All Things Impact.

private capital & the public good

All Things Impact 2016.6: philanthropy vs democracy, what impact investing can learn from microfinance, opting out of ESG, and is humanity getting better?

Brian WalshComment

Hi friends,

Here are four links worth your time:

1. Effective Philanthropy: what is the appropriate role of philanthropy in a democracy?
Gara LaMarche oversaw the deployment of ~$3 billion in philanthropic grants when he ran both the Atlantic Philanthropies and Open Society. Now president of Democracy Alliance, he recently spoke with Denver Frederick for the Business of Giving podcast about the nature of philanthropy in democracy. The whole interview is worth a listen, but here is a partial, unofficial transcript:

“When ‘big philanthropy first came on the scene, about 100 years ago (with the Rockefeller and Carnegie foundations), people on the American left, progressives of the day..viewed the dawn of these big trusts with enormous suspicion, partly because Rockefeller and Carnegie had bad labor practices and operated in extractive industries…it was thought they were trying to ‘cleanse’ or ‘launder’ their money…[Also,] the dominant left critique of philanthropy was to be very suspicious of it and that it was inherently undemocratic…As the years went by that muted considerably. 

Why, now, do progressives have deep concern about the power of money in politics, but not in philanthropy? When you spend hundreds of millions or billions of dollars trying to affect the democratic process and you do so by enjoying a tax exemption (which is a form of subsidy), you can have an enormous influence…a greater degree of self consciousness about it would behoove all of us in philanthropy.”

2. Impact Investing: what can impact investing learn from microfiance?
Many people have pointed out the looming challenge for impact investing as a practice: to gain traction, eventually “impact” can’t be in the eye of the beholder. In SSIR, Laura Foose and Anne Flan offer insights on this challenge from their experience helping to define social performance in the microfinance industry:

“Ten years ago, the microfinance industry was exactly where the impact investment community finds itself now. We prided ourselves on the “double bottom line”—delivering meaningful social performance while operating on a financially self-sustaining, even profitable, basis. Great efforts were underway to measure financial performance. But—and stop us if any of this is sounding familiar—with a few notable early exceptions, no one was measuring social performance. No one was even defining the term. It was simply taken for granted that if a financial institution said it had a social mission, it was serving poor people well. In short, social performance back then, like impact investment today, meant whatever anyone said it meant.

The backlash did not hit until 2007, but when it did, it was fierce. The windfall profits from high-profile IPOs—and the mind-boggling interest rates paid by very poor people that had made those profits possible—soured the public on an industry that had enjoyed respect, not to mention taxpayer funding. Never mind that the IPOs were hardly representative of the whole industry. Without universal standards, the public understandably concluded that “social performance” was nothing more than a marketing slogan.

…The Social Performance Task Force (SPTF) was created in 2005—crucially, so it turned out, before the IPOs—as a platform for the industry to get real about social performance: defining it, measuring it, promoting best practice…

…We’ve seen what happens when a market gets flooded with new money from investors who demand aggressive returns and are content not to ask the tough questions about what makes those returns possible. That story never ends well.

The impact investor community has an opportunity to write a new story, and get it right from the beginning.”

3. Responsible Investing: should ESG investing be the default, and fund managers who want to ignore these factors be required to “opt out”?
The CapRock Group’s Matthew Weatherley-White writes about about a recent encounter at Credit Suisse’s annual gathering of “Conservation Finance” professionals:

“…one of the true luminaries in the world of sustainability-focused fixed income management spoke of his fund’s Environmental, Social and Governance (ESG) research capabilities, and their deep track record in applying it. He was informed. Wicked smart. Thoughtful. Contemplative. Analytical. A bit nerdy, but in just the right way. Precisely the kind of guy you’d want managing your bond portfolio. The focus of his talk was the benefits to be derived from focusing on non-financial metrics when performing due diligence and constructing portfolios. And the results were unambiguously positive.

Anyone who has been around this space for a while would recognize the reasoning: de-risking a portfolio’s carbon exposure and environmental risk; gaining visibility into governance issues that inform credit worthiness; exposure to things like health-care cost liability for pension beneficiaries; etc. And he demonstrated, convincingly, that on a fully risk-adjusted basis, portfolios that emphasized this approach outperformed – if only marginally - his firm’s conventionally managed portfolios. (For context, the firm manages approximately $21billion, of which $1billion is managed specifically against this more stringent set of criteria. So he is not just tossing around a few bucks and calling it a strategy.)

So I raised my hand during the Q&A, and asked him why, if the approach and results were as productive as his slides proclaimed (and I have no reason to doubt him), did his firm not simply apply the same depth of ESG criteria to all of the portfolios they managed? Put more bluntly, I asked him why, with the empirical evidence at his disposal, didn’t his firm require conventional investors to opt-out of the ESG analysis? After all, investment professionals fight hammer and tong every single day for the slightest performance edge. Entire careers are made or broken on a few percentage points. His presentation made it sound like their ESG approach equated, simplistically, to free money.”

The reaction? “It was as if I had suddenly broken out singing “I Like To Be In America”. In Klingon.” Matthew goes on:

[I] came to a startling realization: if we, collectively, were to simply make ESG investing the opt-out proposition, that would change the game instantly and completely.

Imagine asking someone, for example, if they would like to invest along a special set of investment criteria that treated with utter disregard the environmental and social consequences of their capital. We would be required to disclose that by doing so, the investable universe would be limited. And of course, as a result, volatility would increase and the result would likely be a performance sacrifice. On the plus side, this approach would represent an excellent values-alignment exercise (so long as their values included environmental degradation, a willful ignorance to the hardening science around climate change and tacit support for the increasing levels of wealth and income disparity that we see not only in the US, but also throughout the world).”

4. Wildcard Topic: is humanity getting better?
In ‘The Stone’ section of the New York Times, the philosopher Leif Wenar has a beautiful reflection on human progress:

“The 20th century marked an inflection point — the beginning of humanity’s transition from its ancient crises of ignorance to its modern crises of invention. Our science is now so penetrating, our systems are so robust, that we are mostly endangered by our own creations. Our bomb-making is now informed by particle physics; our computers are becoming ever-better informed about our private lives.

In 1665, half a billion humans sweated to sustain the species near subsistence with their crude implements. Now our global economy is so productive that 16 times that number — some 8 billion humans — will soon be alive, and most will never have known such poverty.

…[T]he big picture of postwar history shows significant improvements in nearly all indicators of lived human experience. The average life span of humans is today longer than it has ever been. A smaller proportion of women die in childbirth than ever before. Child malnutrition is at its lowest level ever, while literacy rates worldwide have never been higher. Most impressive has been the recent reduction in severe poverty — the reduction in the percentage of humans living each day on what a tall Starbucks coffee costs in America. During a recent 20-year stretch the mainstream estimate is that the percentage of the developing world living in such extreme poverty shrank by more than half, from 43 to 21 percent.

The real trick to understanding our world is to see it with both eyes at once. The world now is a thoroughly awful place — compared with what it should be. But not compared with what it was. Keeping both eyes open gives depth to our perception of our own time in history, and makes us better able to see where paths to more progress may be open.

…Humanity does learn, painfully and often only after thousands or even millions have died — like a giant starfish hurrying over a jagged reef, with only primitive vision, slicing off spines on its way, yet regenerating as it grows and slowly adapting its motion. The currents are pushing the starfish faster, the reefs ahead are sharper — humanity must become sharper, too. Mainly, humanity learns as identities alter to become less aggressive and more open, so that networks can connect individual capacities more effectively and join our resources together.”

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 puppy using its mother’s ear as a blanket).

Until next time, thanks for reading!