In Pursuit of Deeper Impact Mobilizing Capital for Social Equity

By Katherine Pease With Sarah L. Thomas Foreword By Jed Emerson About the Authors Katherine Pease Katherine Pease is the principal of KP Advisors. She has worked with foundations, investors and nonprofit organizations for more than 20 years. She served as the executive director of the Gill Foundation and as Senior Vice President for Philanthropic Investments and Policy at Gary Community Investments, which includes The Piton Foundation. She has also consulted exten- sively with foundations, investors and nonprofit organizations on strategy, program design, organizational development, and related topics. She regularly presents on topics ranging from social equity in impact investing to strategic planning for foundations and philanthropic networks. She earned her Bache- lor of Arts from The Colorado College and her Masters in Public Administration from The University of Colorado where she is also a Lecturer in the School of Public Affairs. She currently serves on the Board of Directors of Global Greengrants Fund. She is also on the Steering Committee of Impact Finance Center at the University of Denver and she serves on the Advisory Board for the School of Public Affairs at the University of Colorado.

Sarah L. Thomas Sarah’s work over the past fifteen years has focused on advancing healthy communities and environments in the United States and globally. The principal of Sarah Thomas Consulting, LLC, Sarah specializes in programmatic research and analysis, strategy development, and communications for philanthropic, nonprofit, and government clients. Her projects have addressed a variety of issues at the intersection of environmental policy and social justice, including land use and public health, rural gentrification, smart growth, community-based natural resources management, and climate mitigation and adaptation. Previ- ously, Sarah was a research fellow at the University of Colorado, Boulder and a staff member at the Natural Resources Defense Council. She has taught undergraduate courses on environmental policy and social change at the University of California, Berkeley and the University of Colorado, Boulder. She currently is a Board Member for the Wildlands Restoration Volunteers. Sarah holds a Ph.D. in Environmental Science, Policy, and Management from the University of California, Berkeley, and a B.A., magna cum laude, from Harvard University.

ii KP Advisors is an experienced advisory firm that works with foundations and investors to achieve their strategic goals. At KP Advisors, we are convinced that many of the biggest issues confronting society, including widening economic inequality, climate change, and social injustice that is based on race, gender, sexual orientation and other factors, can be ameliorated through impact investing and philanthropy. Our mission is to help grantmakers, investors, and nonprofit organizations develop thoughtful, innovative approaches to address the challenges they care most about by using a variety of types of capital and other resources to make the world more just, fair and equitable.

iii Acknowledgements

This paper was made possible by a This paper would not have been number of people and institutions possible without the generous whose vision, support and funding support of our funders to whom were critical to its development. we are deeply grateful for their We are deeply appreciative to ev- encouragement as well as their eryone who generously contributed financial support, includingThe their wisdom, time and financial Colorado Health Foundation, the resources. L.P. Brown Foundation, the Libra Foundation, and The Ben and Lucy Ana Walton Fund of the Walton In particular, we would like to Family Foundation. thank those individuals who shared their wisdom and time with us in the interview process. For a Finally, we would like to especially complete list of interviewees, see thank Jed Emerson for his guidance, Appendix A. We would also like to wisdom, and friendship. He provid- thank the individuals who reviewed ed continuous input throughout drafts of the paper, including the conceptualization, research Chinesom Ejiasa formerly of Over- and writing of the paper and never seas Private Investment Corpora- faltered in his ability to ask hard tion (OPIC), Patrick Horvath of The questions while providing encour- Denver Foundation, Kellea Miller agement and thoughtful feedback. of KSMiller Consulting, Will Morgan The entire impact investment field of Sonen Capital, Jennifer Near is indebted to Jed for his many of the Libra Foundation, Marielle years of thinking, speaking, prod- Oetjen, Regan Pritzker of the Libra ding, and leading – indeed, it is Foundation, and Kate Reinemund impossible to imagine the industry of ImpactCharitable. We are also without his involvement and we grateful to Bruce Pfrommer of are grateful for his continued lead- OnDesign who provided the page ership in pushing us all to think layout and design work. more deeply about social equity in impact investing. In addition, we would like to rec- ognize the early support of our in- The viewpoints expressed in the paper do stitutional partners, the University not necessarily reflect those of its funders, of Colorado Denver School of Public reviewers, or other collaborators. Affairs, and ImpactCharitable, our fiscal sponsor for the project. iv KP ADVISORS © ALL RIGHTS RESERVED 2016

CONTENTS About the Authors ��ii Acknowledgements ��iv Foreword ��vi

Overview ��2 Background ��5 Socially Equitable Investing ��7 Expectations for Comparable Levels of Risk, Return, and Time frame ��8 Aligning Philanthropic and For-profit Capital ��9 Sharing Risk ��14 Investment Time Horizon ��18 Investment Theses ��21 Learning from Philanthropic Theories of Change ��22 Socially Equitable Impact Theses ��23 Evaluation of Social Equity ��24

Engaging Beneficiaries in the Investment Process ��26 Beneficiary Engagement in the Process of Co-Determining Value ��27 The Historic Gulf Between Resource Holders and Recipients ��28 Beneficiary Engagement as a Tool for Risk Mitigation ��34 Strategies for Engaging Beneficiaries In the Investment Process ��36 Conclusion and Recommendations ��44 Appendex A - Interviewees ��46 Endnotes ��47 Bibliography ��49

v Foreword BY JED EMERSON

A DECADE AGO, THE TRADITIONAL WEALTH management and advisory community largely viewed the notion of using capital to generate financial returns with social and environmental impacts as the purview of social workers and investors willing to forgo financial performance in return for feel-good notions of creating a better world. Today, most major institutional advisory and management firms have at least an “impact practice” and several have plunged a public stake in the ground, committing their brand and reputation to advancing impact investment offerings.

Within philanthropy, while the rhet- Nations is exploring how impact oric has in some ways outperformed investing may be leveraged as a the allocation of capital, interest tool for achieving the next round of in impact investing is strong and sustainable development goals. Lead- commitments are growing. Mission ing business schools in the United Investor’s Exchange is seeing an States and Europe are now expected ever increasing pool of foundations to offer students the opportunity to interested in integrating impact learn the skills of impact investing investing with the best practices of not as an add on to fluff up a resume, philanthropic strategy. One cannot but as a clear and important part of attend a national convening of professional development. foundations or nonprofit organizations without seeing sessions on the While the growth of impact investing agenda addressing impact investing. is unmistakable, it is also clear that with such growth comes a renewed The growth of the field is evident in focus upon a set of fundamental the U.S. and globally. For example, questions concerning how we define the G-7 has adopted impact investing impact and what exactly it actually as a focus of its work and the United means to invest for financial returns vi with social and environmental urgency against the backdrop of impact. Over the past decade a Black Lives Matter and immigration diverse set of actors have worked politics. We know investment capital hard to establish initial responses to may be structured to account for these questions. While a sound start environmental and governance for what is for many a new invest- risk. We have shown competitive ment practice, much of this initial financial returns may be generated focus has been upon defining what at the same time as we have created may best be thought of as first level, various aspects of “good” in the initial impact. The emphasis has world. Therefore, in many ways our been on job creation, loans made current challenge is how to move and capital invested. The measure from impact outputs (job creation, of success largely has been based loans made) to the profound on counting the number of impact challenge of impact outcomes that funds launched, investment products center on the achievement of a more brought to market, and individual just and equitable society, both in entrepreneurs receiving start-up or the United States and beyond. expansion capital. While this initial progress and the interest it has Some may object, but in many ways generated should be applauded and the focus of our first generation must be built upon, in some ways efforts to implement impact invest- these initial efforts raise a more ing have centered on addressing the central question: concerns of asset owners and fund managers. How can we generate a How do we now move from financial return while creating pos- these “first order” efforts, itive impacts? How does one create to directing our investment an investment pipeline of commu- capital to have an impact upon nity level investible opportunities systems that perpetuate social while generating consistent financial and economic inequality? returns for investors commensurate with comparable direct equity or And now is exactly the time for us debt investment offerings in the to explore and answer that question. larger market? And, fine…We have While many of us have been hard at now shown both these may be done. work creating new investment vehicles and performance frameworks, However, what has been clear to the world around us has also been some within impact investing is changing and evolving. Within the now increasingly clear to all: If we United States, the issue of economic are to truly engage in the pursuit inequality has now come full bore of deep impact within communities onto the national, public stage. of concern, we must now open up Questions of racial and environ- new relationships and explore more mental justice now have a renewed direct connections with those same

vii communities. We must move from a focus for investor, investee and community. on the needs, interests and priorities of Over this past year, the field has seen the asset owners, to the needs, interests and publication of a number of calls to act in priorities of the stakeholder community— advancing equity for equity, including a those whose lives we claim to be con- series of articles published by the Stan- cerned with and whose interests we claim ford Social Innovation Review, as well as to seek to advance. In the following pages, an article released by Dr. Sara Minard and Katherine Pease and Sarah Thomas frame myself. What is unique about this paper this challenge and highlight some of the by Pease and Thomas is its promotion of best current thinking with regard to it. several key insights of this initial body of literature and its work to connect these The ideas in this paper are not premised latest contributions within a unified on a criticism of those who have built the framework of deep impact investing for foundational practices of impact investing, equity. but rather they are a challenge to us all to now build upon that foundation to I look forward to continuing to engage in advance a more sustained, deeper form this dialogue and exploring how we may of impact and a more relevant under- all move our work toward the generation standing of our potential to create real, of deep impact. I anticipate continuing to community level change. The call heard be inspired by the work of our colleagues here in the pages to come is to now take and many others committed to investing the manner in which one can invest for capital for change. And I welcome the op- positive social and environmental impacts portunity to cultivate and expand my own and add to it the commitment, practices understanding of the possibilities before and possibilities of also investing for more us to continue to frame and advance a systemic change in our world. And it is more nuanced appreciation for how we all indeed time we advanced a more nuanced might work to create the world we seek. understanding of impact that recognizes there are degrees of greater social equity Jed Emerson analysis in which we may engage that Grand Lake, CO hold the potential for us to move from efforts to empower marginalized communities, toward efforts to support communities in owning their power in alignment with their understanding of opportunity and, finally, to shift the terms of impact investment itself.

What has come to this point of impact investing practice is sound and good and heavy with potential. What must now come is the conversion of that potential into a new reality and set of relationships viii In Pursuit of Deeper Impact

Mobilizing Capital for Social Equity

Arriving at one goal is the starting point to another. ▶ John Dewey

s the impact investing field has evolved, so too has the understanding of the profound possibilities for social change that can occur whenA the tools and power of finance are brought to bear on social issues. Whether we look at capital markets responding to external pressures to decrease carbon emissions, or corporations’ efforts to develop sustainable methods for increasing global food supply and reducing famine, or companies developing life-saving vaccinations, the list of positive social impacts that have resulted from impact investing is long and is growing longer by the day. Impact investors should (and often do) celebrate the significant and meaningful social change that the field has created. Despite its successes, however, the impact investing field has not adequately focused on a critical component of impact: promoting social equity.

As many resources have document- where social returns are a goal but ed [1] , investment strategies exist are often subordinate to achieving on a continuum from traditional financial returns. If the next gen- investment where social returns eration of impact investing is to are not a goal, to philanthropy, meaningfully pursue both financial where social returns are paramount returns and social equity, then the and financial returns are gained impact investment field will need to through a one-time tax deduction. give far greater attention to invest- Impact investing generally falls ing in social equity in communities, in the middle of this continuum, when social equity is defined as

2 fair access to livelihood, education, and resources; full participation in the political and cultural life of the community; and self-determination in meeting fundamental needs of the beneficiary community[2].

