Even before research was available, my field work in development had left me convinced that investment managers should be able to pursue the mandates desired by their investors, regardless of whether or not the primary mandate was “maximize financial returns”. I don’t want to maximize financial returns, I want to optimize financial and social returns at the highest level possible. As an investment manager, I want the freedom to customize that optimization around the values and conditions established by the people whose money I manage.

So why aren’t I jumping up and down in joy over the creation of benefit corporations (B-corps) and low-income limited liability companies (L3Cs)? Basically, I think the intention behind these structures is excellent but the implementation is highly paternalistic and flawed.

Yes, there is probably a need for a centralized certifying entity with clear standards and active engagement (i.e, renewal evaluations rather than permanent status granted at the start of the enterprise life-cycle). A legitimate certification – along the lines of the “Good Housekeeping” seal of approval – can offer competitive advantages to growth-oriented MBLs aka “impact” ventures.

I do not, however, believe that certification should be a requirement. Nor do I think that having multiple government entities (State or Federal) attempting to define, verify, certify etc the universe of MBL ventures and social enterprises that will emerge if creativity is given free reign. The government is not giving tax breaks to B-corps or L3Cs, so why should they be subject to requirements that don’t apply to all for-profit corporations. Who are we protecting by mandating certification? How certain are we that we are certifying the right things, at a fair cost, in a transparent and constructive manner? Shouldn’t potential investors get to decide if they want a company to obtain certification? And from whom?

What if my investors have an environmental mission but don’t want to focus on social returns? Or vice-versa? What if they want to maximize financial returns first, but also achieve specific social and/or environmental goals? What if I think that paying employees fairly and offering career paths fills my community impact goals? Now that we can escape the “you must maximize financial return to successfully exercise your fiduciary responsibility”, will we get into trouble for someone else’s opinion that we’re not doing “enough” on the social or environmental front?  I want to see a level playing field for impact investment and multiple bottom-line returns, not a straight-jacket of regulations that add questionable value.

All corporate entities have some form of by-laws, statues, operating charters or the like. This core organizational document is where all of the MBL objectives should be specified. Require a super-majority vote to change this core document and you’ve got the mission locked nicely into place. I may not feel that certification is necessary at this stage because I have the “comfort” I seek through a negotiated operating charter. When we get to the next growth round, I may decide the moment is ripe for certification as a tool for enhancing value for incoming investors. Or not. I may suggest instead that we conduct a specific type of impact measurement exercise instead. The thing is – I don’t know today what tools, tactics and strategies are going to create the most value for my investors or portfolio companies – and I don’t want to spend time and money on something that doesn’t have a clear, current value proposition.

Whether through legislation (B-Corp, L3C or otherwise) or practice (operating charters, statutes, etc), one thing I would require of MBL companies is an integrated report. Actually, I’d pick up on recent Brazilian legislation and require ALL companies to adopt an integrated report or explain why not. Given our current reality, however, an MBL integrated reporting requirement could help pave the way for this sort of broader adoption of integrated reporting. Given the growing number of standards, indicators and ratings, figuring out how to present a single report that clearly describes a company’s impact with respect to financial, social and environmental resources isn’t going to be a one-shot deal. Different companies will experiment with integrated reporting, and somewhere down the line, consensus will start to emerge. For now, moving from having a separate Annual Report surrounding financial statements plus a Social Impact (or ESG, or Environmental, or CSR) report, toward a single report addressing MBLs would be a huge step forward.

Having said the above, I’d like to extend sincere thanks and congratulations to the many people and groups who have worked to obtain B-Corp and L3C legislation, as well as to the intrepid entrepreneurs who have whole-heartedly adopted these new structures. Check out this well written article in “The Economist” for more on why B-Corps and the like are worthwhile (Firms with Benefits). The US is absolutely better off for the existence of these hybrid structures and for the still ongoing debate around their design and implementation. However, in order to reach that semi-utopian state in which all investments are assessed on their collective financial, environmental and social returns, as well as the potential sustainability of those returns, we’re going to have to keep innovating. We need to keep exploring legal and financial structures that align interests and can evolve as impact investment evolves. Bring on the B-Corps and L3Cs, but don’t stop there.

Lauren Burnhill – @LaurenOPV

Impact investment – the pursuit of social and/or environmental returns as well as financial returns – is rapidly gaining global importance. Development challenges such as poverty alleviation, sustainable development self-sufficiency and social justice can be addressed through impact investment work. The double- and triple-bottom line organizations in this field seek top tier human capital with broad knowledge and experience, but face constraints in hiring and retaining talent. The effective use of impact investment funds requires two things: (1) human capital to develop new ideas and paradigms; and (2) new ways of working together that create a meaningful workplace culture and an effective vehicle for deploying financial capital.

In late 2010, the One Planet team identified human capital and organization growth as key factors shaping and constraining industry evolution. Under the auspices of Dr. K.C. Soares, a pilot research project was developed around these topics. We wanted to understand current baseline practices among industry leaders and gain a clearer understanding of how people and workplace culture are influencing impact investment. Baseline clarity is a first step toward developing benchmarks that will contribute to healthy growth of multiple bottom line enterprises. These scalable impact investment firms will encourage increased flows of capital into ventures that benefit “the other 99%” as well as the firm’s investors.

Our self-funded research included face-to-face interviews with fourteen people in nine organizations of sizes ranging from about five to over 50 persons, and a thematic range including microfinance, social investing, VC, and an internationally respected specialty rating agency. Given limited resources, we focused on current human capital and organization development practices within participating organizations and the extent to which these are an integral part of workplace culture. Can we identify practices that increase workplace satisfaction and productivity? What kinds of initial conclusions can we draw and how might these shape industry dialogue and future research initiatives?

We began with the basic premise that impact investment requires each workplace to attract and integrate persons from diverse professions and backgrounds. In other words, social sector and development expertise is needed alongside traditional finance and investment skills. Additionally, we believe that a healthy workplace embracing change and innovation will incrementally, and possibly exponentially, improve and consolidate performance quality. Interview questions touched on structure, performance evaluation, hiring practices, communications, governance and the role of creativity and innovation in work processes and procedures.

Given our small sample size, research findings must be considered as preliminary. However, there was a recognized and articulated need to devote more time and effort to human capital and professional development, as well as to organizational culture as a means of ensuring sustainable growth. The nine discussion points below emerged from Dr. Soares’ analysis. The complete White Paper, which discusses these topics in greater detail, can be found on the TMITM blogsite (White Paper).

1. The different and specific vocabularies and approaches of financial and social sector professionals which are unique, considered sui generis, create potential barriers of mutual understanding. People are hired from these different professional and must work together productively even though each may think the others are speaking different languages. Organizations recognize the “two different worlds” phenomenon but are unprepared to handle the specific human and organization issues that arise as a result.

2. Workplace culture is rightly viewed as important. The need for mutual understanding, shared values, and collaborative approaches to work were often mentioned. Nevertheless, few organizations have specific plans or programs designed to create and maintain this type of environment. In the absence of a formal workplace culture, how people develop professionally and how they foster, learn of and share innovations in their profession are constrained.

3. Growth requires increased staff and integrating new hires into the workplace requires formal, or at least informal, on-boarding. Little, if any, formal on-boarding is planned and conducted, which worsens the problem of staff with different subject matter expertise and vocabularies. Conscious, purposeful on-boarding would foster better alignment between professed organization goals versus actual work place approaches and methods, as well as increased employee satisfaction.

