All Things Impact.

private capital & the public good

All Things Impact for October 14: tax avoidance, "impact security", keep the strategy - leave the "strategic philanthropy", and a language for demographic anxiety

Brian WalshComment

Hi friends,

Welcome to All Things Impact, a newsletter of interesting things I've seen from across the spectrum of impact: responsible investing (in the public markets),  impact investing (in the private markets), effective philanthropy, and a wildcard topic. For previous posts, to subscribe, and for more information, please visit All Things Impact.

Here are four links worth your time (plus items of note, job postings, and a calendar of upcoming events):

1. Responsible Investing: inside the secret world of wealth managers
An often overlooked aspect to responsible investing is compiling with relevant regulations, including paying necessary taxes. Brooke Harrington has a long read in The Guardian about the “secret world of wealth managers", who help the very wealthy to minimize and avoid taxes:

“The work of wealth managers has been described by some leading practitioners as a defence against the depredations of “confiscatory states.” Much of these professionals’ day-to-day practice occurs in an ethical grey area – a realm of activity that is formally legal but socially illegitimate. This includes the use of trusts, offshore corporations and similar tools to help clients avoid paying tax, debts to creditors or alimony to ex-spouses. ..

As world wealth has grown to record levels in recent years – to an estimated $241 trillion – inequality has also grown, with 0.7% of the global population owning 41% of the assets. Wealth managers are estimated to direct the flows of up to $21tn in private wealth, resulting in about $200bn in lost tax revenues globally each year. In effect, these professionals detach assets from the states that wish to tax and regulate them, creating a form of capital that is, like its owners, transnational and hypermobile. Doing so involves creating not just asset-holding and tax-avoidance structures but a new body of transnational institutions, which are expanding outside of any democratic process of checks and balances. In this way, the rise of the super-rich and the wealth management industry is creating an elite who are increasingly ungoverned and ungovernable…

A wealth manager’s daily work is similar to that of an architect, in that both design complex, multifunctional structures. The financial architecture created by wealth managers contains assets rather than people and the structures are composed of linked organisational entities, such as trusts, corporations, and foundations. These structures are often means to reduce tax, avoid regulation and control inheritance planning…

Within the world of wealth management, being obliged to honour debts, pay the costs of government, and otherwise obey the laws of the land are often seen as offences to liberty. One training textbook describes the claims of creditors as “risks”, rather than obligations that borrowers take on voluntarily. Other threats include the legal system itself, regulation and, of course, taxation….

The economist Gabriel Zucman has argued that the offshore financial system has grown to the point that it calls into question the future of national sovereignty. His argument is based primarily on tax avoidance, which he calls “theft pure and simple”. By allowing taxpayers to steal from their governments to the tune of $200bn in worldwide lost tax revenue each year, he argues, wealth managers dramatically undermine the power of the state…

With offshore, the wealthy, and the elite professionals who serve them, have created a kind of parallel world of selective lawlessness: selective in that the super-rich can continue to enjoy the benefits of laws that suit their interests while ignoring laws that inconvenience them. This parallel world operates largely unnoticed, except when it contributes to throwing the world that the rest us inhabit into chaos, as it did in the 2008 financial crisis.

2. Impact Investing: "Impact Security" - putting the “bond” back into “Social Impact Bonds”
Lindsay Beck, Catarina Schwab, & Anna Pinedo write in the Stanford Social Innovation Review about their proposal to tweak the model of a “Social Impact Bond” (SIB) to be not just a “pay-for-success” contract, but an actual fixed income security.

“Despite their potential, SIBs have failed to gain meaningful traction. In the United States, for example, approximately 12 SIB deals have been launched since 2012, raising only about $140 million in initial private investment, which is less than 0.01 percent of the $1.7 trillion in total annual nonprofit revenue and contributions.

 Why is that the case? One major reason is that calling these arrangements “bonds” is misleading. None of the SIBs put in play so far—nor many of their cousins, the development impact bonds, environmental impact bonds, and so on—has actually been a bond. Some people familiar with the field are willing to acknowledge that issue, accept it, and move on. But they are in the minority. Would-be investors who are not intimately acquainted with the nuances of SIBs—and this includes most would-be investors—may not know that the investments are not bonds. And so for most, calling a SIB a “bond” becomes a stumbling block that requires explanation, detracting from the positive and innovative aspects of pay-for-performance instruments…

What if an impact bond was actually a debt security—a financial instrument similar in legal structure to a corporate bond or municipal bond that can be bought or sold between various parties and has basic standardized terms such as obligations to make payments to investors upon the occurrence of certain events? In other words, what if we combined the pay-for-success model with an established, scalable, and tradable capital markets structure, and named it accordingly? And what if we called it an “impact security”?

This new structure would have five main benefits.

1. Credibility: Accurate nomenclature would promote the product’s integrity and build its credibility in investor circles. As mentioned above, attracting investor participation at scale requires accurate terminology.

2. Real scalability: A standard debt security would offer consistent, familiar documentation that allowed for easy replication and faster transaction speeds, resulting in a more scalable product.

3. Expanded investor access: If the debt security were issued by a nonprofit, a foundation, or a government or supranational entity, it would be exempt from SEC registration and available as a public offering open to all investors, accredited and non-accredited. This would expand the pool of eligible investors and could permit crowdfunding.

4. Transparency: A debt security model would facilitate public disclosures and reporting, which would lead to enhanced transparency and pricing that was more responsive to market data.

5. Liquidity: Debt securities could easily be held in brokerage accounts and be readily transferable. That would increase the potential for liquidity, which could broaden the investor market.