As compared to impact investing for social equity, conventional impact investment practices often fail to incorporate an analysis of the root causes of inequality. They also tend to favor transactional investments that achieve a certain social or environmental output, e.g. increased water efficiency, which may or may not result in transformational social or economic change. Moreover, as we will explore in some detail, the investment process often privileges the needs of investors over the needs of the communities in which investments are made, resulting in lost potential for achieving both social and financial impact. In short, we maintain that Impact investing for social equity investors have significant unmet potential is defined as investments that to find solutions to some of the most signif- are made with the intention of icant social and economic challenges of our times using impact investments that focus achieving financial and social on social equity. returns that result in fair access to livelihood, education, and Dr. Sara Minard and Jed Emerson make the case for socially equitable impact resources; full participation investing and begin to tackle some of these in the political, economic and challenging but critical questions in their cultural life of the community; recent publication, Doing Justice to Impact, and self-determination in Exploring the Interplay Between Wealth Creation, Impact Investing and Social Justice, meeting the fundamental needs in which they reference the work of Robert J. of the beneficiary community. Schiller[3]:

“A significant responsibility, therefore, as impact investors—and everyone is some form of investor—is to use our moral imagination to renew faith in the private sector and financial markets as reliable, values-based vehicles to help people find

3 meaning and a larger social purpose in the The paper is divided into three sections fol- economic system. Our larger challenge is lowed by conclusions and recommendations. also to redefine the role of the private sector in making markets more just by making The sections cover the following topics: them function in pursuit of the most noble interests of society. How do we, then, use the Section 1 Socially Equitable Investing current quest for more effective monitoring Understanding the practice of impact and measuring of impact from both the investing for social equity including investor and the enterprise to encourage examples of specific tools and investment more serious discussions—and ultimately, strategies, as well as an overview of movement toward—the attainment of factors that are important in a risk/return greater social and environmental justice?”[4] analysis of impact investing for social equity. In this paper, we will build on Minard and Emerson’s work, as well as the important Section 2 Investment Theses work done by others in the impact investing Analysis of social equity impact in- arena, to provide an applied understanding vestment theses to inform investment of impact investing for social equity. We will strategy. also consider the key barriers to investing for social equity, including: Section 3 Engaging Beneficiaries in the Investment Process ££ A narrow understanding of the factors Awareness of the benefits of engaging that influence systemic social and beneficiaries in the investment process economic problems; and when and how investors can support deeper beneficiary engagement in order ££ An unwillingness to reconsider the to achieve more socially equitable out- interplay between risk, return, and time comes. horizon in an investment context; Together, these sections serve as a challenge ££ An investor class that often assumes to the impact investing community to deep- that it knows what is best for a commu- en its efforts to find solutions to some of the nity rather than engaging the communi- most significant social and economic chal- ties it purports to influence. lenges of our times using impact investments that focus on social equity.

The term beneficiary is used throughout this paper to refer to the communities and individuals whom a socially equitable investment is purportedly seeking to benefit. Beneficiary engagement is used to describe an array of possible strategies that engage beneficiaries in the investment process.

4 A Note on Methodology

This report was developed after an extensive review of dozens of resources related to impact investing and social equity. More than 30 leaders in the impact investing field were also interviewed for the research, including leaders from the five organizations that are profiled throughout the document. (Please see Appendix A for a list of interviewees.) The organizations that are profiled were selected because of their commitment to making impact investments that result in socially equitable outcomes as well as financial returns. All of the organizations that are profiled also actively engage beneficiaries in the investment process and illustrate the potential for other funds and investors to do the same.

Note: This paper principally addresses socially equitable impact investing in the United States, though examples of international funds and investments are presented so that readers can learn from relevant experiences of international investors.

Background

The tensions we find in the impact investing accumulated. Minard and Emerson maintain field are not new. According to Antony Bugg- that investors who “assume capital is simply Levine, one of the pioneers of the movement, a neutral resource” actually “shield” them- “In 2007, when we (the Rockefeller Foun- selves from “the realities of modern finance.” dation) convened the meeting in which we They posit that current investments (even coined the phrase impact investing, what impact investments) are most fundamentally was clear is that there were people in that extractive in nature—meaning that they take meeting who were coming from two camps out more value (for the investor) than they regarding social justice. One group was add to a community—and thus compound focused on investments that would unlock rather than combat social and environmental more capital to be applied to businesses and injustices. These investments sometimes organizations whose activities could provide inadvertently perpetuate inequities that they capital for low-income communities and are trying to address. As Minard and Emerson other beneficiaries.” But a second smaller, argue, “By operating without a justice and pioneering camp, Bugg-Levine states, was equity lens, our economic system has largely not “just concerned about impact investing contributed to—if not created—many of the but also about radically transforming capital- exact challenges impact investors and invest- ism itself.” ees are organizing themselves to address.” They further maintain that, “asset owners Many thought-leaders, most notably Minard have and do benefit from systemic inequities and Emerson, have since argued that those in the aggregation of the capital they now with access to capital have a responsibility seek to manage with the intentionality of to examine the process by which wealth is creating positive impact.”[5]

5 “Current investments (even Fortunately for those concerned impact investments) are with social equity, a growing body fundamentally extractive of practice by social equity impact investors, comprised of individual in nature—meaning that investors, family offices (entities they take out more value established by wealthy families to (for the investor) than they manage their wealth and provide services to family members)[6], add to a community—and foundations, and other leaders in thus compound rather the field, indicates that there are than combat social and opportunities to halt the deeply environmental injustices.” negative impacts that have resulted from financial investments. By fo- ▶ Jed Emerson and Dr. Sarah Minard, cusing on and showing the potential Doing Justice to Impact, of socially equitable investments, Exploring the Interplay the impact investment community between Wealth Creation, can help extricate investors from a Impact Investing, and Social Justice perpetual cycle of asset building for some and asset depletion for others.[7] Specifically, the next generation of impact investors can lead the way in improving the investment system and in promoting social equity through investing that is based on principles “I am the eternal optimist. of non-extraction and beneficiary Thirty years ago, ESG engagement. (environmental, social, governance) was completely radical. It’s considered very boring now—in a good way, since it’s become such common practice! My objective is to be boring in 30 years.” ▶ Morgan Simon, Managing Director, Pi Investments

6 Socially Equitable Investing

Infinite growth of material consumption in a finite world is an impossibility. ▶ E. F. Schumacher

ocially equitable investing is based on the premise that investment decisions are made with the intention of achieving financial andS social returns resulting in fair access to livelihood, education, and resources; full participation in the political, economic, and cultural life of the community; and self-determination in meeting the fundamental needs of the beneficiary community. It also embraces a different understanding of value—one rooted in processes of creating social change that address complex social and environmental challenges as determined by beneficiaries and communities, rather than by investors. While it aspires to generate financial returns, it also means the investment is non-extractive and that both financial and social returns should meaningfully benefit investees, their communities, and society.

7 The achievement of socially equitable 3. Share more risk with the beneficiaries outcomes through impact investment is of investments; predicated on the notion that investors: 4. Rethink the investment time horizon 1. Reevaluate expectations for compa- and liquidity expectations; rable levels of risk, return, and time- frame for individual investments, 5. Develop investment theses with social irrespective of social impact goals;[*][8] equity as the main driver;

2. Align philanthropic capital with 6. Engage beneficiaries in the investment for-profit capital; process.

* Note that issues of risk, return, and liquidity can and should Each of these points will be explored in be addressed at a portfolio level as well as at an individual investment level greater detail below.

Expectations for Comparable Levels of Risk, Return, and Time frame

Before we explore this topic in depth, it is impact investing field are actively seeking important to state for the record that within to articulate a more nuanced understanding defined asset classes (equity, debt, fixed -in of impact. Impact investors who want to go come, alternative investments) it is possible beyond ESG to achieve greater social equity to make impact investments that provide fi- should anticipate making investments where: nancial returns comparable to those achieved in traditional capital markets. Numerous ££ Financial returns are expected; studies have compared financial returns from conventional impact investments and other ££ Depending on the type of investment investments within the same asset class. (where, for whom, to do what), financial When Environmental/Social/Governance returns may outperform their bench- (ESG) factors are used as the determinants of marks, be equivalent to their bench- social impact, impact investments frequently marks, or, may provide a lower rate of generate equal or greater financial returns.[9] return;

After years of documenting that impact ££ Social returns are valued as much as or investing is a legitimate and competitive more than financial returns; way to invest, however, many leaders in the

“If you’re saying you don’t ever have to compromise financial returns, you’re still looking at the model as it is now.” ▶ Regan Pritzker, Trustee, Libra Foundation

8 ££ Investments do not extract more value “In a certain sense, impact investing aims from the investee than is provided to make money roll uphill, to serve people through the investment. that conventional markets leave behind. In our system, rich people with resources get In short, investors trying to address some of served, because it’s profitable to serve them. the most intractable and complex social and When you ask the question ‘what does it take economic issues in society should not always to serve people who don’t have resources?’ expect that they will be able to have the the answer is that it usually takes an extra same portfolio construction, with the same something and somebody pays for that. levels of risk and projected financial returns, Either they pay for it in the transaction costs as they would in a traditional investment of complex deals, or there’s a need to obtain paradigm. Investors should be clear that en- subsidies, so a private investor gets his or trenched social and economic challenges are her desired level of returns and someone else difficult and tackling these challenges may pays for it, or the investor takes a lower rate require a rebalancing of investors’ portfolios of return or a higher level of risk. But there and expectations for returns.[10] Robin Hacke, are often additional costs or risks involved in Senior Fellow at the Kresge Foundation, serving low-income folks. And that is socially describes the challenge this way: valuable, and should be done, but it doesn’t mean it doesn’t have a cost.”

Aligning Philanthropic and For-profit Capital

By using multiple types of capital and an which has led to a deeper examination by array of strategies, instruments, and funds foundations of how various forms of capital that generate a variety of financial and social can be strategically deployed to achieve returns, investors can move toward achieving specific outcomes, including socially equita- greater impact. When an investor’s goals ble outcomes. These efforts, as well as those include achieving greater social equity, the of a considerable number of family offices necessity of using an aligned approach to and high net worth individuals, show how capital deployment is perhaps even greater.[11] various asset classes, including cash, fixed income, public equity, private equity, and In recent years, innovative grantmakers and alternatives, all have the potential to achieve social equity impact investors have explored socially equitable outcomes alongside phil- how they can align different types of capital anthropic investment.[12] to achieve socially equitable outcomes. Historically, many foundations have made program related investments (PRIs) using capital from their grantmaking funds to achieve programmatic objectives. More recently, though, a small number of pioneering foundations have started making mission-related investments from their endowments,

9 Ford Foundation Solving Problems with Multiple Capital Types One of the country’s largest foundations, the Ford Foundation, has been investing in program related investments (PRIs) for almost 50 years and recently began exploring the possibilities of investing across asset classes within their endowment. Senior Program In- vestment Officer Christine Looney, a relative veteran in the impact investing arena, says that at Ford, “We benefit from the use of grants and program related investments to advance our programmatic goals. We continue to iterate on blending capital to ensure that when we use subsidy, if applicable, we do so in a manner that efficiently and effectively addresses market gaps and leverages other investors. The goal is to crowd in versus crowd out investors, in an effort to contribute to long-term investment solutions to social challenges.

