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private capital & the public good

All Things Impact for December 22: the case against social investing; beyond the tradeoff debate; 50 years of philanthropy; and conditional optimism

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: the case against public pension funds engaging in social investing
 Public pension funds invest taxpayer money in order to provide money for retired government employees (known as beneficiaries) today and well into the future. Since at least the 1970’s, state legislatures and pension boards have advocated or mandated the types of investments that these public pension funds should – and should not – invest in.
The Center for Retirement Research at Boston College recently released a report, “New Developments in Social Investing by Public Pensions,” which concludes that public pension funds should not engage in what they term social investing, claiming that “social investing is often not effective, as other investors step in to buy divested stocks” and that this approach “can also produce lower investment returns, conflict with the views of beneficiaries and taxpayers, and interfere with federal policy.”

“Social investing in public plans highlights a classic principal-agent problem in economics. The principals in this case are tomorrow’s pension beneficiaries and/or taxpayers: the people with skin in the game. The agents are the fund boards or state legislatures that make investment decisions on behalf of the principals. In theory, agents are supposed to act solely in the interests of the principals. In reality, especially in public plans, conflicts of interest may arise if state legislatures make investing decisions for political reasons. If social investing produces losses, tomorrow’s taxpayers will have to ante up or future retirees will receive lower benefits. The welfare of these future actors is not well represented in the decision-making process.
Even if decision makers always acted in the best interests of beneficiaries, it is still very difficult to determine how different beneficiaries value ESG factors. For example, one beneficiary may accept lower returns for fossil-free but not firearms-free investments, while a second one may accept lower returns for terror-free but not fossil-free investments, and a third may not accept lower returns at all. Given different preferences, it would be difficult for public pension funds to fully incorporate the value of ESG factors of all beneficiaries. Additionally, these preferences may change over time as social values and political views shift.”

2. Impact Investing: Moving Beyond the Tradeoff Debate
Writing in Medium, the Omidyar Network’s Matt Bannick and Paula Goldman are bullish on impact investing, but “frustrated by some of the rhetoric we hear, especially the ongoing — almost ideological — debate about whether there is a necessary tradeoff between financial returns and social impact….

"The skeptics argue there is always a tradeoff; the purists argue there is never a tradeoff. In conferences and newspapers and boardrooms, both sides stake their claim, each readily marshalling compelling examples to reinforce their world view. The argument never seems to end.
We believe the answer to this hotly contested question is not yes or no but rather: “It depends.” Our experience at Omidyar Network suggests that there are many opportunities to achieve both great returns and great impact. Indeed, it seems to us that in many cases, the best way to achieve massive social impact is to build a fabulous business that serves a desired market. If a company is highly financially successful, it can use retained earnings and its access to capital markets to serve more people. However, there are also circumstances where commercial returns are simply not possible but businesses can still be highly impactful (and more sustainable than grant reliant nonprofits)…. For us, a concession on return is justified in specific circumstances: when the investment has the potential to transform not just the lives of its direct beneficiaries, but the whole sector within which it operates.”

 They then challenge four “myths” about the relationship between financial returns and social impact:
Myth 1: Solving Social Problems is Inherently Concessionary
Reality: Many Investments Achieve Both Impact and Return

Myth 2: Only Super Profitable Companies Have Real Impact
Reality: There Are Several Paths to Impact
Myth 3: Can’t Reach Two Goals
Reality: In Many Cases, You Can
Myth 4: “Concessionary Capital” Distorts Markets
Reality: Sometimes There is No Market to Distort

3. Effective Philanthropy: a historical perspective on the past 50 years of philanthropy
In celebration of its 50th Anniversary, the Hewlett Foundation commissioned a study on the past half century of philanthropy in the US. Here are some highlights:

"It estimated there were about 18,000 foundations in 1966, although only 6,803 had assets of more than $200,000 or made annual grants of more than $10,000. Combined, these foundations had approximately $19 billion in total assets and made $1.2 billion of grants out of national charitable giving totals of nearly $14 billion…