4. Training and development programs need to be designed and implemented. While placing a high value on this, organizations recognized that neither appropriate time nor funding was being made available for these critical programs. Additionally, there was limited understanding of the distinctions between training (activity specific) and professional development (individual specific) programs. Sporadic and opportunistic training was thus offered, but little or no management/executive development programs. Career development, broadly defined to cover all staff, was not mentioned at all.

5. The need to harmonize across various generations of professionals in the modern workplace is well-known. None of the participating organizations had any specific tools or programs to leverage these generational differences. Although succession planning might appear as a Board level concern, the organizations were constrained in terms of “preparing for the future”, particularly with respect to human capital. Multi-year plans to increase financial capital through donations or investment were the norm, however, rather than the exception.

6. More attention needs to be given to the correlation between articulated organization values on the one hand (i.e., reduce poverty at the base of the pyramid) and objectives that directly impact the workplace. Most organizations believed that having a mission statement was sufficient to make their values clear, yet individuals are given little guidance in transforming a high-level mission into a practical plan of action. Clearly stated values would enhance the organization’s ability to attract experienced industry professionals who will fit well with existing staff and culture. An associated issue, raised by most of those interviewed, was their inability to offer competitive salaries commensurate with the knowledge and experience being recruited.

7. All interviewees commented that “people are the organization’s greatest asset”. This sentiment did not translate into meaningful actions that developed human capital within the organization. The organization’s systems, policies, procedures and values should work in synchronicity to provide meaningful human capital and organization development within the organization. When they do so, growth and expansion are more readily attained.

8. When operating funds are limited, one of the ways to attract and retain qualified staff is by offering well developed career plans and programs. Recognizing and nurturing non-financial value in this way lays the groundwork for a growing talent pool at all levels within the organization.

9. Variable compensation schemes were suggested as a means of addressing the issue of attracting and retaining experienced talent. Specifically, compensation structures that align the interests of staff, management, Boards and investors would contribute to the scalability and sustainability of these organizations. Additional research on performance linked compensation and reward systemsis needed. The recent GIIN case studies on aligning compensation and impact investment goals is a first step in this direction (Case Study:_Impact Based Incentive Structures).

The results of this pilot research provide insights for thoughtful reflection and future action. There was widespread recognition that more needs to be accomplished vis-à-vis the organization’s human capital and its own abilities to develop and grow sustainably. More creative and innovative thinking could be used to address these challenges. Financial performance is often discussed, but enhanced human and organizational performance are also critical for healthy growth of the impact investment industry.

The complete White Paper can be found under the “One Planet Presentations & Publications” Tab.  Please feel free to comment here, or directly to K.C. (kcsoares@erols.com).  If others are working on these issues, please let us know – perhaps we can collaborate and amp up the industry-level discussion!

Lauren Burnhill – @LaurenOPV

In trying to develop (maintain?) my voice as an #impinv industry thought leader, I find myself looking for things that are not working and brainstorming how we can fix them. Usually, I’m worried about one big broken thing at a time – like the cost, utility and ethical implications of some social impact assessment tools/practices. Reading “The Cleantech Meltdown”, however, I was utterly dismayed at the number of big broken things I was looking at simultaneously. Ms. Eilperin’s subtitle “How high hopes, false promises and brutal economics shattered an industry” captures the heartbreak, but my takeways  go further. Here are  three serious breakdowns we, as a society, need to explore:

1.     The Cleantech Meltdown is the perfect argument for having coherent, articulated, integrated national industrial policies.  The power of government to build and finance public goods (roads, bridges, schools, etc) fell sharply through the prosperous last decades of the 20^th century. Much of this has to do with the “Anti Big Government” focus on cutting expenses (and people’s quality of life) rather than asking “What goods and services SHOULD we really deliver to the American people? And what’s the most efficient way to do that?” Working collaboratively, we should be able to identify the carrots and sticks needed to align the incentives of inventors, renewable producers, investors and John Q. Public. When we don’t collaborate, each stakeholder pursues his perceived best outcome and we end up with a cleantech meltdown, dependency on Chinese solar panels and a host of other unpalatable negative “externalities”. Please note, these are only “externalities” if you think single (financial) bottom line. Most of us pursuing multiple bottom lines are thinking more holistically and longer term.

2.     Venture Capital (VC) and Private Equity (PE) are broken: forget defining best practice, these industries need wholesale “re-thinks”.  VC developed a financing model suited to the fast-paced evolution of tech (primarily digital) innovation and eagerly applies this to any hot sector that needs early-stage financing. Many of these sectors have entirely different capital needs and lifecycle patterns than tech. Cleantech is about creating new fuel sources, production techniques, distribution systems and altering engrained consumer behavior. On what planet would you expect a cleantech company to accomplish all of this to scale in three to five years? Are we perhaps arrogantly assuming that the existence of sun, wind, corn, algae & hydrogen means that all the other challenges of going clean and green will be a walk in the park?

Those who argue that VC “is” 3-5 year money are missing a critical point. Is VC early stage TECH finance or early stage finance? If the latter, then take note.  3-5 years will generally get you your exit (one way or another) in digital tech. But if solar innovations or fuel cell ventures will need 7 – 10 years and a couple of major business model pivots to succeed, shouldn’t VC darn well create instruments and governance mechanisms that prime the pump for success?

PE, which used to be a smart and dignified source of capital for corporate change and mid-market growth, is now known for mega-deals, excess leverage and screwing the little guys. Regarding the Solyndra saga, I can’t help thinking that there should have been a PE club deal that brought enough cash and brains to the table to capitalize on what the company had already achieved and avoid further meltdowns in a much needed sector. DOE tried to create a climate for more patient capital and has been ripped apart in the press for “wasting taxpayer dollars”. DOE’s loan guarantee program had its flaws, but end game efforts to help Solyndra survive were not the problem.

I’d bet money that none of the “wasting money” pundits have lived someplace where the lights might not turn on at the flick of a switch, water might not run when you turn on the faucet and sanitary facilities refer to a hole in the ground outside. Just because you or I personally might have it good, that doesn’t mean that our neighbors are OK. And the fact that we are OK today doesn’t mean that things will stay OK tomorrow. What happens when the national grid fails regularly, or too many ancient water conduits leak or burst at the same time? Sustainability requires that we think about these things now and then start taking action now.

We have an innovation obligation to ourselves and to the future. We must learn to make better use of renewable resources and smarter use of all the rest. That will mean taking risks and absorbing the occasional failure. We know that this is true and yet we’d rather punish failure than learn from it. Why is that? Which brings me to broken thing #3

3.     Our values – or at least our priorities – are broken. Much of the US was OK spending $7-10 billion a month in Iraq. Yet the notion of spending a billion a month on green urban renewal programs around the US is unthinkable. Why? Shouldn’t we be putting more effort into ensuring that we attain the highest and most equitably distributed socio-economic well-being of any country on the planet? Doesn’t superpower status mean taking good care of all of our people, as well as looking out for the rest of the world? I’m damn proud to be an American – but that doesn’t mean I think we’ve achieved a status quo that is the best we can hope for or aspire to.