As we are increasingly seeing, opportunities abound for using philanthropic capital (which provides most investors with a one-time 40 percent upfront tax deduction) together with other capital that provides financial returns. For example, in the impact investing space, philanthropic capital is often used to:

££ Incentivize market-rate investors by ££ Fund beneficiary engagement efforts to providing credit enhancement for ensure community voice is active in the investees with limited credit, such as by investment process; providing a loan guarantee; ££ Provide funding for nonprofits to ££ Underwrite investments with lower ex- provide supportive services that com- pectations for return in order to leverage plement for-profit investment, e.g. more market-rate investment; childcare services co-located within an affordable housing development.[13] ££ Pay for capacity building to ensure the long-term health and viability of the Thousand Currents (formerly known as investment; IDEX), provides an interesting example of a public grantmaking foundation that ££ Underwrite pre-development costs for understands there is a need and a market for complex deals; investors who want to make impact investments that complements their grantmaking. ££ Support research and development for The result is a new investment fund called new innovations in the field, such as the Buen Vivir Fund. pay-for-success initiatives or regional community development funds;

10 Social Equity Fund Profile

Thousand Currents’ Buen Vivir Fund

Inception: 2016 Asset class: Debt Open to investment: Open to investment at the end of the current pilot phase Investment size: Currently $125,000 for pilot phase/founding investor circle. Minimum threshold may be lowered for future/post-pilot investments. Focus: Global South*; in the future, likely also will include the United States Democratic governance: Investee-led design and decision-making; potential peer evaluation of investments

The Buen Vivir Fund, an initiative of 3 Limited investment models and Thousand Currents (formerly IDEX), terms. lends to grassroots enterprises in the Global South. Based on the concept of The Fund’s goals are to direct invest- buen vivir—which comes from Latin ments to innovative grassroots economic American indigenous movements and initiatives advancing food sovereignty, implies “right living” or life in balance climate resilience, and alternative with community, natural systems, and economy, and to influence broader future generations, the Fund seeks to investment practices by demonstrating promote financial models and practices the potential of non-extractive and that support communities’ holistic transformative approaches to finance. well-being, as opposed to focusing solely on maximizing individuals’ capital Rather than imposing terms and accumulation. In launching Buen Vivir, models designed by investors, the Buen Thousand Currents’ leaders committed Vivir Fund aims to flip this traditional to avoiding the shortcomings in impact approach on its head: The Fund’s invest- investing that their research and experi- ment model is built upon identifying ence indicated was endemic: lending practices developed by grassroots groups themselves and which are 1 A lack of beneficiary voices in already proving effective on the ground, investments’ design; and to uplift and apply these practices to the level of a global investment fund. 2 Undue pressure on revenue genera- In its pilot phase, the Buen Vivir Fund tion; and, is bringing together a “founding circle” of 8 investors and 12 grassroots groups * The Global South refers collectively to countries in Latin America, Africa, and much of Asia. with which Thousand Currents—a leader

11 in innovative, grassroots philanthro- including the U.S., and to make invest- py—has long-standing relationships. ments available to individual and insti- This founding group is working together tutional investors with a more accessible to design the terms, governance, and minimum investment (ideally $30,000) practices of the Buen Vivir Fund—includ- than its founding circle requirements. ing for learning and capacity building among both investors and investees. Over the next few years, the Buen The Fund will then implement this Vivir Fund intends to develop multiple model and begin deploying investment member funds, designed and governed to the founding cohort of investees. The by regional and local partners, which criteria for this initial cohort of invest- will invest in communities. The Fund ees include a track record of economic also emphasizes the co-creation of success that supports communities’ investment models and terms. Leaders buen vivir, demonstrated work on new are now engaged in a “deep dive” into economic models, and a commitment to investment models, including analyzing learning and knowledge exchange. The practices of innovative investment funds first twelve investments will provide and grassroots enterprises to determine capital to groups in Guatemala, India, deal processes and terms. Fund leaders Mexico, Nepal, and South Africa, many also are committed to knowledge of which are women-led and focused on sharing as an important component of sustainable agriculture. Fund leaders in- the Fund’s structure and measurement tend to couple some of the investments strategy. They intend to encourage with Thousand Currents’ grantmaking, peer learning by having enterprises thereby supporting capacity building in share their experiences and insights promising initiatives seeking loans. Buen with other groups. They also anticipate Vivir’s leaders believe its connection evaluating enterprises’ financial and to Thousand Currents’ grantees and social returns through indicators and partners gives it a comparative advan- possibly through peer evaluation. Buen tage in ensuring a robust pipeline. As Vivir’s leaders believe the focus on Joanna Levitt Cea, Thousand Currents knowledge exchange has made the Fund Special Funds Director, explained, “Our attractive for investors and investees. As partners are so deeply networked in the Joanna Levitt Cea observed, “We think regions in which we work that they are there is a great hunger throughout the able to surface opportunities that would system for people, both investors and never come on the radar otherwise.” In grassroots individuals, to be involved in the future, Fund leaders also hope to more creative capacities.” invest in enterprises in the Global North,

12 Women’s Awareness Centre Nepal

One of the Buen Vivir Fund’s first community-based development investees will be the Women Aware- activities and loans for children’s ness Centre Nepal (WACN). WACN healthcare and education. WACN is a network of savings-and-loan has developed a comprehensive cooperatives in Nepal, managed “need-based” methodology for by women, that seeks to alleviate selecting communities for new poverty and to empower rural cooperatives, as well as for em- women and children. A Thousand powering communities’ ownership Currents’ partner since 2004, WACN and implementation of the project. provides loans to members for land Today, WACN includes over 35,000 leasing, micro-enterprise, live- women members and 42 coopera- stock-raising, and other activities tives circulating $4 million. that create income. It also supports

Individual investors and family offices Some of the greatest innovations in im- interested in socially equitable impact pact investing have come from individual investing can increasingly take advantage investors, family offices, and leaders in of opportunities to co-invest with founda- philanthropy who have been determined to tions, especially community foundations. find new ways of aligning capital to achieve Grantmaking foundations bring to the table social change. Their determination to find infrastructure and experience in mis- new methodologies often results from years sion-driven engagement that can ameliorate of experience trying to make change only some of the challenges described above with grant dollars and an acute awareness of when paired with financial investment. the challenges of addressing systemic issues Advantages of co-investment include such as poverty. Regan Pritzker, a trustee of capitalizing on foundations’ expertise and the Libra Foundation, sums it up this way: professional staff; connecting with local communities; spreading risk among multiple “There’s still a huge need for grant dollars investors; leveraging resources to make to build out the ecosystem. Unfortunately greater change; and more. Co-investment we live in a world where the communities particularly makes sense when trying to that most need opportunities to rebuild affect changes at scale or when engaging in their economic infrastructure are deeply complex transactions where capital must and structurally disadvantaged. So there’s a be layered in order to maximize all forms of need to work in partnership as grantmakers available capital and meet the risk/return with communities with social value, where needs of multiple donors. Please see Sidebar there are strong grassroots organizations on Regional Funds, page 16 but they are capital poor.”

13 Focused Regional Funds Investing in Community Infrastructure In most regions of the United professionals overseeing due homes and 100,000 square States, the costs of affordable diligence and deal structuring. feet of community space at 13 housing and other critical Through these funds, individu- transit-accessible properties community development al investments also go further, across the Metro Denver projects are skyrocketing, as they can be leveraged, often region. Investors in the fund and the supply of available by a mix of other investors, include banks, foundations, community-focused capital to including banks, government and municipal government. invest is far outweighed by the entities, and foundations. The fund was initially capi- demand. In response, pio- Investors in regional funds talized by local and national neering investors are coming usually have the added foundations who made below together to maximize human security of loan guarantees or market rate investments given and financial resources to sup- similar mechanisms to limit the importance of the issue in port socially equitable impact their financial risk. the region and the opportunity at a local and regional level. it would provide to leverage Rather than individuals seek- One such fund is the Denver additional capital from other ing out and managing distinct Transit Oriented Development investors. projects, regional funds offer Fund, which has provided investors the opportunity to nearly $20 million for the pool capital around a shared creation or preservation of vision, with experienced more than 1,100 affordable

Sharing Risk

Most investment professionals strive to and rebalancing who bears the brunt when expertly manage risk. Calculating risk and investments go awry. Simply put, when eco- figuring out how to minimize financial and nomically or socially marginalized commu- other forms of exposure while maximizing nities are involved, the investor community returns for the investor is part of the pre- ought to take on more risk, because a failed dominant investment paradigm. In a socially investment can have disastrous impacts on equitable investing paradigm, though, inves- communities that have little capacity to tors must ask whether traditional approaches absorb the fall-out from a failed investment. to risk management are appropriate. If the Armeni makes the case eloquently: investor is not taking on the risk, then who is? Andrea Armeni, Executive Director of “We often find that investors are far more Transform Finance, and Morgan Simon, sophisticated in calculating and minimizing Chair and Co-founder of Transform Finance risk than communities are. Yet, communities and Managing Director of Pi Investments, stand to lose far more than investors do have asked this question for years. They if things don’t go as planned. In a failed make the persuasive argument that socially project, chances are an investor will still equitable investing requires reevaluating the have a roof over his / her head, and a job relationship between investor and investee, the next day. A community may suffer much

14 more, not only in terms of resourc- The es but also in terms of opportunity Bill & Melinda Gates cost over alternatives it could have Foundation pursued.” [14]

To be sure, risk analyses are essential and should not be downplayed— rather, the calculation of risk needs to be determined according not An Approach to only to the investors’ needs but also Assessing Risk the investees’ circumstances. As In the philanthropic community, discussed previously, on a broader where program related investments scale, financial and social risk can (PRIs) are often used as a tool for also be managed through co-invest- investment, some grantmakers have ment with philanthropy and across been experimenting with balancing financial risks with social returns and asset classes so that investors with a sharing the risks with grantees. In a higher degree of commitment to so- recent article in the Stanford Social cial equity can underwrite individ- Innovation Review (Summer 2016), ual deals or groups of deals through Paul Brest reports on the Bill and funds and allow other investors with Melinda Gates Foundation’s approach more limited risk tolerance to also to calculating risk with PRIs. Gates support a deal or group of deals. considers traditional investment factors such as competitive market environment, regulatory issues, etc., The Working World is a U.S.-based but also considers the likelihood organization that invests in collec- that a project will meet social impact tively owned and managed enter- goals. If the risks of failure are high prises in low-income neighborhoods and the likelihood of repayment is in targeted regions globally. Their relatively low, Gates has the option to investment structure, where capital use a blend of grant capital with pro- will be repaid only when the invest- gram related investment (PRI) capital because only using PRI capital would ment profit is deemed successful by mean that the investee must pay back investors and investees, exemplifies capital and interest regardless of the a model of shared risk-taking. It also outcomes of the project. Gates calls speaks to the value of establishing this “RiskShare” because this allows relationships with the investees them to “share” the risk within the that lead to more honesty and joint foundation’s own stakeholders—their problem solving when confronting investment staff as well as their program staff—as well as with their execution challenges. investees. In the case of an investment with a high social equity goal and a greater risk of low financial returns, sharing the risk among the internal and external stakeholders allows for more responsible investing.