In 2014, some 67,700 foundations held $831.6 billion in net assets and gave nearly $55 billion, while total charitable giving rose to its highest level ever, $358 billion…
Today’s philanthropy, and especially its mega-philanthropy, echoes and is implicated in today’s skewed economic distribution. Even when it is not directed to ‘‘big bets’’ for social change and instead channeled to traditional institutions------universities, hospitals, museums------such gifts underscore the power of a small elite to impose their preferences and priorities on the public and on private institutions. The gap between the wealthiest nonprofit institutions and the bulk of the sector widens. Some 28 percent of the $40 billion raised by America’s universities, for instance, went to the top 20 institutions with the largest endowments. In fact, as the Congressional Research Service recently reported, 74 percent of the $516 billion in total endowment assets held by colleges and universities in 2014 was concentrated in just 11 percent of those institutions….
What is new today is not the predominance of self-made wealth but the speed at which that self-making occurs------and thus, the age at which those who have accumulated great wealth can apply it to philanthropic ends. The vast majority of the major donors of the 20th century only turned to systematic philanthropy (as opposed to haphazard gift-giving to intimates) late in their careers, most often as a post-retirement project…
In the last half century, however, the market has risen as a rival paradigm, surpassing scientific or academic norms as the dominant means of understanding philanthropic practice. This market-based orientation has taken on many forms and assumed many names: from venture philanthropy to strategic philanthropy to philanthrocapitalism to social entrepreneurship to hacker philanthropy. There is considerable overlap between these categorizations, but there are also important distinctions between them, reflecting both the particular historical moments in which the labels developed and the dominant modes of industry, commerce, and accumulation that they modeled. There are many other terms whose history we do not consider below – in the time it has taken you to read this paragraph, it is likely a few more have been added to the philanthropic lexicon. This taxonomical profusion is itself a development worthy of consideration… It is difficult to determine whether this has been due to the fact that the actual pace of change within the sector has accelerated, whether the sector is now experiencing heightened self-consciousness, or whether the sector is simply more sophisticated at self-branding….
The ascendance of a business management-trained class, and of management-based theory, within the philanthropic sector has perhaps been most significant to the rise of strategic philanthropy, for it encouraged foundations and donors to regard philanthropic interventions in terms of carefully-calibrated investments. In this sense, evaluation was not simply applied retrospectively to understand a program’s impact and to inform future philanthropic practice; nor was it a public relations instrument, to educate the public about the contributions of philanthropy. Strategic philanthropy has helped to incorporate evaluation into the grantmaking process itself, with outcomes defined in terms of closely monitored ‘‘deliverables’’ and frequent benchmarking of performance metrics…"

4. Wildcard: conditional optimism about the future
Cognitive scientist and linguist Steven Pinker gave an interview to Vox on why he’s optimistic about the future:

“I’ve never been “optimistic” in the sense of just seeing the glass as half-full — only in the sense of looking at trend lines rather than headlines. It’s irrational both to ignore good developments and to put a happy face on bad ones.
As it happens, most global, long-term trends have been positive. As for the future, I like the distinction drawn by the economist Paul Romer between complacent optimism, the feeling of a child waiting for presents, and conditional optimism, the feeling of a child who wants a treehouse and realizes that if he gets some wood and nails and persuades other kids to help him, he can build one. I am not complacently optimistic about the future; I am conditionally optimistic….
Look at history and data, not headlines. The world continues to improve in just about every way. Extreme poverty, child mortality, illiteracy, and global inequality are at historic lows; vaccinations, basic education, including girls, and democracy are at all-time highs.
War deaths have risen since 2011 because of the Syrian civil war, but are a fraction of the levels of the 1950s through the early 1990s, when megadeath wars and genocides raged all over the world. Colombia’s peace deal marks the end of the last war in the Western Hemisphere, and the last remnant of the Cold War. Homicide rates in the world are falling, and the rate in United States is lower than at any time between 1966 and 2009. Outside of war zones, terrorist deaths are far lower than they were in the heyday of the Weathermen, IRA, and Red Brigades….
Several awful things happened in the world’s democracies in 2016, and the election of a mercurial and ignorant president injects a troubling degree of uncertainty into international relations.
But it’s vital to keep cool and identify specific dangers rather than being overcome by a vague apocalyptic gloom…”

5. Items of Note
6. Job Postings
7. Upcoming Events
Feb 7-8 Do Good Data (Stanford University) Effective Philanthropy
March 30 Impact 2 (Paris) Impact Investing
April 4-6 Center for Effective Philanthropy (Boston) Effective Philanthropy
April 7 Wharton Social Impact Conference (Philadelphia) Impact Investing
May 31 - June 1 Grantmakers for Effective Organizations (Chicago) Effective Philanthropy

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 this woman hugging her own real-life teddy bear). 

Until next time, thanks for reading!

Brian Walsh
Head of Impact at LiquidnetFull Bio.