The 1% is increasingly full of lawyers and bankers, while teachers, firemen, soldiers and social workers struggle to get or keep a foothold in the middle class. What is that saying about our values? That people who “serve” should live in servitude while others take disproportionate returns? Maybe you’d argue, for example, that lawyers must invest more years and dollars on education than firemen or soldiers. On average, that’s most likely true. Firemen and soldiers, however, risk their lives to protect the rest of us on a daily basis.  How can 4 years of college and 3 years of law school be worth so much more than a lifetime of selfless risk?

On what basis are we deciding how different professions should be compensated? It clearly has little to do with risk and reward, nor can you argue “brains versus brawn” unless you’re willing to claim that it doesn’t matter who teaches our children or what materials they have with which to do so. Mostly we are NOT thinking at all about aligning values and compensation.  I suspect that many compensation practices are hangovers from high society’s adaptation to the Industrial Revolution. The children of the wealthy were taught by servants – tutors and governesses – so why would an emerging public education sector stop to think about what value a teacher provides to society. They already “knew” there was labor available at a low price.  Besides, the demagogues will point out, think of the cost to taxpayers if teachers earned more money!

The answer to that question brings me back to where I started, arguing about falsely labeled “externalities”. Before we start calculating costs, let’s go back to the question of a teacher’s value. Our children spend the majority of their waking hours between ages 5-18 under a teacher’s stewardship. They absolutely should be learning “reading, writing and ‘rithmatic”, but they are also learning how socialize and interact with others and who they are as individuals distinct from their parents and peers. What if our children left K-12 ready to pursue whatever vocation they were most drawn to? What if you knew with certainty that the quality of your child’s education today could ensure their socio-economic well-being later in life.  Every parent who sends their child to private prep schools is already thinking this – and yet the overall pace of educational reform is glacial.

My heart – and significant work experience – has focused on improving life at the base of the pyramid. I believe, however, that a sustainable society needs ALL investment to be multiple bottom-line (MBL) in nature. Whenever and wherever our economic activity has a direct impact on people or planet, the social and environmental returns are either positive or negative – but they are NOT externalities. If, as my mother was fond of reminding me, our sins of omission are as great as our sins of commission, then the pursuit of a single (financial) bottom line is a sin! Repent now!!

Put more money into clean and green and impact investment! Although please do take the time to think through whether your planned financial structure will help or hinder performance. Are you aligning incentives or trying to come out ahead of the next guy? 100% of nothing is always worth less than 10% of something good. Are you being realistic about likely hold periods and time to maturity, or hoping that luck and a fluffy IPO market will be adequate substitutes for realism? If you screw up the financial structure, the outcome will probably be sub-par as well, furthering a vicious chain of short-term thinking and me-first logic.

Remember, we have only the one planet. F*** it up irretrievably and we can kiss the human race goodbye. We’re all in this for the long haul, like it or not. Are we going to start thinking about sustainability, or just keep rolling the dice? As I watch the US election campaign, my fear is that we’re going with the dice. What a shame!

What are your takeaways from the Cleantech Meltdown? What “big broken things” are keeping you up at night?

Lauren Burnhill – @LaurenOPV

Each week my local paper is full of stupid short-term thinking on this topic. Let’s build the Dulles Airport Metro Station OUTSIDE of the airport because that costs less! OK for the short-term, but will that decision affect usage? Without conducting a formal survey, I’m fairly certain that many business travelers will opt out (especially those of us on the Red Line who already face transfer time and delay). What about tourists? Sure, budget tourists will use the outside Metro station because the options are so few and so expensive. Many tourists, however, accustomed to the seamless air to ground transits of European airports will decide not to use Metro – and not to fly into Dulles either. Not only is BWI an alternative, but Newark and JFK (where airfares from Europe are often lower) plus Amtrak are favored by many people I know. Would the inverse decision – Metro station underground with seamless access to the airport have a positive economic effect? Again, no scientific survey, but I’d think yes – this option would leave BWI in the dust and encourage tourists to fly into Dulles. So, in the short-term, we’re saving some money, but potentially facing permanently lower revenue flows.

One group is better off for even a poorly placed Dulles Metro – the service workers who need to reach the airport. This brings me to the poverty issue. Too many of our politicos and higher income citizens think public transportation is a luxury good designed to improve their automobile commute or enhance their access to entertainment and services around an urban center. Or maybe they’re just thinking “I don’t need it, who cares”. Access to public transportation, however, can make the difference between getting by and giving up.

At the lower end of the income spectrum, public transport is both a necessity and for many a perpetual torment. How would you feel about your 50 hour work week if you had to add 20 hours of multiple bus routes to get to work? Most of our bus stops have neither shelter from the elements nor seating, so please imagine yourself spending at least half an hour a day exposed to the elements, waiting for the bus alongside the two to four hours riding the bus. Unless you do this regularly, it is hard to imagine the kind of toll this type of commuting takes on energy and health, other family responsibilities and the ability to believe that the future might one day be brighter for yourself or your children.

The more extensive and humane our public transport systems, the more easily labor can flow to where capital and commerce require. Economics 101 suggests that equilibrium requires the free flow of capital and labor, so step away from bank regulations for a moment to think about helping the labor side of the equation. Talk of job creation is great, but people have to be able to get to those jobs!!

When we fail to consider the immediate AND the long-term impact of public transport decisions on the poor, elderly, low-income and disadvantaged of our society, we are perpetuating cycles of injustice and inequality. Make a decision today based only on your personal interests and we are assured of facing a more difficult tomorrow that requires even more expensive solutions.

There is also a “money in the middle” problem here! The US has a lot of bankers, but apparently very few financiers. Why isn’t someone like Goldman Sachs designing a 50 year fixed rate Transport Bond for Metro? Betcha we could reduce the element of public subsidy by adding just enough enhancement to attract pension funds, which need longer term instruments to match their long-term obligations. Appropriate financing would also mean that fare increases could be phased in over a long-time period while both maintenance and investment for growth chug merrily along.

Public transport isn’t a luxury good and it need not be a wasteful expense. It should be considered part of the basic infrastructure that all Americans have access to, regardless of income. Aside from that, permanently reducing poverty will be impossible unless the poor have affordable ways of reaching schools and employment. Tune out the idiots focused only on short-term cost and think about what a sustainable and equitable future might look like. Then make up your mind and go rock the vote!

Lauren Burnhill - @LaurenOPV

I used the term “build” metrics for a reason. A prerequisite for the availability of robust longitudinal data is the passage of time. Hence the word “longitudinal”. Improvements in socio-economic well-being don’t happen overnight (unless you happen to luck into a reality TV show gig). What you CAN learn/know in the early stages of a venture with social impact (VSI) is different than what you can know and learn five or ten years down the road. Unless you plan on sitting it out and waiting for others to collect data over time before making any impact investments, you’re going to need to start simple, and have a plan for gaining deeper insight as the VSI grows.

Start with a practical and respectful approach to impact measurement. You don’t want to spend a boatload of money to find out that you’ve created 50 jobs that increased household income and nutrition for 250 people. Furthermore, the people who are the objects of your measurements are people: not objects of charity, not things. They have the same right to privacy that you and I do – and before you ask them to give that right up so that you can understand the impact of your investment, think about what you really need to know versus what you’d like to know. Given your core values, what impact is most important for you and how can you measure progress toward that impact goal?