15 Social Equity Fund Profile

The Working World

Inception: 2005 (Argentina fund); 2008 (Nicaragua fund); 2012 (New York fund) Asset class: Debt Open to Investment: Yes; all funds currently open to investment and all are in a capital building phase Investment size: $100,000, though potential opportunities for lower investments Focus: Argentina, Nicaragua, and New York Democratic governance: Co-design of investment and commitment to local control

The Working World seeks to advance also maintain that local control and non-extractive and democratically decision-making are key elements of controlled investments in Argentina, non-extraction. As founder Brendan Nicaragua, and New York. Through Martin explains, “Non-extraction is not pooled investments to its three separate just about ensuring that more profit and locally-controlled loan funds, The stays within a community, it is about Working World supports collectively maintaining local control of decisions, owned and managed enterprises (or so that it is a community who can decide those wanting to become democratically on trade-offs between cost-cutting and owned) in low-income neighborhoods. other impacts, such as local pollution Since its inception, The Working World or worker safety.” The Working World has directed millions of dollars to over co-designs all projects directly with 200 businesses with a 98% repayment investees and establishes the investees rate. The Working World offers invest- as the decision-makers for the projects’ ments with fixed-rate returns (2%), as implementation. well as floating-rate returns (with projected returns of 4% and higher). According to The Working World leaders, this non-extractive, grassroots The principles of non-extraction, radical approach is a critical part of Working inclusion, and democratic control under- World’s success. Martin notes that it pin all aspects of The Working World’s helps to ensure that “motivated people approach. It applies deal terms that are inside of the project want to make sure explicitly non-extractive: The Working the project succeeds.” It also changes World requires payment only when the investor-investee relationship and enterprises start to generate a profit, it minimizes risk: Martin notes that be- establishes a ceiling for profit-sharing cause investees know that The Working based on the amount of its investment, World will not get paid unless the project and it eschews traditional forms of succeeds, they view The Working World collateral. The Working World leaders as “on their side” and frequently contact

16 fund leaders for advice and technical principles in a way that utilizes on-the- assistance. ground knowledge and local relationships of its peers, while also aggregating The Working World recently launched a small investments so they can compete network of locally-controlled funds fo- with large funds in capital markets. cused on worker and community-owned In tandem with the Cooperative is a enterprises in the United States. The peer network, in which members share goal of this financial cooperative is to knowledge and experiences. expand The Working World’s model and

17 Investment Time Horizon

When moving from more conventional termination in meeting the fundamental investing to socially equitable impact in- needs of the beneficiary community typically vesting, it is likely that investors will need to has additional layers of complexity than does modify their expectations regarding the time developing a product and taking it to market. horizon in which they will assess impact, Numerous factors influence the time-frame based on the specific social impacts they are in which socially equitable outcomes are seeking. As the philanthropic community achieved. Many of these factors also influ- has learned, sometimes the hard way, social ence how profit-first investments progress, change takes time. Addressing fair access but the degree to which they influence the to livelihood, education, and resources; full pace of progress may be drastically different participation in the political, economic, and depending on the nature of the investment. cultural life of the community; and self-de-

Figure 1: Factors Influencing Pace Of Progress of Investments

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uimn nmn inmnui example i nmn n

Business model and profit Profit potential greater and sooner with higher-income ni i example num m i n i financial returns)

n inii example in in uin iii inmi iu

in n i in n inin in n inu example n u ui i in i

i example u inmn i

18 In figure 2 we look at a few examples of how the nature of an investment might affect the investment time horizon.

Figure 2: Time Frame From Inception Of Company To Payout To Investors

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m iin i ui nmn M

m i ni i ui nmn i m u nm

m i ni i ui nm nmn i i ui u

m uin nmn i i ui u

A C D ew product developed ew product developed ew product ffordable housing by experienced by new for-profit social addressing unmet need proect with social company selling to enterprise with in low-income services in a established market high-uality obs focus community with low-income seeking to bring minimal disposable neighborhood near environmentally income being transit that is at risk beneficial product to developed by relatively for gentrification and established market inexperienced needs private capital to for-profit social supplement tax credits venture company and government financing

In each of these scenarios there are examples of shorter or longer-term investment opportunities. In general, however, the more significant the social equity goals one is trying to affect, the harder and longer it will take to achieve success.

Furthermore, depending on the field in which one is working, investees may need a longer runway to prepare to receive an investment. For example, start-up enterprises in regions that have been chronically under capitalized, such as the rural South, have less access to technical assistance and venture capital compared to well-resourced companies located in

19 “When it comes to affordable housing, economically prosperous regions the number one challenge is duration. such as Silicon Valley or New York. The number two challenge is duration. Thus, potential investees may need significant support and assistance Our biggest need is 15-year money. before they are ready to bring a via- While we are usually able to access ble product or service to market. As low-cost capital from our financial Marnie Thompson from the South- ern Reparations Loan Fund (SRLF), partners, the terms are usually short, which invests in under-served just a few years in duration. One communities in the U.S. South percent money for 15 years would through loans to coopera- change the entire way we approach tively-owned enterprises, notes, SRLF has encountered an unex- affordable housing in the region..” pected challenge since the Fund’s ▶ Melinda Pollack, Vice President and Denver Market launch: finding suitable projects. Leader, Enterprise Community Partners Thompson describes “the thinness of the pipeline,” which she believes reflects the “weak economic development in these communities.” While SRLF wants to give more loans, it is trying to learn from other funds’ mistakes and “not jump the gun by giving loans before projects are ready.” SRFL is working with local partners to identify possible investments and to provide technical assistance to make them investment-ready. (For more information on SRLF, see profile on page 41.)

20 Investment Theses

The proxies we use for social equity don’t communicate a lot Investment about long-term positive impact. Theses ▶ Will Morgan, Senior Impact Analyst at Sonen Capital

In the traditional investment field, investment decisions are driven by he process of determining a good investors’ financial ob- investment strategy and measure- jectives. In the majority of impact investments, deci- ments of success within socially sions are driven by inves- equitableT investing can be daunting. tors’ financial objectives and the attainment of desired outputs (defined as the However, by engaging with beneficiary communities amount of something that and studying the root causes of complex social and is produced by a person or economic problems, investors can unpack the variables thing). In socially equitable that affect whether a desired goal is achievable and investing, the investments home in on the most appropriate interventions to are driven by the attain- support and the most appropriate capital forms to ment of outcomes (defined use to achieve these goals. Furthermore, articulating as something that happens as a result of an activity assumptions about the change process makes explicit or process) that result in what is often only implicitly understood by some and fair access to livelihood, often not actually agreed upon by stakeholders other education, and resources; than those who control the resources. Elucidating the full participation in the assumptions that are being made also illuminates the political, economic and financial and social value trade-offs that investors cultural life of the commu- may be making, which is ultimately positive for the nity; and self-determination beneficiaries and the investors. David Wood, Director in meeting the fundamental needs of the beneficiary of the Institute for Responsible Investment at Harvard community. University says, “Focusing on social equity makes you think about what investments do in the world, how they affect people. It raises the ethical stakes for investors, by requiring them to think about more than just what are sound long-term strategies that take ESG

21 issues into account—taking framework can be useful to work can also help investors equity seriously means impact investors who are identify the most appropriate thinking about their positive interested in social equity as type of capital to use in and negative impacts on they navigate the somewhat various circumstances in others.” As we will see, challenging endeavor of order to achieve their stated articulating and evaluating identifying value within their investment outcomes. social change using a investment portfolio. In the modified “theory of change” best of worlds, such a frame-

Learning from Philanthropic Theories of Change

As most philanthropists who inequalities has not been what causes the issues they have tried to tackle complex addressed and the changes are dealing with. It is this social problems will admit, are not likely to have lasting type of thinking—rooted in a the pursuit of social change effects on a broader scale. desire to do more—that has is difficult and achieving To date, most philanthropy caused many foundations to ultimate outcomes can be has been organized around develop theories of change, elusive. There is almost supporting smaller inter- a framework that articulates always a dynamic and chal- ventions with incremental the desired change they are lenging path between the and measurable impacts. seeking in the long term, good intention and the in- While this mode of providing the benchmarks they would tended outcome. As a result, service-oriented grants does hope to achieve along the a great deal of philanthropy make a difference, after a road to making change, and understandably focuses on while, many donors and the various activities and charity not social change. philanthropies often begin resources that are needed to For many donors, providing asking if they could be doing achieve their goals. financial support for direct more to achieve the change services is sufficiently that they are seeking. Some rewarding and the benefits wonder, why should they are measurable. For example, continue to provide funding if a donor supports an af- to address the fall-out of ter-school tutoring program fundamentally flawed sys- and the grades of the stu- tems, instead of interrupting dents who are tutored rise, and improving the systems the donor can take personal to begin with? This level of satisfaction in knowing that inquiry has caused many s/he made a positive differ- grantmakers to develop ence. However, in this case, strategies that are informed the structure of educational by a deep understanding of

22 Socially Equitable Impact Theses

As with many individual philanthropists, making things better for the farmers on the for many impact investors, identifying and ground? And how would an investor know investing in projects that lead to socially- or without understanding the larger issues that environmentally-desirable outputs that created the low yields in the first place, as can be achieved through the creation of well as understanding the economic forces products and services has been sufficient. that minimize profitability for these farm- For example, an impact investment that puts ers? Socially equitable impact investments new technologies into the hands of farmers should be driven by an investment thesis that in emerging markets and thereby increases articulates the broader context surrounding their production yields seems worthwhile an investment and an understanding of and satisfying. If one can do this at the same the factors that truly influence how change time as making a financial return, that must happens. be even better. But what if it isn’t actually

Figure 3: Simplified Socially Equitable Investment Theory Of Change

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um n Outputs are the Activities are the things Inputs are the tangible the identiﬁable measurable results that must be done in resources, such as long-term change that are prioritized order to achieve the ﬁnancial capital, that can that is being sought. and deemed outputs. be deployed to essential to accomplish the activities. achieving the desired outcomes.

This simplified model of a socially equitable investment theory of change begins with ‘outcomes’ on the left-hand side rather than the normative approach of starting with ‘inputs’ in order to show that inputs (e.g. types of capital) are subordinate to the desired change.

Using the example of a social equity impact investment thesis designed to create lasting economic opportunity for low-income women in the rural South, a specific investment thesis might look as follows in figure 4.

23 Figure 4: Sample Socially Equitable Investment Theory Of Change

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um uu iii nu

mnn u mn i mn uin inu Minimum i n in mnn i ui i mmn uin mnn uin mn i iin n in i n i u i in uin i i in i ui i uiin n mii i childcare nonproﬁts iin iniii M inuin

Developing an investment thesis with social financial objectives can be achieved within equity as the primary driver fundamentally it. It also results in a better understanding alters the logic of how and what decisions of the appropriate types of capital to use are made. In the example above, investment under various circumstances. In other words, capital is a tool toward achieving a specific the investors’ behavior is determined by end with specific, measurable outputs the change they are seeking to accomplish, and outcomes. Starting with this kind of instead of by what kind of social change they framework allows investors to understand can support through the process of making the change process and then decide if their money.