3. Effective Philanthropy: Don’t throw the baby strategy out with the “strategic philanthropy” bathwater
Phil Buchanan and Patti Patrizi argue in the Chronicle of Philanthropy that while it is time to “ditch” the term “strategic philanthropy,” it is not time to ditch strategy in philanthropy.  (“After all, what will replace it? Random, uncoordinated acts of philanthropy?” they write.)

“Recently, there has been a kind of backlash against "strategic philanthropy." The term has come to take on some very negative connotations, conjuring up images of arrogant, overpriced consultants and their large foundation clients issuing top-down edicts that are ineffective and divorced from the realities nonprofits face.

Strategic philanthropy, in this conception, is seen as overly formulaic and linear, denying the complexity of the tough, interdependent challenges foundations and nonprofits try to address. Moreover, feedback from grant recipients is usually absent, because the idea is that the donor knows best…

The reality is that good strategy is vital. It is underneath and behind every great philanthropic success — from the response to the tuberculosis epidemic a century ago to recent progress in reforming the criminal-justice system. As longtime proponents of strategy in philanthropy, we would argue that it is, in fact, as important as ever — more so, even, because as philanthropy’s scale increases with every newly minted billionaire, so, too, do the consequences of ineffectiveness.

We see strategy in philanthropy differently than those who come out of business. Indeed, we do not see it as a business concept, because it isn’t one. We see strategy in philanthropy as a set of logical hypotheses about how to achieve a goal — hypotheses that guide decision-making and, importantly, learning. As we have both been saying for decades to anyone who would listen, sound strategy in philanthropy is much harder, and plays out differently, than sound strategy in business, for several reasons:

  • Any sound philanthropic strategy recognizes that many players are needed. 
  • Good philanthropic strategy recognizes the effects of complexity and uncertainty. 
  • Being good at strategy requires being good at learning."

4. Wildcard topic: political correctness and the language of demographic anxiety
Journalist Ezra Klein of Vox sat down with economist Tyler Cowen of George Mason for a fascinating podcast conversation, part of the exceptional “Conversations with Tyler” series. It’s worth a listen, but this section where Ezra discusses our lack of language to talk about demographic anxiety is particularly interesting:

“We do not have a language for demographic anxiety that is not a language that is about racism. And we need one…We have properly been working very, very hard in this society to make racism socially intolerable. We have a society that continues to have a lot of racism, a lot of sexism, a lot of bigotry of different kinds. But I do think that as a by-product of that debate and that effort, there isn’t a good way to have people discuss slightly more inchoate feelings of losing power that aren’t necessarily in their view, about taking it away from other people. It’s more about losing it themselves. I think that’s a big difference in this.

Arlie Hochschild…she’s a sociologist who spent five years with tea party folks in Louisiana—she talks about this deep story of feeling like they’ve been waiting in line, and now other people are getting in front. It’s not so much that they don’t want those other people to get ahead, it’s that they want to get ahead themselves. They are feeling a loss in a zero-sum competition, and they may actually be correct about that.

There are probably types of advancement in society that is zero-sum, particularly when you begin really trying to open up the floodgates. So I think that’s correct, and I think that we don’t have a good language for it. I don’t know what it would mean to get one, but one thing that has annoyed me this year is I really dislike the use of political correctness as a language for it…

5. Items of Note

  • The Manhattan DA has launched an RFP for $7.2 million in grants to up to 4 NYC social enterprises "particularly focused on revenue-generating models that provide quality jobs for participants and facilitate positive economic impact in underserved and under-resourced" NYC communities (the funds come from settlements with international banks charged with violating U.S. sanctions)
  • The Silicon Valley Community Foundation has a new report, Starting with Purpose, which is a guide to social responsibility for startups
  • The Miller Center for Social Entrepreneurship at Santa Clara University has a business accelerator program starting in January 2017 (applications due by Oct 21)
  • Caparia (acclerator for impact fund managers) opens applications for its 3rd cohort (due November 11th)
  • Mission Measurement has launched its Impact Genome Project
  • Etsy has launched a new report on economic security for the "gig economy"
  • 92Y has launched applications for its "Women in Power" fellowship program for rising women leaders in NYC
  • The Packard Foundation has launched an organizational effectiveness knowledge center for nonprofits and foundations

6. Job Postings

7. Upcoming Events
Oct 17-18 African Philanthropy Forum (Rabat, Morocco) Philanthropy
Oct 18  High Water Women (NYC) Impact Investing
Oct 18-19 Commit! Forum (NYC) Responsible Investing
Oct 18-20 Conscious Capitalism CEO Summit (Austin, TX) Responsible Investing
Oct 20-22 PopTech: Culture Clash (Camden, Maine)
Oct 24-26 Impact Convergence (Atlanta, GA) Impact Investing, Philanthropy
Oct 27-28 Feedback Labs 2nd Annual Feedback Summit (DC) Effective Philanthropy
Nov 3-5  Net Impact (Philadelphia) Various
Nov 9-11  Sustainable, Responsible, Impact Investing (Denver) Responsible Investing
Nov 16-18 Independent Sector (DC) Philanthropy
Dec 7-8  Global Impact Investing Network (Amsterdam) Impact Investing
April 7, 2017 Wharton Social Impact Conference (Philadelphia) Impact Investing

That’s it for this week. Help me spread the word about #AllThingsImpact to your friends and colleagues, who can sign up to receive this newsletter at All Things Impact. Please also send me any job postings, items of note, upcoming events, or compelling links you discover in your own journeys across the web (even things like like this humpback whale breaching). 

Until next time, thanks for reading!

Brian Walsh
Head of Impact at LiquidnetFull Bio.