Three tactics to keep in mind:

1. Pick impacts that can be measured. If you can’t get raw data, or the cost of getting data is going to be significant, you may be over-thinking the problem. What information can you gather at little or no cost that will answer your questions about impact and help your portfolio company grow a better business?
2. Get baseline data: If you don’t know how much protein was in a child’s diet before your nutritional supplement hit the market, you’re going to have a very hard time figuring out how much better off that child is after consuming your product. If you’re going to invest money up front in impact measurement, start by getting good baseline data around the specific impacts you plan on tracking.
3. Be ethical: Your VSI is, to some extent, a social change experiment. The objective may be to improve the socio-economic well-being of the target market, but getting there usually requires that target market to adopt new behaviors, practices and values. The people who make up the target market struggle to survive in conditions far more onerous than we may be aware. Think twice before you violate their privacy, frame questions that threaten their dignity or ask questions that are illegal in your home market. You may want to know how many indigenous women are working in the company, or how their average salary compares to non-indigenous workers in similar jobs – but how is that information going to be used once it’s acquired? Make sure that the means you use reflect the same values as the impact you hope to achieve.

Now here’s a big secret that can help you get more value from an impact investment. Impact isn’t just the effect your VSI has on the target market. There are three different levels of impact that you should consider when looking at a possible investment:

1. Impact on the Target Market: Of course you need to know that the product or service offered by a potential VSI portfolio company is delivering promised returns, within the projected revenue and expense profile. This is your level one impact.
2. Impact of Internal Operations: Level two looks inside the VSI to explore whether customer-focused values are reflected in employee and organizational practices. Does the company offer benefits to its workers? Are there training and professional development opportunities? Is any element of compensation tied to performance (individual and/or firm level)? Does the company recycle? When renewable energy sources are available, are these being used? Ceteris paribus, a company that treats its employees well and cares about the environment is more likely to deliver long-term performance than one that uses human and planetary resources wantonly.
3. Impact on the Eco-System: Level three looks for higher order impact. Are collaborative stakeholder relationships valued? Does the company participate in industry associations? Does management regularly and proactively dialogue with regulators and policy makers? Are suppliers screened? Is the company adding value to its market as a long-term sustainability practice, or is it just minding its own business and hoping for the best?

Impact measurement isn’t a simple task. Alongside the challenge of what we measure, when we measure it and who bears the cost, we need to dive more deeply into the complementary task of integrated reporting. We have IRIS impact indicators and GIIRS impact ratings, Sustainability indicators and ratings (Morgan Stanley, EIRIS and others), ESG indicators (Bloomberg and others), the Global Reporting Initiative, the One Report movement and all sorts of worthy efforts to develop standards and practices around an evolving multiple bottom-line ethos. For now, we each need to pick a set of indicators, use them, report our data and pay attention for convergence opportunities.

Back when dinosaurs walked the planet, industry conferences were few and annual events were often commemorated with a poster. At my very first international development conference, I received a poster that I have to this day – Miró-like modern art splashed in black, red, yellow and blue on white, the name and date of the conference, and this statement, scrawled in cursive across the bottom of the poster:

“We are all going to become one community, or we are going to die”

Bold, brutal and dramatic, but we only have this one planet. Let’s make sure the impact we have on it is something we can live with by making ALL investments multiple bottom-line impact investments.

Lauren Burnhill aka @LaurenOPV

1. Impact Investment Funds of Funds (IIFoF) will come on strong: Most money moves into microfinance or impact investment through special purpose fund vehicles. Raising capital for these vehicles is time-consuming, expensive and highly inefficient. New funds, with new managers, are often small and resource constrained, adding to potential investment risk. The new crop of impact investment advisors hope to overcome some of these constraints by creating IIFoF structures that can serve as anchor investors in emerging funds while at the same time offer a more diversified product to their own investors.

Before you rush to invest in an IIFoF, ask yourself what the Fund Manager is offering to portfolio investee funds, aside from a slug of capital. Where the Fund Manager has a robust plan for supporting investee funds, enhancing governance and adding value, an IIFoF may indeed offer superior returns, compared to a single fund investment. On the other hand, if the Fund Manager assumes that financial capital is the primary area in which new funds need support, you’ll still benefit from diversification, but the potential return profile is a bit more opaque.

2. Mobile Payment Networks and Systems will displace MFIs in delivering financial access to the Base of the Pyramid (BOP): As the microfinance industry has grown, poverty alleviation theorists have pushed for the addition of savings products in what has been a largely credit-oriented industry. With many microfinance practitioners (including myself) moving from access to finance into “access to life” issues, poverty alleviation theorists have been looking at MFIs as conduits for health insurance, renewable energy programs, education finance and so on. The thinking is that since MFIs have regular contact with the BOP target market, they are ideal distribution channels for non-financial goods and services that improve BOP quality of life. While an interesting theory, most MFIs are still struggling to adapt to regulation, manage growth and move from single product (working capital loans) dominated portfolios to offering a robust and diversified suite of financial products. Regulatory issues aside, there isn’t enough bandwidth in most MFIs to tackle other social sector challenges.

Mobile payment networks are stepping in to fill the gap. MicroEnsure  clients in Africa can purchase and pay for health and other types of insurance using their mobile phones. Simpa Networks uses a mobile and digital control network to offer prepaid renewable energy solutions for rural villages in India.

3. Latin America will return to favor: In recent years, multilaterals and development experts have favored investment in Africa and Asia and reduced or eliminated new commitments in Latin America. The argument for doing this? More poor people and poorer poor people outside of Latin America. The problem? Latin American economies and societies are far more “investment ready” than most African and many Asian counterparts. As an investor, I want Latin America in my portfolio. As a social development expert, I believe that poverty is poverty, wherever it occurs.

Can you ethically exclude Latin America from your impact investment work? Aren’t you then saying that you want to help only the most miserable and to heck with the moderately miserable? Excluding the Latin American BOP won’t necessarily get you better impact results given investment readiness issues; but it will probably lower your portfolio returns.

4. Focus on Operational Excellence will become a key differentiator across impact investment funds and firms. Mainstream asset managers asked about innovation trends and what it takes to outperform  (Investment Innovations: Raising the Bar) consider operational excellence to be a core driver. In the impact investment world, we’ve been more focused on selling a new vision and figuring out how to report on the multiple bottom lines we’re promising investors. Few of the impact investment funds & firms coming to market have a lot of hands-on experience with social sector lending, much less equity investing. We must, collectively, demonstrate that we are giving as much thought to how we can add value through our work with #ImpInv portfolio companies as we do to the issue of what social & environmental impacts we plan to measure. Failure to do so will contribute to sub-par results that make #ImpInv a temporary bubble rather than a long-term agent for sustainable change.

Are you thinking that you know how to invest in health clinics because the clientele are the same poor people served by the MFI you invested in a few years ago? Regardless of whether the target market is the same or not, lending to financial institutions isn’t the same as lending to corporate whether these latter are small enterprises or giant conglomerates. And I don’t care how many years you’ve been a lender, there’s no reason to believe you’ll make a good early stage equity investor, social or otherwise. What I hear from colleagues with money to place is that “there’s no there there” – they’re hearing a lot of high level mission statements, without a lot of substance behind them. What they’d like is to hear is impact investment fund and firm managers talking about the HOWs in addition to the WHOs and WHYs.