Evaluation of Social Equity

The conundrum of how to measure the ef- from impact investments. For example, fects of an investment or set of investments how many small farmers are employed by has alienated multitudes of potential impact a sustainable agriculture investment? Or investors who simply do not feel comfortable how many tons of greenhouse gas emissions with the complexities of measuring social are offset by a particular green technology change. To address this challenge and to be- investment? These efforts are enormously gin creating an industry-wide taxonomy and important and have been fundamental in the set of quantitative measurements, various advancement of the impact investing field. efforts have been initiated, most notably the However, as many impact investing profes- Impact Reporting and Investment Standards sionals will confirm, measuring outputs does (IRIS), [15] which measures outputs that result not necessarily lead to an understanding of

24 whether true social equity is advanced. Will While there are significant challenges in Morgan, Senior Impact Analyst at Sonen measuring social equity and the even bigger Capital says, “Things like asset building, challenge of addressing causal effects of job creation, and repayment rates are good individual investments, hope should not be proxies to look at program efficacy, but we lost. In many instances, outputs can be mean- don’t know if it means your life is any better. ingfully used as proxies for social change. The proxies we use for social equity don’t As the industry evolves, improvements will communicate a lot about long-term positive likely be made in the precision with which impact.” we can correlate outputs and long-term outcomes. In the meantime, a key element of Moreover, most of the existing measurements evaluating success may come from beneficia- do not account for disparate impacts that ry engagement (discussed below). As much often are not easily measurable. “Disparate as or even more than quantitative data, the impact” refers to policies, practices, rules, perspectives and lived experiences of affected or other systems that appear to be neutral, communities can help investors understand but result in a disproportionately negative whether they are having a positive impact. impact on communities. For example, one With a little patience and willingness to lead might develop a social equity investment in new territory, investors can make a signif- thesis that is focused on improving access to icant difference in how the field understands opportunities for low-income communities the process of creating and evaluating change and thus invest in infrastructure improve- and where to go next. ments to enhance mobility across a region. In this instance, desired outputs might include developing public transit stations in low-income neighborhoods and increasing highway access to improve mobility for low-income communities. At face value, these would be laudable achievements. However, as former Ford Foundation program officer Lisa Davis notes when talking about the issue:

“A concept that’s important, but hard for people to understand is disparate impact. The example we always talk about is high- ways that everyone can drive on: unless you look at them from a disparate impact lens, you might not see that where they’ve bulldozed—in the name of infrastructure improvements—is having a really negative impact on a low-income community.”

25 Engaging Beneficiaries in the Investment Process

A more enlightened approach to impact investing takes the view that local communities know what they need. ▶ Fran Seegull, Chief Investment Officer and Managing Director, ImpactAssets

small group of strategic foundations has long understood the benefits of engaging end-users in the design of programs intended forA their benefit. The for-profit industry has also recently seen a wave of new research that points to a correlation between financial profits and engaging end-users in product design and marketing. However, on the whole, the impact investment field has little experience in engaging beneficiaries. This shortcom- ing is a significant barrier to the pursuit of achieving social equity through impact investing because it hinders investors’ ability to understand:

££ The real social and economic issues and opportunities affecting people and communities;

££ Contextual factors that may influence the ability to make social and economic change and an understanding of the real risks involved with an investment;

££ Whether their investments are actually resulting in the intended impacts that they were designed to achieve.

26 Though it may seem obvious that engaging especially within the context of the United the beneficiaries of an investment would in- States. “It’s a major challenge and a nut that crease the likelihood of positive financial and hasn’t been cracked,” notes Morgan Simon of social impacts, there is a woeful absence of Pi Investments. The challenge for the impact the practice in the impact investing industry. investing field, then, is to better understand In fact, many leaders in the impact investing why the practice is not better employed field were flummoxed when, as part of the and to innovate around new methods for research for this paper, they were asked to engaging beneficiaries in impact investing provide examples of impact investing that for social equity. actively engages the beneficiary community,

Beneficiary Engagement in the Process of Co-Determining Value

The foundational work of Jed Emerson in co-determinant of value—requires engaging his 2003 essay entitled “The Blended Value those beneficiaries in a manner similar Proposition: Integrating Social and Financial to how nonprofits and foundations have Returns” [16], and the subsequent work of attempted to engage end-users of social Michael Porter and Mark Kramer, Creating service programs or that for-profit compa- Shared Value[17] illuminate how value nies have attempted to assess value for their creation is inherently different in impact customers. investing compared to traditional investing. Porter and Kramer write: “Shared value can The fact is, however, that the vast majority be defined as policies and operating prac- of decisions related to impact investments tices that enhance the competitiveness of a are made without the active engagement of company while simultaneously advancing the beneficiaries. To be fair, there are many the economic and social conditions in the legitimate reasons for this gap. For one, if it communities in which it operates.” In their is not a familiar practice, figuring out how framework, increased societal value leads to to engage beneficiaries at the appropriate increased economic value. “By better con- time and at the appropriate level can necting companies’ successes with societal seem unnecessarily costly and inefficient. improvement, it opens up many ways to Second, impact investing is still new to serve new needs, gain efficiency, create most investors, and sorting through the differential, and expand markets.” [18] relationship between financial returns and social returns requires a fundamental shift In a social equity framework, value is deter- in investors’ mindsets. The opposite holds mined both in terms of the financial returns true for foundations and others who have that result in addition to the social impacts approached their work from the perspective that are experienced by the ultimate ben- of social returns first—for those investors, a eficiary, as compared to being determined fundamental shift in mindset is also needed by how they impact society at large or the to incorporate financial returns and that customer. This type of understanding—with shift takes time. Optimistically, we might the ultimate beneficiary’s experience being a surmise that as for-profit centered investors

27 “Foundations have to really and social-impact centered investors become understand what alignment more comfortable with impact investing as a means—alignment doesn’t always practice, they will quickly ascertain the value in engaging beneficiaries in the investment mean it just works for you, it process. means it works for both parties that are trying to come together. Unfortunately, while some evidence exists that foundations and investors might be This is one of the problems that persuaded that beneficiary engagement will foundations are having with help them achieve their social and financial impact investing— they’re more goals, centuries of power imbalances within focused on what they need as capitalist systems between those with resources and those who are the recipients of grantmakers than what the resources shed light on the true difficulty that community needs.” may lie ahead. ▶ Dana Lanza, CEO, Confluence Philanthropy

The Historic Gulf Between Resource Holders and Recipients

The history of capitalism and philanthropy beneficiaries of its charity as passive recip- —and the intersection of the two—continues ients in need. The assumption was (and for to shape how investment decisions are made some in philanthropy, very much still is) today. On the one hand, capitalist society has that recipients of philanthropic dollars know long valued the perspectives of those with less than trustees and professional staff who access to resources over those who do not have more education and access to resources. have access to resources, as Joanna Levitt The influence of these attitudes on impact Cea and Jess Rimington, visiting scholars at investing is troubling.“Lacking any account- Stanford University’s Global Projects Center, ability to their end-users, for-impact insti- rightfully point out through their extensive tutions have not been forced to update their research with impact investors, social en- practices and thus continue to do business trepreneurs, and foundations.[19] Levitt Cea as usual,” state Levitt Cea and Rimington. and Rimington note that only recently have They go onto argue, “This implicitly biased for-profit investors realized that, through mindset prevents the sector from seeing the use of technology and other means, end-users’ valuable expertise, even though engaging end-users in the design process can the latest research demonstrates that their increase profits. Prior to the widespread use knowledge is essential for achieving quality, of design-thinking processes, the expectation innovation, and optimized returns.” was that investors and business people knew what the masses wanted. Likewise, philanthropy has historically viewed the

28 “This environment encourages for-impact practitioners to infantilize, dehumanize, ignore, and even fear its end-users— although it may do so unconsciously.” ▶ Designing with the Beneficiary: An Essential Strategy to Optimize Impact, Joanna Levitt Cea and Jess Rimington

To understand the true barriers that exist in any effort to authentically bring beneficiary voice into the investment process, contemporary issues of race and gender must be considered. We begin by looking at the financial investments industry. As attendance at virtually any gathering of investment advisors will confirm, the financial sector is dominated by white men. Despite widespread acknowledgment of the depth of the problem, 2015 data from the Bureau of Labor Statistics indicate that women still make up just 35 percent of the workforce in the investment industry, and people of color remain vastly underrepresented.

Figure 5: Employees in Finacial Investments Industry

lacfrican merican sian ispanicatino hite

Source: Bureau of Labor Statistics 2015. Includes employees working in the following areas: Securities, commodities, funds, trusts, and other financial investments.[20]

Similarly, the leadership of foundations is overwhelming white. Though 55 percent of foundation presidents are women, the majority (72 percent) of CEOs of the largest foundations in the country are men.[21] Moreover, in 2015 only eight percent of CEOs in philanthropy were people of color.

29 Figure 6: Race/Ethnicity of Foundation CEOs and Executive Staff

s Other Full-time Executive Staff

hite . hite . frican-merican . frican-merican . atino . atino . Asian-Paciﬁc Islanders . Asian-Paciﬁc Islanders . American Indian . American Indian . Bi-Multi-Racial . Bi-Multi-Racial . ther . ther .

Source: D5 Coalition, State of the Work Year 5: Stories from the Movement to Advance Diversity, Equity, and Inclusion[22]

In other words, in many cases there is a dollars from people who are different from disconnect between those who are making the investor this way: investment decisions across the impact investing arena (primarily white men) “Part of the culture of being an entrepreneur and those who are the beneficiaries of is having people who will take a risk on you investments that are supposed to lead to and invest. It’s a tall order for white guys increased social equity (often low-income with privilege to be able to summon that communities of color). At the same time, level of confidence in or identification with people with greater access to resources someone who is ‘other’ to them. So those are historically do not relate well to those who cultural, unconscious, but very real structur- have lesser access to resources because their al barriers that are part of the system.” knowledge of the experience of people who are different from them is often uninformed. In practice, the chasm between those who Yet, an unconscious assumption often exists have resources and those who are seeking among those with access to capital that they resources is especially acute for women of understand the perspectives of those who color entrepreneurs, who experience multiple have limited access to capital. Minard and forms of bias. As Weekes-Laidlow says, “Then Emerson observe that impact investing “re- there’s the issue of trying to attract invest- quires expanding the view of the other, and ments from Silicon Valley for black women developing a deeper understanding beyond founders because of the devaluation of the perception of what determines impact from worth and low expectations for what black the ground up.”[23] A poignant illustration people can do, and black women in partic- of this phenomenon is provided by Melinda ular.” Indeed, according to Project Diane, Weekes-Laidlow, the founder of Beautiful out of more than 10,000 venture deals that Ventures, a start-up social impact fund they studied that were funded from 2012 to focused on early stage creative businesses as 2014, just 24 of the startups were led by black a way to upend the root causes of racism and women. [24] especially anti-blackness. Weekes-Laidlow frames the challenge of securing investment

30 People often look to community develop- In sum, if the composition of the investor ment finance institutions (CDFIs) for leader- community is markedly different from the ship in this area because CDFIs are required communities that they are purportedly trying by law to incorporate the perspectives of to influence through impact investing and beneficiaries onto their boards. Despite the they are genuine in their desires to achieve mandate to include beneficiary voice, many financially and socially equitable outcomes, CDFIs have some distance to traverse before the imperative for figuring out how to engage they can claim victory. The regulations beneficiaries is undeniable. But is it doable? governing CDFIs only require that “An Another one of the veterans of the impact in- organization must maintain accountability vesting industry, Don Shaffer, President and to its Target Market(s)—the residents of CEO of RSF Social Finance, is direct about an Investment Area(s) and/or a Targeted the issue at-hand…but perhaps his words can Population(s)—through representation on also offer some hope for the future: its governing board and/or advisory board(s), and/or through other mechanisms such as “There are a lot of white guys in blue blazers focus groups, community meetings, and/ deciding where this money should go. On the or customer surveys.”[25] As is evident from one hand, it’s sort of sad, borderline pathetic the way the regulation is written, the actual that we haven’t made more progress, but communities served do not necessarily have on the flip-side it’s hopeful that it’s getting decision-making authority. As Antony Bugg- named more and more.” Levine, President of the Nonprofit Finance Fund and a long-time leader in the CDFI community, says:

“The CDFI community has largely been led by a technocracy, not by the communities affected. We are much whiter, more educated, more male—and that’s been a fundamentally patronizing power dynamic that doesn’t instinctively act toward aspects of social equity. So it’s a constraint and to some degree probably a blindness when coming from technocracy.”

tech·noc·ra·cy n. /tek´näkrǝsē/ The government or management of society or industry by an elite of technical experts.

