All Things Impact.

private capital & the public good

A 21st Century Gospel of Wealth, improved regulatory framework for impact investing, Just Capital, and Picketty, Rousseau & the desire for inequality

Brian WalshComment

Hi friends,
This is a newsletter of interesting things I've seen from across the spectrum of impact: effective philanthropyimpact investing (in the private markets), responsible investing (in the public markets) and a wildcard topic. See more at All Things Impact.

For this holiday season, here are four links worth your time:
1. Effective Philanthropy: Why Giving Back Isn’t Enough
In the New York Times, Ford Foundation president Darren Walker calls for an update to Andrew Carnegie’s classic 1889 essay “The Gospel of Wealth” – for the 21st Century:

“…for all the advances made in the last century, society’s challenges may have outpaced philanthropy’s resources. Today, the cumulative wealth of the most generous donors seems a pittance compared with the world’s trillions of dollars’ worth of need. Generosity, blooming as it may be from legacies of both Carnegie’s age and the newly enriched, is no longer enough.
Our self-awareness — our humility — shouldn’t be limited to examining the problems. It should include the structures of solutions, like giving itself. As the Rev. Dr. Martin Luther King Jr. said not long before his assassination, “Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary.” It is, after all, an offspring of the free market; it is enabled by returns on capital.

And yet, too often, we have declined to question our own circumstances: a system that produces vast differences in privilege, and then tasks the most privileged with improving the system.

Whatever our intentions, the truth is that we can inadvertently widen inequality in the course of making money, even though we claim to support equality and justice when giving it away. And while our end-of-year giving might support worthy organizations, we must also ask if these financial donations contribute to larger social change.

In other words, “giving back” is necessary, but not sufficient. We should seek to bring about lasting, systemic change, even if that change might adversely affect us. We must bend each act of generosity toward justice.”

2. Impact Investing: improvements to the regulatory framework
I’ve previously identified four things that need to come together to accelerate the practice of impact investing:

1.      Increased supply of impact focused investment opportunities

2.      Increased demand from capital owners for impact focused investment products

3.      Sufficient market infrastructure (like scalable intermediaries) to bring together the supply of investment opportunities with the demand from capital owners

4.      An effective enabling environment supporting the development of the field.

In the Stanford Social Innovation Review, Michael Etzel reviews two significant regulatory changes from this past year, which in the long-run should help boost the enabling environment for impact investing.

First change from the IRS: 

“On September 18, the IRS issued new guidance for foundations’ mission-related investments. Under the old rules, foundations worried that they would suffer tax penalties for making impact investments, especially those that produced returns below market rates. Henceforth, foundations are free to invest endowment assets in mission-driven organizations that align with the foundation’s charitable purpose. And they need not fear tax penalties if they choose to accept a lesser return from an investment with a strong mission component.”

Second change from the DOL: 

“A month later, on October 22, Department of Labor (DOL) issued a bulletin rescinding a 2008 rule that subjected so-called economically targeted investments—aka impact investments—to extra scrutiny, all but eliminating them from consideration by pension fund managers. The change reverts to a 1994 rule stating that “fiduciaries may consider (social and environmental) goals as tie-breakers when choosing between investment alternatives that are otherwise equal with respect to return and risk over the appropriate time horizon.”

In short, the ruling means that pension funds may invest in organizations with a social mission as long as the investment is financially prudent—the fundamental obligation pension fund fiduciaries. "Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand," said US Secretary of Labor Thomas E. Perez.
Even a relatively small percentage increase in pension fund impact investments would add up to billions in new capital. Funds governed by ERISA manage roughly half of the $18 trillion in US pension assets. But ERISA rules also have a powerful spillover effect on the trillions managed by state and local governments, and by religiously affiliated organizations.”

3. Responsible Investing: A Plan to Rank ‘Just’ Companies Aims to Close the Wealth Gap
Paul Tudor Jones II, the hedge-fund billionaire who also helped found the renowned Robin Hood Foundation, has a plan to reduce income inequality. The New York Times covers the ambitions of the nonprofit he recently helped launch, called Just Capital:

“Just Capital will rank corporations on how well, or “justly,” they treat employees, society and the environment. The idea is to laud companies that offer better pay, happier workplaces and greater transparency — and perhaps shame others to follow suit.
This kind of moral index, Mr. Jones said, “could not only impact investors, it could impact consumers, it might impact the way companies hire, the way people go and work with companies; it will impact boardrooms, everything.”…
Mr. Jones argues that income inequality is being driven by what he calls “shareholder hegemony,” the principle that companies first and foremost should satisfy investors. The solution is for companies to make social responsibility as important as profits and share price.
Just Capital’s mission fits into an existing trend. Socially responsible investing, the favoring of companies that demonstrate environmental and social awareness, is a growing movement, driven in large part by the economic ascendance of millennials and women. As of this month, Morningstar said about 2 percent of the mutual funds it tracked were tagged “socially conscious.” Such funds “typically perform on par or a little better than conventional funds,” said Jon Hale, director of manager research at Morningstar.”

4. Wildcard topic: Piketty, Rousseau and the desire for inequality
In Crooked Timber, Chris Bertram explores Piketty through the lens of Rousseau and Rawls, arguing that because some people value inequality for its own sake, it will be harder to tackle than even Piketty imagines:

“Where does this leave democracy? Piketty fears that given rising levels of wealth inequality, democracy is doomed. People will not tolerate high levels of inequality forever, and repressing their resistance to an unequal social order will eventually require dispensing with democratic forms. I’m not so sure.

A highly unequal society in wealth and income is certainly incompatible with a society of equal citizens, standing in relations of equal respect to one another and satisfying their amour propre, their craving for recognition though a sense of shared citizenship. (This benign outcome roughly corresponds to the Rawlsian ideal of a well-ordered society where the social bases of self-respect are in place.)

But the outward form of democracy, its procedures, are surely compatible with great inequality, just so long as the wealthy can construct a large enough electoral coalition to win or can ensure that the median voter is the kind of “aspirational” person who identifies with the one per cent, even though they are not of it. In an unequal society such people are very common. They may be very poor compared to the super-rich, but they have just enough to take pride in their status as members of “hard working families” and to hope for the lucky break that will elevate them. At the same time they can look down with contempt on the welfare claimant and the “illegal” immigrant, nurturing their own amour propre by taking satisfaction in what they are not. Here we have, in another guise, the phenomenon of the “poor white” who looks down on poorer blacks and is thereby impelled to sustain a hierarchical social order.

Procedural democracy limping on against a background of inequality, disdain and humiliaton is not an attractive prospect, but it is already a big part of our present and may be the whole of our future unless egalitarian politics can be revived.”

That’s it for this year! Please send me any compelling links you discover in your own journeys across the web (even things like this seemingly flying bunny).

Until next year – Happy Holidays!