5. Broader discussion around Values & Sustainability, and how these relate to what we can achieve as a society:  I hope we get to a time when ALL investments are sustainable and multiple bottom-line. Before we get there, we’ve got to cross the “impact measurement” hurdle and that implies a clearer understanding of what we want to accomplish given the values we hold dear. It’s important to note two things:  (1) having a mission statement is not the same as having identified and actionable core values; and (2) we do not all value the same things to the same degree and that’s OK. Successful product development and differentiation is likely to happen faster as a result, assuming the values discussion comes first.

Getting clear on values will save investors money (and reduce the stress on investment managers). Most “impact indicators”  cost money to collect, and some – like those requiring randomized control trials – may cost a significant amount of money. If you know what matters most, you can focus on greater depth of understanding in those priority impact areas and skip the rest.

Values clarity may also help address one of the biggest problems I’ve found in my exploration of impact measurement. Specifically, the social and micro-entrepreneurs we invest in are people, not objects of charity. They have human dignity and the same rights to privacy that you and I expect to enjoy. When we ask questions that are illegal to ask in our home markets to satisfy our drive to understand impact, we are crossing an ethical boundary – we are essentially saying that the ends (economic development, peace etc) justify the means (privacy violations and other “crimes” against human dignity). We are certainly intruding into the private lives of our clients to a greater or lesser degree! Measuring fewer –but more important to us — things would not only save money, it might also lessen the ethical transgressions we commit in the pursuit of impact. I’d be very happy about that.

**

My trends list derives from unscientific observation of the impact investment industry and lots of conversations with a wide range of social entrepreneurs, private investors and development organizations. One additional thing you’ll be hearing more about in 2012? Convergence. It doesn’t mean what you think it does – but what it does mean has significant implications for sustainability, impact investment and the possibility that socio-economic conditions will improve for the BOP during our lifetimes!

How do you think Impact Investment is changing or will change in 2012? Let me know what you think!

Lauren Burnhill
@LaurenOPV

Tomato, Tomahto, Potato, Potahto: what does “impact investment” mean to you? Although most agree on the high level goal of protecting people and planet while generating profits, numerous approaches to achieving these objectives are creating confusion and constraining the growth of impact investment. Like emerging markets, impact investment is a theme within which varied strategies and asset classes can be pursued.

In the past, we all accepted single line returns – financial – as the only possible investment objective. Today, we have the option of pursuing multiple-bottom-line (MBL) returns. But what does that mean for investors and what are they key obstacles to pursuing an MBL strategy? Broadly speaking, these obstacles relate to strategic clarity and economies of scale.

The desire to do good – or to do well by doing good – has created numerous MBL practice areas or sub-themes that offer different risk-reward value propositions, including: corporate social responsibility (CSR), environmental, social and governance (ESG) screening, ethical investment (EI) screening, socially responsible investment (SRI) screening, social enterprise, social capital, venture philanthropy, social venturing, sustainable finance and impact investment. Convergence and consolidation are to be expected, but finding strategic clarity and a reasonable path forward in the present is both necessary and feasible.

On an aggregate basis, two distinct schools of thought have emerged around MBL investing. The first, following Rockefeller Foundation’s taxonomy, segregates impact investment into “finance first” versus “social first”. The former seeks primarily financial returns with a little something extra on behalf of social equality or the environment. The latter pursues social and environmental goals first and looks to add a layer of financial returns as icing on the cake. “Finance first” investors see the uncertainty around evolving industry benchmarking standards for environmental, social and governance (ESG) targets and opt to use known financial benchmarks as primary drivers, relegating ESG to a secondary role. “Social first” investors emphasize the human and planetary impact of a potential investment, with financial returns as a secondary driver.

In a recent Forbes magazine interview, Luther Ragin of Harvard’s Kennedy School noted: “the continuing challenge of a traditional investor mindset that views the simultaneous pursuit of financial return and positive social and environmental benefits as inherently contradictory or even unwise. It is a paradoxical position, coming often from those who otherwise embrace market-based, private sector solutions.” The concept of Blended Value put forth by Jed Emerson provides a useful counterpoint to the “finance first vs. social first” paradox. This alternative school of thought acknowledges that we can and should look at the ESG impact potential of all investments. Alternative thinkers see “impact investment” as an opportunity to design innovative products that incorporate social values and responsible stewardship of the environment alongside profitability targets.

Where you fall on the spectrum between these two schools of thought can guide how impact investment fits within your overall investment strategy. If you believe that all investment should bring some element of ESG alongside financial performance, you can achieve blended value returns within any and every asset class in your portfolio (see   Impact Investing Across Asset Classes) for further insights).

Alternatively, you can allocate a defined percentage of total portfolio to one or more impact sub-themes, leaving your core portfolio strategy unaltered. One important sub-theme focuses on finding market-driven solutions to serving and improving quality of life for the large consumer market at the “base of the pyramid” (BOP). These investments tend to be early-stage, emerging markets ventures, with an entirely different risk and return profile than listed SRI and ESG instruments.

Becoming an impact investor does not, however, mean that you must include BOP risks in your portfolio. Defining and implementing an appropriate impact strategy for your organization may mean hiring new advisors and gradually realigning your portfolio around multiple bottom lines. You do not, however, have to accept a single (financial) return anymore. Specialty advisors like R. Paul Herman’s HIP Investor (Human Impact + Profit), Ron Cordes’ Impact Assets and others offer “next generation” information, advice and product access to accredited investors. Cordes notes that a major obstacle for impact investment is the “lack of awareness among the financial advisor/wealth manager community who are truly the “gatekeepers” for the $ 37 trillion of investor capital held by US households” and looks to provide full spectrum knowledge to this community.

Alongside strategic clarity, two additional obstacles are worth noting, both relating to economies of scale. Investment and asset managers with experience in EI, SRI and ESG products and efficiently sized operations are no longer difficult to find. As you move closer to the BOP end of the spectrum, established managers are scarce and, as a result, product offerings are few and far between. This new manager risk, combined with the lack of a transparent and appropriate ecosystem, tends to constrain scale, with a correspondingly negative impact on efficiency and effectiveness.

Traditional approaches to new manager risk limit the size of a first fund, without adjusting standard fee structures. The result is likely to be riskier than a larger, less resource-constrained, fund with alternative risk mitigation features. For example, does emerging markets risk make deal pricing look too low? Consider political risk insurance (PRI) tools that take this risk out of the equation. 2012 will see the launch of at least half a dozen “Impact Investment fund of funds” hoping to address new manager risk by providing anchor capital and launch support, but more is needed to move from niche to mainstream.

Developing an impact investment ecosystem is key for this “niche to mainstream” transition. New impact product offerings typically lack the size and trajectory needed to support a public offering. Much as NASDAQ emerged in the 1960s to provide a transparent, affordable way for smaller, newer firms to access public markets, today impact investment needs a specialized marketplace. Platforms that can provide affordable access and effective oversight of smaller MBL instruments and enterprises, like Mission Markets, have made significant headway in this regard but themselves lack access to growth capital. Investing in financial services firms catering to impact investment offers an interesting private equity play for sophisticated investors.

Sorting through the hype and exuberance surrounding impact investment can be challenging, but failing to do so – and remaining focused on financial returns alone – means forgoing additional upside from social and environmental returns. With public concern about water, energy and social justice on the rise, MBL investing is poised to enter the mainstream. As a responsible investor, you can choose to help lead this transition or follow along, but either way, impact investing is here to stay.