31 One CDFI that has actively sought to engage the beneficiaries of their investments is South- ern Bancorp, Inc.

Social Equity Fund Profile

Southern Bancorp, Inc.

Inception: 1986 Asset class: Debt Open to investment: Yes; also launching capital building phase in 2017 Investment size: Variable Focus: Economically depressed communities in the rural U.S. mid-South Democratic governance: Board consists of community representatives; Southern Bancorp Bank maintains local advisory boards to ensure community perspectives are represented in decision-making Established in 1986, Southern Bancorp, communities, Southern plans a capital or “Southern,” is a family of companies building phase in 2017 for expansion of that works to develop and revitalize its mission. rural, economically-depressed communities in Arkansas and Mississippi. Williams believes Southern’s structure Guided by the belief that “net worth gives it a comparative advantage and drives economic opportunity for people an ability to “meet both margin and and communities,” Southern works mission” in its lending. Southern to empower individuals economically Bancorp, Inc., a certified Community by assisting them in homeownership, Development Financial Institution entrepreneurship, and savings. Over (CDFI) holding company, provides the next 10 years, Southern’s strategic strategic direction for Southern’s vision is to support: 1) 100,000 jobs; entities. Southern Bancorp Bank, also 2) 10,000 people in gaining affordable a certified CDFI, provides an array of housing; and, 3) 1 million people in loans, including home mortgage loans, saving. According to Southern’s CEO, agricultural lending, and small business Darrin Williams, 85 percent of its loans. Southern prioritizes loans to lending now occurs in low-to-moderate individuals who might not qualify for income communities, many of which are credit from other institutions due to under-banked—places where traditional limited credit or to the modest size of financial institutions have stopped do- the loan. Applicants who do not receive ing business, leaving residents without a loan from Southern Bancorp Bank access to capital for economic oppor- are referred to Southern’s third entity, tunity. As part of its effort to expand Southern Bancorp Community Partners into low-income and under-banked (SBCO), a not-for-profit, CDFI certified

32 33

loan fund, which offers a range of financial development services to make applicants more bankable. As Williams explains, South- ern works hard to say “not yet” rather than “no” to loan applicants. In addition, SBCP can use program related investments (PRI) from philanthropic organizations to make loans to these borrowers with greater flexibility.

Southern Bancorp Inc., Southern Bancorp Bank, and Southern Bancorp Community Partners have boards of directors that consist largely of individuals from the communities and markets they serve. In addition, South- ern’s community banks are advised by local regional advisory boards that are comprised of leaders from the communities served. [26] According to Williams, Southern’s strong local ties help to support its work with under-banked individuals and communities. “Our significant knowledge of communities makes a real difference,” Williams explains. “Our employees live in the community and know the folks in the community who will do what is necessary to meet the loan.” Since the employees “know more than what you can see on paper,” they often are willing to make a loan that a traditional bank might not.

33 Learning from the Private Sector A recent study, Designing with the Beneficiary: An process of discovery and feedback, as well as Essential Strategy to Optimize Impact by Joanna empowering end-users to be in decision-making Levitt Cea and Jess Rimington[27], provides a roles during this process, are more financially suc- comprehensive analysis of research that assesses cessful than those that only engage the end-user the benefits to companies of consulting with superficially.[28] Like conventional entrepreneurs, end-users. In the study, the authors conclude that social entrepreneurs that receive social impact end-users add significant value when they are capital should have ample reasons to engage the involved in multiple stages of the product design beneficiaries of their products, but unlike many process, including iterative discovery and feed- conventional entrepreneurs, they don’t seem to be back. End-users involved in these stages act as doing so. According to Levitt Cea and Rimington, true thought partners with companies’ designers one of the reasons they do not is that impact and technical experts. Moreover, as Venkat Ra- investors rarely invest in the preliminary develop- maswamy and Kerimcan Ozcan point out , there is ment stages of a social equity project, a practice evidence to suggest that companies that engage that could ameliorate numerous problems on the in co-creation, i.e. the process of involving end-us- back-end of the investment process. ers not only in the design but also in the iterative

Beneficiary Engagement as a Tool for Risk Mitigation

As a moral imperative, it is easy to argue that most importantly, investors need to under- engaging beneficiaries is simply the right stand the perceptions of the local residents, thing to do. And it is, at least in many cases. such as their housing experiences and prefer- But what about the business imperative? ences, their satisfaction with commercial and Some practitioners argue that in the impact community-serving facilities, and how they investing space, engaging beneficiaries is are planning for their future. Though Many a good business practice. For one thing, it well-intentioned developers and investors may be one of the most significant risk-mit- may have an intuitive sense of what is best igation tools available to investors. In the for the community, without the awareness of same way that traditional investing must community perspectives they are at a higher consider a variety of externalities, socially risk of making investments that will have equitable impact investing usually requires negative social and/or financial returns. understanding an even more complex set of externalities. For example, an investment in This phenomenon has played out time and a mixed-use development in a low-income again in emerging markets outside the Unit- neighborhood within a quickly gentrifying ed States. Chinesom Ejiasa, former Managing urban area requires understanding the local Director at the Overseas Private Investment housing market; the current environment Corporation (OPIC), recalls repeated in- for commercial investment; and the policy vestments in Africa where well-intentioned environment that will bolster or weaken investors set out to provide a valuable low-income residents’ opportunities as they resource, such as renewable energy, to a rural feel the squeeze from middle-income people population, only to see the endeavor fail. In coming into their neighborhoods. Perhaps one instance, investors in a renewable energy

34 project lost nearly $66 million in lent over $300 million to a variety “Better community early-stage investment capital of social enterprises and their engagement because the local community was investors have received 100 percent that uncovers not sufficiently engaged. According return of capital plus interest. Their to Ejiasa: model emphasizes working with the motivations their investees as partners and and desires of a “It’s tough with investors who communicating with them at every community would require a certain return and they stage of the investment process. don’t spend enough time thinking Moreover, in some funds they further mitigate the about the broader implications of bring their investors and investees commercial risks the investment, particularly for together on a quarterly basis to of these sorts of the local community. For example, determine the appropriate level of investments and in terms of moving populations payout to investors and how much from ancestral land to clear to reinvest back into the social more importantly ground for a renewable energy enterprises. RSF’s results offer an produce more broad- project, the investors don’t fully important example for other social based benefits. “ appreciate that the local residents equity impact investors as they ▶ Chinesom Ejiasa, Former will probably have to move from consider how to best manage risk in Managing Director, OPIC government-owned land, where the social equity arena: they don’t have to pay rent, to privately-owned land where they “When a company is having diffi- will have to pay for rent they often culties, which many do, especially cannot sustain. Better community early stage, they call us. They’re engagement that uncovers the not paranoid that we’re going to motivations and desires of a pull their loan or penalize them community would further mitigate for the transparency because of the commercial risks of these sorts how we set it up in the first place. of investments and more impor- The longer a company waits to tell tantly produce more broad-based you they’re having difficulty, the benefits. To effect ideal change in less chance you have to help them a community, one has to consider and the higher chance you have of the makeup of the community, losing your money.” otherwise one will employ an investment thesis that will benefit ▶ Don Schaffer, President and some, but generate unintended CEO, RSF Social Finance consequences that are adverse to the community meant to benefit the most.”

RSF Social Finance is a bright light in the impact investing arena when it comes to engaging stakeholders. Over the past 32 years they have

35 Strategies for Engaging Beneficiaries In the Investment Process

Throughout the investment cycle, there are These stages are naturally iterative and, multiple opportunities for engaging benefi- generally speaking, we hope that beneficia- ciaries, including: ries would be engaged throughout the whole process, from the early stage of developing 1. Developing an investment thesis or an investment framework to the ongoing theory of change; assessment and analysis. At the moment, only a few investment opportunities exist 2. Assessing opportunities and gaps that engage beneficiaries at all stages, some within communities; of which are profiled in this paper. Though we set the ideal as whole-scale engagement, 3. Creating investment strategies; in some instances engagement can happen in a meaningful way in distinct parts of the 4. Determining benchmarks for assess- cycle. This could be due to time and cost or ing success and impact of invest- because engagement in another stage has ments and assessing the (ongoing) been sufficient, but should never circumvent effectiveness and impact of specific input and decision-making from the com- investments; munity in the project. Below, we describe why and how beneficiaries might be involved 5. Evaluating individual investment in each of the five stages. opportunities.

Figure 7: Opportunities for Engaging Beneficiaries in the Investment Process

1 nvestment hesis pportunity and gap analysis

ndividual assessment nvestment decisions Strategy

Setting benchmarks and assessing progress

36 1. Beneficiary Engagement in Developing an Investment Thesis

Reasonable people can differ in their opinion investments in low-income communities? as to whether beneficiaries should provide Is it reasonable for an investor from New input or have decision-making responsibility York to develop an investment thesis about in the process of developing an investment impacting access to jobs in the rural South, thesis. Some would ask, should the investor independent of knowledge about the realities not be able to decide what type of impacts of who is living in that community? Is their they want their money to have? Well, it investment portfolio likely to be as success- depends. It depends in part on whether the ful if they do not engage people who live in investment thesis focuses on a community the targeted areas? Deep knowledge of the that the investor does not come from. For context that is borne from lived experiences example, is it reasonable for one investor or but that can also be garnered through engag- a group of investors who have no experience ing the beneficiary community is fundamen- or exposure to living in poverty to determine tal to successfully defining socially equitable the best strategies and outcomes for impact investment goals and strategies.

2. Beneficiary Engagement in Assessing Opportunity and Needs

There are multiple ways of learning about Organizations like the Keystone Account- the needs of a community—from basic data ability Project[29] can provide an array of gathering through reviewing reports and approaches to working with communities in other forms of documentation; to holding the U.S. and globally. When investing locally community forums to conducting surveys, or regionally, local groups, including commu- interviews, and focus groups; to simply nity development corporations, can be a huge talking to people—there is no shortage of asset in the investment process. Moreover, opportunities to understand the needs of by supporting the capacity of local groups stakeholders, if one is interested in listening. that do community engagement, investors It is also important to note that investors do can help build the long-term infrastructure not have to lead the actual work of engaging for a community, which provides additional beneficiaries. By working in partnership benefits to the community beyond the in- with intermediary organizations that have vestment itself.[30] the capacity and expertise to engage with communities, including nonprofits, for-prof- The Calvert Foundation, which is one of its, and community foundations, investors the most experienced impact investing firms, can gain a meaningful understanding of the has learned over the years that, especially driving issues, challenges, and opportunities with place-based investing (international or in a community. While it is beyond the scope domestic), failing to engage beneficiaries can of this paper to provide an overview of the lead to costly failures. Through a process of many intermediaries that can assist with en- trial and error, they have determined that gaging investment beneficiaries, it is import- understanding the needs and opportunities ant to emphasize that there are multitudes in the beneficiary community has served of such groups with different areas of focus. them—and their investors—well.

