All Things Impact.

private capital & the public good

2016.5: foundation openness, impact fidelity, the case against SRI funds, and are we hopelessly hooked?

Brian WalshComment

Hi friends,

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

Here are four links worth your time:

1. Effective Philanthropy: what do we mean by foundation openness?
One of my favorite projects in my work at Liquidnet is our participation in the Fund for Shared Insight, a funding collaborative that seeks to make philanthropy more effective by both advancing the research and practice of feedback loops in the nonprofit sector and by advancing foundation openness.

My terrific Shared Insight colleague at the Ford Foundation, Chris Cardona, has a helpful blog post about how we are internally wrestling with what we mean by foundation openness:

“The essential point is, there’s a difference between one-way openness, in which a foundation makes its information available to the outside world, and two-way openness, in which it engages in dialogue with the outside world and is willing to make changes as a result. For some foundations, it’s a huge achievement even to get to one-way openness; as we point out below, nearly a third of foundations with assets over $100 million (that is, pretty big ones) don’t even have a website. For other foundations, sharing by default has become the norm, and they’re pushing themselves to address the power dynamic between funders and nonprofits, or talking candidly about failure. We want to recognize these different forms of openness and encourage conversation and practice that moves foundations toward two-way openness where that makes sense.”

We are trying to refine an RFP that would solicit helpful ideas for how we might meaningfully increase foundation openness. Please do give the whole post a read and either comment on Chris’s blog or send me any thoughts you might have.

2. Impact Investing: impact fidelity & making sense of the many kinds of impact investing

My friend Brian Trelstad of Bridges Ventures wrote a great piece for Harvard Business Review on the confusion around the impact label in investing:

“Currently, impact can mean anything from venture investments in new health technologies to microfinance loans in Peru; from affordable housing in the US to renewable energy in India; from social impact bonds to private equity funds that create jobs.  That’s just the beginning of the confusion—even if you accepted that such diverse investments should all be grouped into one category, how do you even measure and compare impact anyway?

Faced with this uncertainty, most investors have chosen one of three options.  First, they search for examples of impact within their existing portfolios, bringing no incremental capital into the field.  Second, they deploy a small amount out of an experimental or mission-motivated pocket, which still holds back enormous amounts of capital.  Or third, and more common, is that they sit on the impact-investing sidelines. None of these are ideal outcomes.

In order to free up all the dry powder waiting for the right impact opportunity, the investment industry needs to help investors clearly articulate three guiding principles behind their investments: what kind of impact they want to have, how deep or broad their intended impact is, and the level of risk they are willing to accept.”

But after you’ve defined your impact preferences and how they fit into an overall portfolio, who does an investor ensure their impact intent is preserved? Brian proposes that: 

“…without a mechanism to align all players in the impact value chain around an investor’s expectations, the field risks an impact “race to the bottom” where funds or companies do as little as possible to comply with an investor’s [impact] objectives.  A comparable concept to “fiduciary duty” — call it “impact fidelity” — is needed to bind different actors to attempt to achieve the impact preferences that an investor articulates.” 

So…what might this “impact fidelity” look like?

3. Responsible Investing: better to avoid low-performing SRI funds and donate gains to charity instead?
Over at the MutualFunds website, Larry Swedroe offers a skeptical view of SRI (socially responsible investing):

“The implication is that you’re seeking not only profitable investments, but also investments that meet your personal standards. Some investors don’t want their money to support companies that sell tobacco products, alcoholic beverages or weapons, or firms that rely on animal testing as part of their research and development efforts. Other investors may be concerned about social, environmental, governance, labor or religious issues.

It is important to note, however, that SRI encompasses many personal beliefs and doesn’t reflect just one set of values. Therefore, it’s no surprise that each socially responsible fund relies on its own carefully developed “screening” system.”

Swedroe then reports on recent studies on the financial performance of SRI funds, finding:

“Evidence in the literature on mutual funds has shown that investor flows respond positively and significantly to past performance. However, this relationship weakens as the level of CSR increases. Investors in funds with higher ethical standards become less responsive to past performance and derive their utility from non-financial attributes. As the level of ethical compliance increases, it becomes more difficult for investors to find similar investment alternatives and therefore they may be more reluctant to switch to other funds, even when these funds register poor performance.” 

By this, Swedroe argues that SRI investors “pay a price in the form of lower expected returns and less effective diversification” and goes on to argue that SRI investors should instead “avoid socially responsible funds and donate the higher expected returns to the charities that you are most passionate about. In that way you can directly impact the causes you care deeply about and get a tax deduction at the same time.”  

(I obviously disagree, though it’s helpful to read these critiques. Thanks to my friend Aref for sending this link along!)

4. Wildcard Topic: are we hopelessly hooked?
Jacob Weinberg reviews several books in the New York Review of Books dealing with our digital culture and the impact of technology on relationships. (Did you know that evidently on average we check our smart phones 221 times a day—an average of every 4.3 minutes?)

“What does it mean to shift overnight from a society in which people walk down the street looking around to one in which people walk down the street looking at machines? We wouldn’t be always clutching smartphones if we didn’t believe they made us safer, more productive, less bored, and were useful in all of the ways that a computer in your pocket can be useful. At the same time, smartphone owners describe feeling “frustrated” and “distracted.” In a 2015 Pew survey, 70 percent of respondents said their phones made them feel freer, while 30 percent said they felt like a leash. Nearly half of eighteen-to-twenty-nine-year-olds said they used their phones to “avoid others around you.”

One insight he covered that I found interesting: why do teenagers prefer Snapchat over Facebook?

“For young people, she observes, the art of friendship is increasingly the art of dividing your attention successfully. Speaking to someone who isn’t fully present is irritating, but it’s increasingly the norm. Turkle has already noticed considerable evolution in “friendship technologies.” At first, she saw kids investing effort into enhancing their profiles on Facebook. More recently, they’ve come to prefer Snapchat, known for its messages that vanish after being viewed, and Instagram, where users engage with one another around a stream of shared photos, usually taken by phone. Both of these platforms combine asynchronicity with ephemerality, allowing you to compose your self-presentation, while looking more causal and spontaneous than on a Facebook profile. It’s not the indelible record that Snapchat’s teenage users fear. It’s the sin of premeditated curating—looking like you’re trying too hard.”

That’s it for this week. Help me spread the word about #Allthingsimpact to your friends and colleagues. People can sign up to receive this newsletter at All Things Impact. Please also send me any compelling links you discover in your own journeys across the web (even things like this gif of a baboon who has just had it with the internet today). 

Until next time, thanks for reading!