Lauren Burnhill
Managing Director, One Planet Ventures (Lauren.OPV@gmail.com)

My 13 month all-out campaign to launch One Planet Investments and its first two products (a social spectrum fund and a value-added “fund of impact funds” type product) has made 2011 financially constrained for me personally. Scaling everything back to finance the enterprise included a dramatic drop in what was already a very modest philanthropic effort. I very much regret this, as I know that the non-profit sector is feeling the effects of prolonged global financial crises and falling public and private funding sources. With the OPI launch scrubbed, I found myself wondering how I could have an impact this holiday season, when I had no cash in hand.

When I’m actively investing, I know I create value like mad ( in terms of dollars and industry award-winning portfolio companies). When I’m focused on advising and industry thought leadership, as I am at present, it can be harder to assess how much value I’m creating. Influence is trickier to measure than capital gains! Still, if money isn’t everything, then by putting on my creative thinking cap, I expected to find ways to make a difference, using primarily “in-house” resources. I was surprised to find how many small things I could do that would make the holidays warmer for others. Here are some of the ideas I came up with – and I challenge each of you to find ways you can “pay it forward” as well:

1. Good old fashioned volunteer work: The Community section of my local paper highlights volunteer opportunities of all kinds. This year, I signed up to wrap gifts at Barnes & Nobles on behalf of Hospice Caring. I’m raising donations for a good cause and improving my gift wrapping skills, so win-win! Regardless of how much or how little time you can offer, somewhere in your local community there is a need you can fill.

2. Skip the hostess gifts of flowers and chocolate – instead, feed the hungry. I know, my Mom told me not to arrive emptyhanded at a party, and yours probably did too. You can make a small contribution to FeedAmerica.org in honor of your hostess. Every dollar you donate buys 8 meals for hungry Americans through local foodbanks. FeedAmerica will send a snail mail or email card informing the recipient of the donation made in their honor. Your holiday hosts will feel better (and weigh less) than if you were to show up with yet another box of chocolates to share at dessert time.

3. Give hope & innovation instead of “things”: Companies like Global Giving & Kickstarter allow you to make donations in honor of your friends or relatives. You can fund social entrepreneurship in Brazil (look for Sitawi on Global Giving), climate change ventures (funding period closed on Sebastian Copeland’s Antarctic Crossing, but check out his progress at www.sebcopeland.com), arts and cultural projects – whatever your friends value, you can make a difference on their behalf. $10 buys a lot more hope than “stuff”.

4. Use business travel to support local homeless shelters: Over the course of the year, I collect airline amenities kits, as well as the soaps, shampoos and sewing kits on offer in the hotels I stay at. I pack each kit to include toothbrush & toothpaste, soap, shampoo, conditioner, moisturizer, a pen and whatever else I turn up (sewing kits, combs, socks, earplugs) and drop them at a nearby shelter where they are much appreciated. Sure, they’d prefer full-size bottles of health & hygiene products (and I’d prefer to be able to give them those things), but sample sizes work too.

5. Bring food to a local foodbank: In lieu of giving cash, I raid my pantry and pull cans and boxes of any item that I have more than one of or that I’ve purchased within the past six months and not put to use. I can usually put together a box of healthy and appealing dried goods without too much effort – and every freebie offered by my grocery store (spend $30, get a free box of stuffing) adds to the package. This is a great opportunity to use coupons, “buy one get one” offers and social media discounts to give more to others without blowing through your own budget. Giftcard offers from CVS and others can help non-profits (A Wider Circle, Hospice, others) to help families going through tough times.

6. Donate your suits to help those looking for work: Dress for Success helps women trying to help themselves by providing suits for interviews and work. You’d be surprised how much of a difference having appropriate clothing can make to self-esteem and first impressions in a job interview. Check your closets – chances are you have a couple of suits that are too big, too small or just don’t fit your current lifestyle. Some Dress for Success chapters partner with local cleaners who will clean your old suits for free and hand them to DfS ready to go.

7. Give warm clothing to your local Interfaith Community Center or Goodwill: We all have sweaters that we never wear, fleece shirts and jackets and other warm clothing items tucked away in our closets. Pull anything you haven’t worn in the past 12 months – surplus to you can make the difference between too cold and comfortable for someone in your community.

8. Recycle those old cellphones: I don’t understand quite how cellphones multiply on their own, but they do. Stop procrastinating about recycling for dollars and donate your cellphones to the troops, or to a local non-profit with a holiday recycling program.

9. Make it yourself: Whether you write a poem, bake cookies, make gift bags with beans & herbs for soup or do something artsy-craftsy to recycle or repurpose things, don’t underestimate the sentimental value of something created with love and purpose. We all like to receive gifts, but for most of us, knowing we are loved and valued is as important as the gift itself. Just because you can’t buy bling or gadgets, doesn’t mean you can’t show how much you care!

What are you doing this holiday season to make a difference? Please share your ideas here! Oh, and one last thought. I recently read an article that noted how sleep deprived many of us are trying to pursue professional success, personal balance and get ready for the holidays. The author noted that instead of pushing harder to “be better people”, it’s worth considering when a little bit more rest and relaxation would leave us refreshed and more productive as a result. Take time this holiday season to recharge your personal batteries. There will still be plenty of good work that needs doing in 2012!

Happy Holidays to all,
@LaurenOPV

First, research on women and governance usually reveals that women aren’t advancing in corporate America as fast or as far as might be expected. To some extent, I can understand this, because most of corporate America runs on a code of precedent developed by the “old boys club” and more advantage accrues from status quo power and politics than from innovation. That’s a shame, and its also a turn-off for many talented women, who prefer to work in more empowering environments. If we can’t envision a different future, we certainly won’t be able to achieve it, so I have no problem with anyone opting out of a prototypical corporate career. Nevertheless, women and minorities who do choose to go the corporate route should have the same opportunities to get ahead as their white, male peers. Do they?

Second, and more personally resonant to me, the chest-banging and hair pulling over the fact that there aren’t enough good female (or minority) candidates to serve on the Boards of publicly traded companies is a bit disingenuous. Where is everyone looking for their candidates and how do they describe the attributes of a desirable Board member? I can tell you where these companies and recruiters are NOT looking, and that’s at the the women and minorities who serve on the Boards of non-publicly traded companies.

A probably statistically significant group of my female and minority colleagues have, as I do, decades of experience in governance. We’ve served on the Boards of non-profits, social enterprises, special-purpose investment funds, and a wide range of privately held emerging markets companies in sectors like telecoms, energy, mining and financial services. We have law degrees and/or MBAs from prestigious schools, have traveled and lived overseas and are widely-read. Most of us not only speak more than one language, we actively participate in Board meetings held in languages other than English. Integrity, not income, is what makes you a rock star in our spheres of influence. Companies we’ve helped build have risen to national and international leadership positions. Some have gone public, but those happy events usually mark the end of social/development investment periods and our Board seats.

When it comes to potentially serving on the Board of a US Corporate, however, what we’re all being told is that we don’t have corporate governance experience. Really? These past 25 years I’ve just been going to tea parties or something? Gosh, but it sure felt like work – and work that was at times ethically challenging as well. Why doesn’t my Board experience “count” in my home country?

The response is that my colleagues and I don’t have experience with companies that are publicly traded and regulated under US Securities Law — and this is absolutely true. But so what? I’ve taken an NASD course on corporate governance for publicly held companies and it didn’t seem that hard or arcane. I just don’t see that regulatory knowledge is a viable obstacle to increasing women and minority participation on Boards. With Frank-Dodd implementation in process, US financial regulation is more complex than ever, so more legal and regulatory training for all Board members would probably be a good idea regardless!