37 Social Equity Fund Profile

The Calvert Foundation’s Community Investment Note

Inception: 1995 Asset class: Debt Open to investment: Yes Investment size: $20 minimum for individuals; $1000 minimum for brokerage accounts Focus: Organizations working for social good in affordable housing, job creation, environmental protection globally; locally-based initiatives in Baltimore, Denver, and the Twin Cities Democratic governance: “Ours to Own” initiative entails engagement with community leaders in the design and deployment of investments The Calvert Foundation is a long-stand- The Community Investment Note is ing leader in impact investing and one open to individual investors with a of the first impact investment funds to minimum of $20. Brokerage accounts provide investment opportunities across are available for a minimum of $1000. the investor class. Started in 1995, the Calvert’s Community Investment Note lending program works to “connect currently offers various terms from 6 individual investors to organizations months to 20 years, with interest rates across the globe, developing affordable from 0% to 4% depending on the terms. housing, creating jobs, protecting the To evaluate its impact, Calvert has environment, and working for social developed indicators and performance good.” A Community Development metrics from several sources, including Financial Institution (CDFI), Calvert de- the Impact Reporting and Investment ploys capital to nonprofit organizations Standards (IRIS), the CDFI Fund, and and social enterprises in the United the Department of Housing and Urban States and globally. Through Calvert’s Development. The indicators include Community Investment Note, investors organizations’ performance metrics, as can support loans to new and expanding well as assessments of social perfor- businesses, as well as to high impact mance data and outputs. organizations focused on specific issues (affordable housing, women’s empow- With support from the MacArthur erment, education, and community Foundation and other partners, Calvert care for vulnerable elders), on specific recently launched a new initiative for strategies (microfinance, small business, investment through the Community fair trade), and on specific locales (India, Investment Note: “Ours to Own.” The Latin America, Chicago, the Twin Cities, Initiative, an extension of a campaign in Denver, and Baltimore). the Twin Cities, seeks to “bring together

38 passionate investors, citizen funders, Calvert believes the lack of community and development partners to create engagement can undermine invest- vibrant urban communities” in Balti- ments. “We have discovered that local more, Denver, and the Twin Cities. The community development is operating initiative provides loans to start-up and in a pretty deep silo from other forms of growing enterprises, as well as to orga- community advocacy,” Kane stated. “We nizations focused on creating affordable think that is a problem for both sides—it housing and acquiring community threatens the long-term viability of the spaces. financing entities and it imperils the long term of impact of the work the “Ours to Own” deviates from Calvert’s entities are trying to do.” As a result, the traditional model of lending—relying “Ours to Own” Initiative is including on fund managers to determine invest- a range of community stakeholders in ments based on established criteria—by the investments’ design, selection, and engaging local community leaders in promotion. In Baltimore, Calvert also is the design and promotion of place- working with local partners to develop based initiatives. This shift resulted social equity principles for investments from Calvert’s leaders’ realization that in that community. Calvert leaders community involvement in projects’ believe this process has helped them to design and promotion is necessary for a think in a more holistic fashion. As Beth successful local investment campaign. Bafford, Calvert’s Director of Invest- As Margot Kane, former Vice President ments, explained, “There is real value to of Strategy, explained, “We assumed bringing people with different perspec- that community engagement was part of tives and experiences to the table … it lenders’ models in other places, but we not only is democratic, but it also makes have learned the hard way that there is a the end product better.” wide range of capacities on the ground. Some intermediaries invest in relationships on the ground and others do not.”

39 3. Beneficiary Engagement in Developing Strategy

Armed with a clear investment thesis and neighborhood, and we’re going to do a mixed a solid understanding of the beneficiary use development in your neighborhood and community’s needs, it might seem that we need you to help us figure out the param- investors would have the information needed eters, I might give you a seat at the table, but to develop a good strategy that is likely to I’m not inviting you to tell me that we don’t achieve their desired social and financial need a mixed use development. Period. If you impacts. While this may be the case in some asked, what you might hear is that what the instances, as many foundations can attest, community really needs is $5 million to get a well-intentioned professionals sometimes different city council.” can go awry in their assessment of the most effective strategies for achieving social Kate Reinemund, executive director of impacts. Jason Franklin, the W.K. Kellogg ImpactCharitable, a new donor advised fund Community Philanthropy Chair at the focused on impact investing, says that she of- Dorothy A. Johnson Center for Philanthropy ten sees feedback coming from the recipients at Grand Valley State University, has seen it of an investment, but whether the recipients happen too many times. are involved in decision-making is another question, “and a really important one”. “In most cases, there is a set of assumptions that are not open to revision. If I say I’ve got $5 million and I want to invest in your

4. Beneficiary Engagement in Determining Benchmarks and Assessing Impact

Socially equitable impact investments that part of the process of developing bench- are intented to achieve financial and social marks from the outset. Furthermore, if the returns that result in fair access to livelihood, beneficiaries who are closest to the ground education, and resources; full participation and responsible for implementation are at in the political, economic, and cultural life least partially responsible for determining of the community; and self-determination whether success is being achieved, investors in meeting the fundamental needs of the would realistically have a clearer sense of beneficiary community, can be profoundly whether their investments were having an difficult to measure. Establishing causality impact than if they relied solely on external for effecting social change while also mea- benchmarks. Coupled with more quantitative suring financial returns is complex. It is easy measurements, beneficiary involvement in therefore to succumb to developing output assessment can be very helpful in the invest- measurements that do not correlate to the ment process. needs on the ground or to the investment goals as originally intended. Without under- The people behind the Southern Repara- stating the challenges, it is worth considering tions Loan Fund are deeply committed to how goal-setting might look different if the developing measurements that are inclusive ultimate beneficiaries of an investment were of the perspectives of their investees, which

40 include collectively owned and managed enterprises in low-income communities. In this new model, local business owners are involved in determining what success looks like and returns to investors are determined in advance based on a shared agreement about the quantitative measurements of success.

Social Equity Fund Profile

Southern Reparations Loan Fund

Inception: 2015 Asset class: Debt Open to investment: Yes Investment size: Preferred over $25,000 Focus: Marginalized communities in the U.S. South Democratic governance: Loans to democratically-governed businesses whose owners reside in the community; Board consists of representatives from partner organizations with deep community roots

Launched in 2015, the Southern Rep- SRLF lends to projects that: 1) align arations Loan Fund (SRLF) invests in with SRLF’s mission; 2) meet real under-served communities in the U.S. community needs; 3) hold the potential South through loans to coopera- for financial sustainability; 4) are tively-owned enterprises. A project of democratically governed; and 5) would the Southern Grassroots Economies likely not secure a traditional loan (due Project (SGEP), SLRF works to advance to a lack of credit or the small size of an inclusive economy in which busi- the loan). SRLF is in the early phase of nesses promote community benefits and fund development. SRFL is working with improve the lives of African Americans, SGEP partners and networks to identify immigrants, and poor whites. The possible investments and to provide concept of reparations guides its work. the technical assistance to make them SRLF seeks to “move capital stemming investment-ready. Early investments from an economy rooted in extraction, in its portfolio, in partnership with The exploitation, slavery, and land-grabs Working World, include a loan to the to build Southern enterprises that are Renaissance Community Co-op. SRFL’s owned and democratically controlled by approach to democratic governance is the very communities from which the to invest only in democratically owned wealth was stolen in the first place.”[31] and managed businesses whose owners reside in the geography in which the

41 businesses are located. In addition, can pay them back. Furthermore, SRFL the SRLF board of directors consists is instituting a profit-sharing model in of representatives from SGEP partner which 95 percent of pre-tax profit goes organizations that have deep roots in to the cooperative and 5 percent goes to Southern communities. SRLF. SRLF also plans to offer a fixed- rate note (of 0-2 percent) for terms as SRLF is committed to non-extractive short as a year, as well as floating-rate finance, meaning that a person or group notes (likely 4-5 percent) for a minimum should never be worse off for taking a of 5 years. SRLF’s preferred minimum loan. As a result, the Fund will take a investment size is $25,000 and preferred non-traditional approach to security length is over 5 years. and collateral by sharing the risk more evenly with investees, and loans will be of sufficient length to ensure enterprises

5. Beneficiary Engagement in Assessing Individual Investment Opportunities

There are numerous opportunities for pre-development phase can be done through soliciting input from beneficiaries related partnerships with entities that have existing to specific investments. Whether it is in the relationships with the beneficiary commu- nonprofit or the for-profit arena, in most nity, such as nonprofit organizations, faith- cases, investors will work with intermediaries based groups, or neighborhood organizing to solicit input about specific investments. groups. It can also be done using technology The exception to this general practice is to solicit input from beneficiaries throughout when investors bring community members the product development phase. Numerous onto investment committees, grantmaking experts interviewed for this research point committees, or boards of directors where to the potential for active engagement of decisions about specific investments are beneficiaries using human-centered design made. methodologies, as exemplified through the work of IDEO.org. In human-centered design, In the case of social enterprises, investors the people who will benefit from an idea are can fund pre-development expenses to consulted in the inspiration, ideation, and ensure that social enterprises are developing implementation phases of product develop- products or services with the needs and ment. interests of the beneficiary community at the forefront of their innovations. Work in the

42 Learning From Philanthropy

There is an ever-swinging useful beneficiary level information pendulum between “responsive to inform their grantmaking. philanthropy,” where nonprofits and community members influence On a global scale, numerous foun- what is needed and considered dations have pioneered grantmak- effective in the way of making ing models that are deeply rooted change, and “directed philanthropy,” in a belief that grantmakers cannot where the funder determines what know what is best for local commu- is needed and how success will be nities, and thus they empower local determined. No one can predict how communities to make decisions far it will swing in one direction about how grants are made. Global or the other or where it will swing Greengrants Fund (GGF) is one such next, although increasingly the foundation. Founded in 1999, GGF trend has been for foundations to has provided more than $45 million engage in directive grantmaking at in small grants to grassroots ini- the cost of community engagement. tiatives in 163 countries. The vast Recently, however, a consortium majority of those grants have been of large regional and national determined by local advisory boards foundations, including the David that are comprised solely of people and Lucile Packard Foundation, living in the regions in which the Ford Foundation, William and Flora grants are made. According to Terry Hewlett Foundation, W.K. Kellogg Odendahl, GGF’s President and CEO, Foundation and others, joined “There is no way that our staff and forces to lift up the importance board from around the world can of encouraging and incorporating possibly know what the biggest feedback from “the people we seek issues are in all of the countries in to help” through the development which we work. The local advisor of the Fund for Shared Insight. model has allowed us to deploy Through the Fund, the participating grants that have significant impact foundations are blending a commit- that is far beyond the impact any ment to strategic philanthropy with single philanthropist could have the intentional creation of feedback working on their own.” loops that could, ultimately, provide

43 Conclusion and Recommendations

There’s a real difference between people who think about impact and who think about financial returns; we’re about creating this middle thing. There’s historically been a divide. We’re an emergent sector and so the definitions are broad, we all mean different things when we say the words, and we don’t have central places to learn together. ▶ Kim Dempsey, Deputy Director Social Investment Practice, Kresge Foundation

he impact investing field is at a critical inflection point. The energy that is swirling around the field is breathtaking and the willingness of investors of allT types to rethink their approach to investing so that future generations don’t inherit a morass of social problems, an economy that benefits only a small percentage of the world’s population, and shrinking natural resources, is extraordinary. How we respond to the opportunity will have a lasting impact on how people understand the potential for making social change using financial capital. Will we respond to the call to do more with our resources to make lasting change or will we squander the opportunity? As a field, we must do more to deepen our understanding of the actual factors that affect social and economic dynamics in the world and do more to address these root causes of inequality.

