expanded understandings of potential value creation generated by their capital.

      The funds profiled in this book show us, concretely, what this collaborative new world looks like – in the emerging era of Impact Investing 2.0. The work of the twelve funds stands as a testament to the fact that capital can be structured to change the economic conditions of those who remain largely outside the economic mainstream.

      While a great deal has been achieved, a great deal more must be done. We do not pretend to offer “the answer” to the many debates and discussions currently taking place in regard to the ability of capital and companies to advance positive change in the world; nor do we provide a template or defined road map. What we offer in the following pages is a set of organizational data points, experiences, and analysis to inform our next steps as we move forward together. We owe a great deal to these funds willing to open their balance sheets and reflections to outside researchers. And we are pleased to bring their lessons to all those committed to investing with impact to help advance the world to which we aspire.

      August 2014

Cathy ClarkDurham, North CarolinaJed EmersonGranby, ColoradoBen ThornleyOakland, California

      Dedication

      This book is dedicated to J. Gregory Dees.

      1950–2013

      Mentor, Colleague, Friend

      For using the power of words to plant a vision that has inspired a generation to think about how we each can use our talents to make the world better.

      For defining social entrepreneurship as a discipline and not a personal hobby, drawing out in nearly every person he met the desire to engage with others collaboratively toward shared goals.

      And, most of all, for quietly, sneakily nurturing the societal institutions, in education, finance, consulting, government, journalism, philanthropy, nonprofits, and business, making that vision come true.

      Introduction

      You don't need a weatherman to know which way the wind blows.

– Bob Dylan, “Subterranean Homesick Blues”

      There was probably no point in history when life was truly simple and uncomplicated. Every age, every time, every life has its challenges, its complexities, its moments of uncertainty and change. Yet, in the midst of each age's challenges comes a moment of clarity: the need to engage in the Civil War, the ultimate validity of battling the Axis powers, the compelling righteousness of the civil rights movement.

      Our moment is no different than others that have come before, save that the clarion call is for a new generation – figuratively and literally, as the Millennials step into new leadership roles – to advance new thinking with regard to the nature of capital and the practices of investing. We now live in a world where injustice and poverty, down the street or across the world, may be felt in an instant. One where environmental degradation threatens not just some future generations we'll never know, but the quality of life of our children. And what's being demanded, more clearly than ever, across generations, is the opportunity to align every facet of our lives with making a positive difference, with a broader vision of a life well lived.

      In this respect, in a world that technology renders increasingly open and interconnected, capital markets remain one of the last bastions of imperviousness. Even though capital flows around the globe are one of the most powerful forces shaping our societies and economies, most of us still invest under the pretense that the impact of capital is divorced from its uses.

      Yet even as our moment in history demands nothing less than a full accounting of the positive and negative outcomes of capital, a thorough understanding of our role in bending environmental and social systems toward justice, there will be those who continue their efforts to play the role of pundits on the sidelines as our modern Rome devolves into seeming chaos. Even as trillions of dollars continue to be invested with the sole consideration of financial return, and even as companies continue to be managed with an eye to a single, supposedly unencumbered bottom line of financial performance, the majority will see that larger forces are being unleashed in the form of a new capitalism – capitalism focused on the generation of financial returns, yes, but a larger, more holistic economic system operated with reference to previously “off-balance-sheet” factors, such as stakeholder interests and carbon footprint – and a host of additional factors increasingly understood to have influence on long-term value generation and financial return to investors, as well as to our well-being on the planet.

      Capitalism will continue its evolution of past decades but increasingly turn outward, recognizing that economics and finance may no longer be viewed in isolation from those elements on which the capitalist engine itself draws. The new capitalism will continue to be revealed as the unifying backdrop against which innovations and refinements will emerge. The new capitalism will not pit asset owner against wage earner, or shareholder against stakeholder, or capitalist against community. Rather, the new capitalism clearly emerging through the mist of history is one of complements – not contradictions. It is a capitalism of integrated interests. It is a capitalism of shared futures and global markets played out in community contexts connected across the planet via the new wireless world and ultimate reality that value is a blend of environmental, social, and economic components – value is itself fundamentally whole and more than the sum of these parts. The legacy of the future will not be one of blind wealth creation but rather sustained value creation across generations. It is a capitalism of corporate and community commerce, of individual and societal change, and, ultimately, our undeniably common interests.

      It is, at its core, a Collaborative Capitalism: the realization of a community's highest economic and social aspirations through the enterprising deployment of ideas, capital, and shared resources in pursuit of common impact.

      It is within this broad flow of global collaborative capitalism that impact investing takes place.

      As we will explore in the following chapters, impact investing is a banner under which a host of practices now gather:

      • Mainstream, private equity investors seek to integrate environmental, social, and governance factors into their pursuit of financial returns.

      • Pension fund fiduciaries invest with an eye to the health of the communities in which beneficiaries live, as well as their financial interests.

      • Foundations seek not simply to make charitable grants but rather to draw on the full tool kit of capital under their control – grants, to be sure, but also program-related investments and public and private securities – all with an eye toward sustained portfolio performance and maximizing total impact.

      • Individual investors gather on crowdfunding