How else could we overcome the “public company” knowledge gap? When a potential Director’s governance experience is in privately held companies, the company and existing Board can require completion of one or more training courses on public company regulation. We could pair new Directors with their more experienced colleagues so that informal mentoring supports the newbies climb up the learning curve. Board Chairs can look for a Board Committee appointment that draws on one or more of a new Director’s strengths. But please let’s stop turning our backs on all the talented women and minorities whose hard-won governance experience could be just what corporate America needs to develop a sustainable long-term vision of success.

The Boards of US Corporates and Banks need more people willing to take informed risks around equitable and sustainable innovation and fewer who take risks related to accounting practices. On behalf of all the women and minorities whose governance work makes the world a slightly better place, let me tell you that there are many of us out here willing to help your company tackle the challenges of economic growth. Next time you need to fill a Board seat, look a little longer or deeper. One of us will be there, fiduciary responsibility firmly in hand.

While I was Chief Investment Officer at ACCION International, my portfolio grew from one fully-invested equity fund and a couple of languishing guarantee funds into three dynamic and groundbreaking equity funds and one revamped guarantee fund. Along the way we added 16 staff members embedded in ACCION offices on four continents and grew our outreach from 1 million people to 7 million. It goes without saying that job descriptions, professional development plans and an understanding of what skills were needed to exercise fiduciary responsibility while meeting a unique value-added challenge were high on my priority list.

Many employment candidates came to us with solid financial sector skills, although usually not in early stage equity or guarantees, while others brought social sector and development experience to the table. Our challenge came from needing both skill sets – and needing them to come together in each and every individual on the team. Given our global, multi-sector engagement with microfinance institutions and social entrepreneurs, we also knew that creating value and generating multiple bottom-line returns meant adding and growing team skills as quickly and effectively as possible.

The five skill sets outlined below correspond to strengths we looked for when hiring – and also when conducting due diligence on potential fund managers for Gateway MIV, a catalytic investor for new funds such as Lok Capital, one of the first microfinance equity funds in India and Leapfrog, a pioneering microinsurance fund. Within each of the five skill sets, my team and I defined what level of skill we expected at each stage in an investment manager’s career, from analyst upward. We also wrestled with how to manage and develop staff when high skill levels in some functions are matched with more nascent skills in others. End result was a matrix of job titles and primary, secondary and tertiary skill sets that made it easier for us to understand our existing human capital assets and hire in a way that would best leverage those assets to achieve our investment goals.

So what are these five skill sets?

1. Technical: Specialized knowledge bases, including, but not limited to social sectors (health, housing, education, etc), technology and systems, operations. The greater the breadth and depth of knowledge, the better the chances of finding & exploiting hidden synergies and opportunities.

2. Tactical: Think of tactical skills as the “how” response to a technical challenge. What financial instruments has an individual used and how creative were the structures and deals? How well do these skills translate? An equity analyst used to widely-covered and analyzed US stocks might find due diligence on early stage emerging markets social enterprises to be a completely new experience. Fundraising is another important tactical skill to keep in the mix.

3. Strategic: My definition of strategy covers values, vision and empathy. The ability to explore and assess the potential rewards or consequences of a given action or investment is a critical skill for investment managers. When problem-solving, how many alternatives does a person typically generate, or do they tend to see a single “right” answer based on precedent? Creativity, curiosity and healthy understanding of risk (in all its forms) play a role in effective strategy development. It may require time and direct interaction to understand a person’s strategic competence, and not everyone is strategically inclined. We’ve all known brilliant analysts without a strategic bone in their bodies: this is worth thinking about when you’re designing individual career development plans!

4. Communications & Management: I think of this skill set as a continuum of relationship and leadership building. As an analyst, your ability to crunch numbers, write and deliver clear arguments for or against an investment may be what matters most. By the time you’ve matured into a senior investment officer, manager or director, the ability to inspire and motivate others is likely a higher priority.

5. Geographic: Don’t let the name lull you into complacency. Geographic skills include cultural understanding, languages, field experience and even academic background. While you always have the option of deploying excellent technicians and tacticians without any of this “geographic” expertise, I guarantee that understanding local language, culture and history contribute to better performance outcomes.

One Planet, in collaboration with Dr. K.C. Soares of Smith Soares Associates will be releasing an original Research Paper on Human Capital and Organization Development Practices for Impact Investment in early 2012. Subscribe to TMITM now and make sure not to miss this!

Spread the word! #ImpInv needs to think about human capital at home, not just for social enterprises and portfolio companies. If these thoughts and skill sets make sense to you, please share this post on Twitter, LinkedIn or Facebook. You can also leave thoughts and comments here. Please do!

Lauren Burnhill, @LaurenOPV

Let’s say we really do need to do everything possible on our smart phones as fast as possible. How fast do we start running into bandwidth issues, degraded quality of service and the need for more investment? Are we, on a planetary basis, better off if we all become global, mobile data hogs? Is there a different investment and finance model that would leverage 3G, start rolling priority accounts to new 4G networks now but perhaps reduce the growth rate of consumption of new smart phones and fiber optics over the next decade? I would think there is still plenty of growth to be found from new subscribers in low-income populations around the world and late-adapters everywhere.

I’m not suggesting the mobile carriers forgo growth. For one thing, faster and more reliable communications networks are a good thing. Access to speed is important too, be it for emergency responders or corporations. Investment in communications infrastructure is a continual process, with or without advertising hype.

Growth also implies trade-offs, however. For example, the speed and immediacy of text messaging have real safety and business value. The availability and prevalence of low or no cost text messaging may also be contributing to an increase in traffic accidents. Far too many drivers are confident in their ability to text while driving in a safe manner, despite numerous studies proving that they are mistaken.

When it comes to smart phones, bandwidth is not the only issue, there’s a little problem with conflict minerals as well. Gina-Marie Cheeseman via Sustainable Industries  notes that our everyday electronics make widespread use of conflict minerals, meaning forced and/or child labor, amongst other things (http://sustainableindustries.com/articles/2011/11/dont-phone-it).

Shouldn’t our thinking around smart phone growth factor in resource scarcity and conflict minerals? Aren’t there reasonable growth plans that emphasize revenue streams that don’t increase the planet’s resource depletion rate or prop up the atrocious regimes from whence conflict minerals derive?

I’ll freely admit that I’m a bit of a curmudgeon on the topic of smart phones. I don’t want to read books, watch movies or video chat on my phone. I’d appreciate greater emphasis on sound quality and noise dampening over speed because I do need to talk and hear on my cell phone, smart or not. I like to use text messages when I need to communicate something important quickly. Usually this happens when I’m on the road and meeting up with people who may also be on unfamiliar terrain. My 12 year old cousin, however, will send me a text message that just says “S’up?” Clearly we approach technology in different ways. In all honesty though, I don’t see that what most of us are doing or saying requires constant and instantaneous connectivity.

Would our kids grow up deprived if we gave them a basic cell phone for safety, but no smart phones until they land that first part time job and pay for it themselves? Would it reduce your quality of life if you had to give up streaming TV and movies or video chatting on your smart phone? Would you feel as deprived if you knew that changing your consumption habits would help make the world a better place, not just for you, but for your grandchildren and their children as well?