In this paper we have attempted to intractable problems; a resistance illustrate some of the barriers to to reconsidering the interplay be- impact investing for social equity tween risk, return, and time horizon – such as a narrow understanding in an investment context; and an of the factors that influence deep, investor class that often assumes

44 that it knows what is best for the community everyone in the impact investing field rather than engaging the communities it to expect and report on meaningful purports to influence. Our intent has been engagement of beneficiaries at appro- to help illuminate some of the barriers and priate times in the investment process. to persuade impact investors to be bold in their approach to impact investing and to 5. Use existing forums, and develop take more educated risks in the pursuit of new forums as needed, for discussing social equity. These are still very early days practices in impact investing for in the impact investing movement and there social equity. Document and share is much still to be discovered about how experiences and research related to financial investment can foster social equity. evaluation and measurement. As we move forward, we encourage the impact investing field to innovate around the 6. Support activities to build knowledge following key points. and skills across the field regarding impact investing for social equity. 1. Be transparent about the difficulties Require that impact investors spend and opportunities in investing for time refining their acumen for un- social equity and innovate around new derstanding social equity in much the ways to balance expectations of risk, same way that profit-first investors return, and time horizon that lower spend time refining their acumen for the downside risks to communities understanding financial markets. who can least afford to take the fall for investors who make uninformed By combining the best practices of the decisions. for-profit investment community with those of the philanthropic community, there is 2. Co-invest across sectors and learn enormous potential for disrupting the impact from one another in the process. investing space in positive ways. With a Establish real partnerships between commitment to engaging the beneficiaries foundations, which have tremendous of investment capital; rethinking our risk/ experience in fostering social equity, return/time horizon expectations; and being and financial investors, who have honest about the complexity of investing for tremendous experience in creating social equity, we can imagine a future where financial equity. the values and priorities of communities drive investments that truly lead to financial 3. Continue the rigorous exploration of and social returns that result in fair access evaluation and measurement practices to livelihood, education, and resources; full in impact investing to measure both participation in the political, economic, and outputs and outcomes. cultural life of the community; and self-determination in meeting the fundamental 4. Establish new quantitative (e.g. within needs of the community. the IRIS standards) and qualitative measurements for authentic beneficiary engagement and advocate for

45 Appendex A - Interviewees

1. Armeni, Andrea, Executive Director, Transform Finance 2. Bafford, Beth, Director of Investments, Calvert Foundation 3. Bhairvee, Shavdia, Impact Associate, HCAP Partners 4. Bugg-Levine, Antony, Chief Executive Officer, Nonprofit Finance Fund 5. Bynum, Ben, Director of Operations, Vital Healthcare Capital 6. Cea, Levitt Joanna, Special Funds Director, Thousand Currents 7. Clark, Cathy, Director, CASE i3 Initiative on Impact Investing, CASE at Duke University 8. Davidson, Jim, President, Peak Change 9. Davis, Lisa, Former Program Officer, Ford Foundation 10. Dempsey, Kim, Deputy Director, Social Investments Practice, The Kresge Foundation 11. Ejiasa, Chinesom, Former Managing Director, Overseas Private Investment Corporation (OPIC) 12. Gripne, Stephanie, Executive Director, Impact Finance Center, Rockefeller Philanthropy Advisors Sustain- able Endowments Institute & University of Denver 13. Hacke, Robin, Senior Fellow, The Kresge Foundation 14. Kane, Margot, Former Vice President for Strategy, Calvert Foundation 15. Kershman, Phil, Chief Investment Officer, Cornerstone Capital Investment Management 16. Lanza, Dana, Chief Executive Officer, Confluence Philanthropy 17. Looney, Christine, Senior Program Investment Officer, Ford Foundation 18. Martin, Brendan, Founder and Director, Working World 19. Morgan, Will, Senior Impact Analyst, Sonen Capital 20. Pollack, Melinda, Vice President and Denver Market Leader, Enterprise Community Partners 21. Pritzker, Regan, Trustee, The Libra Foundation 22. Reinemund, Kate, Executive Director, ImpactCharitable 23. Ronquillo, John, Assistant Professor of Nonprofit and Public Management, University of Colorado Denver School of Public Affairs 24. Shaffer, Don, President and Chief Executive Officer, RSF Social Finance 25. Seegull, Fran, Chief Investment Officer and Managing Director, ImpactAssets 26. Simon, Morgan, Managing Director of Pi Investments, and Chair and Co-founder of Transform Finance 27. Stanley, Reggie, President and Chief Executive Officer, ImpactUS Marketplace, LLC 28. Thompson, Marnie, Co-Managing Director, Fund for Democratic Communities 29. Weekes-Laidlow, Melinda, Founder, Beautiful Ventures 30. Williams, Darrin, Chief Executive Officer, Southern Bancorp, Inc. 31. Wolfe, Jesse, Former Director, Impact Related Investments, The Colorado Health Foundation 32. Wood, David, Director, Institute for Responsible Investment, Harvard University

46 Endnotes

1. Michael Swack, Expanding Philanthropy: Mission-related Investing at the F.B. Heron Foundation (Durham, NH: Carsey Institute, University of New Hampshire, 2007), accessed July 26, 2016. http://heron.org/sites/default/files/Expanding_Philanthropy_Mission_Related_Invest- ing_at_the_FB_Heron_Foundation.pdf 2. Modified from Reliable Prosperity, “Social Equity,” accessed August 16, 2016.http://www. reliableprosperity.net/social_equity.html 3. Robert J. Shiller, Finance and the Good Society (Princeton and Oxford: Princeton University Press, 2012), 6-7. 4. Sara Minard and Jed Emerson, Doing Justice to Impact, Exploring the Interplay between Wealth Creation, Impact Investing, and Social Justice (forthcoming). 5. See Minard and Emerson, Doing Justice to Impact, 20. 6. See U.S. Securities and Exchange Commission, “SEC Adopts Rule Under Dodd-Frank Act Defining ‘Family Offices,’” accessed August 16, 2016. https://www.sec.gov/news/ press/2011/2011-134.htm 7. See Andrea Armeni, “Redefining Community Impact,”Transform Finance (blog), March 16, 2015, accessed July 14, 2016. http://transformfinance.org/blog/2015/3/30/redefining-community-impact 8. For more information, see Jed Emerson and Lindsay Smalling, ImpactAssets Issue Brief #15, Construction of an Impact Portfolio: Total Portfolio Management for Multiple Returns (Bethesda, MD: Impact Assets, 2015), accessed July 26, 2016. http://impactassets.org/files/Issuebrief_ No.15.pdf 9. See Jacob Grey et al, Great Expectations: Mission Preservation and Financial Performance in Impact Investing (Philadelphia, PA: Wharton University of Pennsylvania Social Impact Initia- tive, 2015), accessed July 14, 2016. http://socialimpact.wharton.upenn.edu/wp-content/ uploads/2013/11/Great-Expectations_Mission-Preservation-and-Financial-Perfor- mance-in-Impact-Investing_10.7.pdf; Abhilash Mudaliar, Hannah Schiff, and Rachel Bass, Annual Impact Investor Survey, 6th edition (United Kingdom: Global Impact Investment Net- work/JP Morgan Chase & Co., 2016), page 41, figure 45: Performance relative to expectations, accessed July 14, 2016. https://thegiin.org/assets/2016%20GIIN%20Annual%20Impact%20Investor%20Survey_ Web.pdf; Marc Fox, Climate Action and Profitability: CDP S&P 500 Climate Change Report 2014 (New York, NY: CDP, 2014), accessed July 14, 2016. https://www.cdp.net/cdpresults/ cdp-sp500-leaders-report-2014.pdf 10. For more information on Total Portfolio Activation, see Emerson and Smalling, ImpactAssets Issue Brief #15. 11. For more information, see Amy Chung and Jed Emerson, ImpactAssets Issue Brief #10, From Grants to Groundbreaking: Unlocking Impact Investments (Bethesda, MD: Impact Assets, 2013), accessed August 16, 2016. http://www.impactassets.org/files/Issue%20Brief%2010.pdf 12. Steven Godeke and Raúl Pomares, Solutions for Impact Investors: From Strategy to Implemen- tation (New York, NY: Rockefeller Philanthropy Advisors, 2009), accessed August 16, 2016. https://thegiin.org/assets/binary-data/RESOURCE/download_file/000/000/53-1.pdf 13. For more information on types of philanthropic impact investing, see Mission Investors Exchange, “Home,” accessed July 26, 2016. https://www.missioninvestors.org/ See also Mission Investors Exchange, Arabella Advisors, and Exponent Philanthropy, Essentials of Impact Investing: A Guide for Small-staffed Foundations (Seattle, WA: Mission Investors

47 Exchange 2015), accessed July 26, 2016. https://www.missioninvestors.org/tools/essentials-of-impact-investing-a-guide-for-small-staffed-foundations?utm_source=Expo- nentPhilanthropy&utm_medium=website&utm_campaign=sfg 14. Armeni, “Redefining Community Impact.” 15. Global Impact Investing Network, “IRIS Metrics,” accessed July 14, 2016. https://iris.thegiin. org/metrics 16. Jed Emerson, “The Blended Value Proposition: Integrating Social and Financial Returns,” California Management Review 45, No. 4 (Summer 2003): 35-51, accessed July 26, 2016, doi: 10.2307/41166187. 17. Michael Porter and Mark Kramer, “Creating Shared Value,” Harvard Business Review, Janu- ary-February Issue (2011): 7, accessed July 14, 2016. https://hbr.org/2011/01/the-big-idea- creating-shared-value. 18. Porter and Kramer, “Creating Shared Value,” 7. 19. Joanna Levitt Cea and Jess Rimington, “Designing with the Beneficiary: An Essential Strategy to Optimize Impact,” Innovations Journal 11 (forthcoming). 20. Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey,” accessed August 24, 2016. http://www.bls.gov/cps/cpsaat18.htm 21. See Council of Foundations, “New Report Provides Comprehensive Operations and Demo- graphic Data on Foundations,” accessed August 16, 2 016. http://www.cof.org/content/ new-report-provides-comprehensive-operations-and-demographic-data-foundations 22. Christopher Shea, State of the Work: Stories from the Movement to Advance Diversity, Equity, and Inclusion (Chicago, IL: D5 Coalition, 2016): 8, accessed July 14, 2016. http://www.d5coalition.org/wp-content/uploads/2016/04/D5-SOTW-2016-Final-web- pages.pdf 23. See Minard and Emerson, Doing Justice to Impact, 19. 24. Kathryn Finney and Marlo Rencher, The Real Unicorns of Tech: Black Women Founders (New York, NY: Digital Undivided, 2016), accessed July 26, 2016. http://www.projectdiane.com/ projectdiane-report/y6msc43xwnucb0o3dc9nyykezgi3xu 25. The Department of the Treasury, Community Development Financial Institutions Fund: Supple- mental Guidance and Tips (Washington D.C.: The Department of the Treasury, 2014), accessed August 24, 2016. https://www.cdfifund.gov/Documents/CDFI%20Cert%20App%20Guid- ance.pdf 26. Southern Bancorp, “About,” accessed July 24, 2016. https://banksouthern.com/about 27. See Cea and Rimington, “Designing with the Beneficiary,” forthcoming. 28. Ramaswamy, Venkat and Kerimcan Ozcan, The Co-Creationg Paradigm (Stanford, CA: Stanford University Press, 2014). 29. Keystone, “Our Approach,” accessed July 26, 2016. https://keystoneaccountability.org 30. For an interesting example of an engagement firm that focuses on engagement in community design, see Dept of Places, “Equity Collective,” accessed July 26, 2016. http://www.deptofplaces.com/projects#/equitycollective/ Or, Corridor Development Initiative, “About CDI,” accessed July 26, 2016. http://www.corridordevelopment.org/15/ 31. Southern Grassroots Economies Project: Southern Reparations Loan Fund, “About,” accessed July 14, 2016. http://sgeproject.org/about/southern-reparations-loan-fund/

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