The Impact Investor. Clark Cathy

and delineate the four key elements of successful impact investing – and by extension Collaborative Capitalism – and provide a range of tools for implementing these practices:

      Chapter 3, “Impact DNA,” highlights successful funds' core approach to impact investing: a process of establishing a clearly embedded strategy and structure for achieving mission prior to investment, enabling a predominantly financial focus throughout the life of the investment. We call this approach “Mission First and Last.” Knowing early and explicitly that impact is contained in a fund's DNA allows all parties (investors, investees, and the fund itself) to move forward with the investment discipline akin to any other financial transaction, confident that any possibility of mission drift can be effectively managed.

      Chapter 4, “Symbiosis as Strategy,” explores the ubiquitous role of government in impact investing, and the multidirectional relationships of trust and support that undergird effective public-private partnership. By nature, impact investors represent a marriage of public and private interests. They seamlessly integrate a commitment to improving public welfare with the power and efficiency of capital markets. Policymakers – who have a vested interest in maximizing the social and environmental well-being of their constituencies and hold massive power to influence the market through laws and regulations – are natural partners for impact investors.

      Chapter 5, “The New Deal,” focuses on the rigorous and creative strategies impact investors use to meet the diverse return objectives of a range of capital providers. By bringing different types of stakeholders to the table, cultivating “catalytic” investors, and doing the hard work of financial structuring, impact investors are able to support markets that would not otherwise be “investable,” providing access to capital in some of the most underserved places and sectors.

      Chapter 6, “Multilingual Leadership,” discusses the inherently cross-sector nature of impact investing and the diversity of skillsets and strategic approaches needed if one is to succeed. Impact investors are expert at simultaneously seeing the world through the eyes of philanthropy (the “theories of change”), government (market failure and subsidy), and finance (the best use of capital; return on investment), which is a difficult but essential approach to master in the era of Collaborative Capitalism.

      In part 3, “Looking Ahead: Trends and Challenges,” we take all that we have learned and pose a simple question about the future. We claim that Collaborative Capitalism is on the march. What then are the signs we should look for to indicate that Collaborative Capitalism is storming the castle? What might still hold it back?

      Chapter 7, “The Writing on the Wall” outlines ten trends to watch that will signal the arrival of a broader practice of Collaborative Capitalism on a range of investment and business activities, both mainstream and niche.

      Chapter 8, “Concluding Reflections,” brings together the themes and explores seven challenges the field must face to successfully bring forth this new vision.

      Finally, we end with an “Impact Investor Resource Guide” that brings together all of the strategies and tools from chapters 3 through 6. This is an easy reference for those eager to move quickly to action.

      Impact investing has been called a dark wood in which various new and exciting creatures bustle about and explore a new world of investing and impact. The Impact Investor points to the paths through the wood and confirms impact investors, social entrepreneurs, pension fund fiduciaries, and a host of other actors actually know a lot more about how to “do” impact investing than many have to this point believed. We do not have to wonder how impact investing may have the greatest impact – the fund managers and strategies in this book document how leading funds execute their strategies for high performance. We do not have to ask, “How does impact investing differ from traditional, mainstream investing?” The investors profiled in the following pages show how impact investing is not altogether “new” or different, but rather an extension of the fundamentals of sound investing practices. We do not need to ask, “What will it take for impact investing to go mainstream?” The practices and diverse pool of investors described in this book show that in fact impact investing has gone mainstream and that it is only a matter of time before we are truly able to see the depth and breadth of the adoption of impact investing practices within those mainstream markets.

      Every era is an era of change. We need only to lift our heads or climb a nearby hill to gain a different perspective, to see the possibility of the changes taking place within our community, region, or market. This book provides an overview of promising investment themes and practices that portend a global economic transformation. The exponential growth of impact investing is well under way as we continue to see new ideas, strategies, and opportunities brought from the fringe to the center of capital markets the world over.

      Part One

      Key Practices and Drivers Underlying Impact Investing

1

      Inside Collaborative Capitalism

      Collaborative Capitalism is 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.

      Collaborative Capitalism is manifest at many levels and in many ways, within and between companies, investors, and the markets and communities in which they operate. It has evolved out of the creative adaptation of business norms, practices, and relationships to address the ultimate effect of capitalist activities on broader social and environmental purposes. At the organization or company level, it is driven by what we often refer to as “mission”; at the fund or investor level, it is usually in the details of the transaction, in the price premium, in the metrics of accountability, or in the ways that risks are mitigated to allow more stakeholders to achieve their goals.

      But let's get down to brass tacks. Collaborative capitalism is not a theoretical construct. It is made real in myriad markets through a wide range of business approaches and financial innovations.

      Consider Fair Trade, a prototypical impulse of Collaborative Capitalism applied to global value chains. A key concept of Fair Trade is to recognize the supplier as a constituent of the business, who is affected by lowered commodity pricing, such as for coffee or bananas. Fair Trade advocates have applied diverse sets of strategies to align the tools of capitalism with working to ensure a fair wage is offered to the supplier in local communities.

      In essence, Fair Trade labels aim to make transparent the effect that a fair, living wage has on this constituent, and ask the customer to agree to pay for those benefits up front. Advocates of Fair Trade then use a host of accountability practices to ensure this price premium is protected all the way down the value chain.

      The outcome at the end of this process – the targeted impact Fair Trade seeks – is a supplier farm, cooperative, or worker with a higher quality of life due to a higher income. This seemingly small innovation in the supplier-to-consumer relationship has become a practice hundreds of companies may now build on and extend to other areas of corporate practice. Collaborative Capitalism–based movements and industries are born of effective innovations like this.

      Peer-group-based microfinance is another example of Collaborative Capitalism at work. In this case, the transparency of peer pressure within a borrower group replaces the need for hard collateral assets, transforming local peers into stakeholders who are highly motivated to ensure regular payments, and obviating the need for layers of risk protection by the lender.

      In our introduction, we presented this idea of Collaborative Capitalism as a larger field of practice encompassing everything from corporate social responsibility (CSR) to operational and supply chain sustainability, public private partnerships, and socially responsible investment. Indeed, it is a broad term we use to describe many different impulses with various terms and names. In this chapter, we explore the roots of Collaborative Capitalism, define its subfields more concretely through