I suspect that “sustainable consumption” will require all of us to think twice about what we plan on consuming. Making everything last a little bit longer sounds like a small and piecemeal approach to a hugely complex problem – but like reusable grocery bags, it’s a small solution that lies easily within our grasp.

How perverse is it to hold one group of dedicated, ethical individuals down because they are willing to devote their lives to making our world a better place? How can we argue, on the one hand, that major corporates should offer living wages and benefits to their employees in emerging markets while at the same time arguing to curtail the wages and benefits of those who work in philanthropy, development and impact investment?

The concept of social equity suggests that we should want to fairly compensate our “do-good” talent for their skills and experience, both because their efforts are important and because we want to attract more “do-good” talent to address the challenges faced by people and planet. That would mean higher core budgets at most non-profits, which donors would be advised to support. Staff turnover costs money; staff burnout is a mostly avoidable (and tragic) waste of resources. Hiring a bright, passionate and committed staffer without the right experience because that’s what talent is available or affordable is not the most efficient way to achieve high performance. Sure, they’ll learn how to swim if you throw them in the water, but imagine if you could provide coaching and support before you threw them in and after they were in the water trying to swim?

How often have we heard business leaders say that their people are their best asset? And yet, comparatively speaking, how well do we treat employees and where in our strategic plans and financial reports is this value reflected? R. Paul Herman of HIP Investors raised (and answered) this question during a recent impact investment webinar through Ventureneer, which you can watch here http://ventureneer.com/webclass/impact-investing-challenges-and-prospects

The way we compensate, nurture, reward and develop our human capital should reflect the same values and outcomes we hope to achieve through our “do good” work. My vision of a post-industrial utopia would include fair compensation, flexible schedules, work-life balance and a passionate, productive and empowered workforce. Three day weekends would be nice too!

The Impact Investment world relies heavily on phrases like “do well by doing good” as a way to attract new investment capital of all kinds. Truly, this notion is an important innovation and should not just be a marketing slogan. Long-term, we need to look at all investments through a blended value lens: in addition to financial returns, we need to consider social and environmental costs & benefits.

Would Coca-Cola be as good an investment prospect if it wasn’t looking to reduce water use in advance of coming scarcity? Is it a coincidence that companies on Fortune’s “100 Best Places to Work” list generate returns 3 times higher than the general market (read more about this at: http://www.greatplacetowork.com/our-approach/what-are-the-benefits-great-workplaces)?

As long as we think social finance, environmental finance and “mainstream finance” are different worlds, we encourage sub-optimal resource deployment. On the flip side, anything can be an impact investment if financial targets are accompanied by social, environmental and/or governance targets as well. If you believe that doing well by doing good is a reasonable proposition, make sure that this value flows through to the organizations and people that you expect to do good things! To do anything less means accepting that our best and brightest will always be better off doing well and donating money than applying their talents to making our planet a better place to live.

Early in my career, a mentor assured me that within 10 years I would have developed the “banker’s nose” that reflects these skills. When building my team at ACCION International, I knew we didn’t have 10 years to wait while everyone developed their skill sets. Still, how do you approach teaching due diligence skills if not by having junior staff shadow senior staff over time?

In the summer of 2008, the 15 members of my team (and our brilliant facilitator, Dr. K.C. Soares) were converging on the Raystown Lake Resort & Conference Center for an intensive week of work, training and global team building. At the time, I owned a “farm” not far from the Lake and wanted to host my team as a gesture of hospitality (despite a 3 hour drive and the need to check in to the conference center by 3pm). In order to make everything work cost effectively, I asked several DC-based staffers to drive, making sure we had enough cars for the total number of people. Note to self: next time pay attention to how much luggage might also have to fit in those cars!

To make the drive out more fun, and a good team building challenge, we decided to have a Top Chef style pot-luck lunch at the farm before continuing on to Raystown Lake. Each car was assigned a part of the meal, given budget and info on places to shop en route and told to be creative, bearing in mind that we needed to include vegetarian options for about a third of the team. This Top Chef challenge gave each group the chance to work as a team, figuring out what dishes would work with dietary requirements, budget allowances and the limited time frame we had to prepare and eat lunch before checking in at the conference center. They also had to adjust their plans when the local markets they visited failed to have the same diversity of options as the urban supermarkets some of them were accustomed to.

The results of this exercise were certainly interesting. One team – and K.C. – arrived at my farm before I did and was well on the way to completing their contribution to the meal (dessert – strawberry brownies!) and a bonus dish. One team arrived so late that they barely had time to gulp down some of everyone else’s dishes before we had to get started for the conference center. Every team exceeded the terms of their assignment, so we had plenty of food and beverages despite the late-comers. Almost everyone came in at or under budget – and the team that didn’t took the $13 hit out of their own pockets.

At the time, I was stressed out about the results, and felt a bit bad about the whole exercise. It was clearly a tough challenge for this great bunch of people, many of whom had not yet met in person (working remotely – or completely new to the entire team). Upon reflection, however, I would absolutely run a revised version of this challenge again! As a due diligence skills training exercise, it’s far more entertaining (and easier to set up) than creating case studies and mock data rooms.

The timing was admittedly too tight, but the global team members in each car DID work together to achieve a complex goal. Even the latecomers’ car – a delicate grouping to which I had gratefully assigned my number #2 – were o.k. with the disagreements and decisions (or indecision) that resulted in their tardiness.

I felt bad that my number #2 didn’t get to shine, because he certainly deserved to! No matter how high the performance bar was raised or how many hats he had to wear as we grew, he’d been stepping up to the plate. And yet, his driver was a fellow countryman and the dynamic they worked through that day was illustrative (and helpful) with regard to some of the tensions that hadn’t yet been worked through in the office. That’s as important an outcome as completing the assignment on time and under budget – at least in this type of exercise!

All in all, our “Top Chef ACCION Global Investments” challenge was almost as fun, provocative and productive as I could have hoped for. Our team retreat was phenomenal. We worked hard, came together around strategy and process, played on a budget ($17 p.p. dinner cruise on the Lake, $3 miniature golf), saw a part of the US new to almost all of the team, US or foreign and contributed to the economy of south central Pennsylvania, the foothills of the Appalachian mountains.

I don’t, of course, credit the Top Chef challenge with the success of the entire team retreat. K.C.’s brilliant facilitation and the can-do spirit of my staff, new and old, is what made everything work so well. It was, however, an activity that yielded insights for me as a manager for many months. As a change of pace from more academic training activities – and as a way for geographically diverse staff to interact and rapidly advance their working relationships – it was also definitely worthwhile.

After that week, everyone went back to their home country offices and our routine of email, video, Skype and coordinated field work resumed. We smashed it out of the ballpark that year, exceeding our revenue goals and coming in under budget and went on to create hundreds of millions of dollars in value for our industry with a nine-figure payday for our own organization. The lesson I learned from Top Chef was that not all learning needs to happen in a classroom, but all team building requires face-to-face work, as well as clear communications, policies and practices. Access to good, appropriate technology helps. So does fun!

Two important points apply to all three of these “scandals”. First, the overall track record of these government agencies is actually decent. USDA claims total loan guarantee write-offs in the range of 1% and DOE boasts low default numbers as well. HUD doesn’t have good statistics at hand, but it seems likely that total write-offs are a bit higher than in the other two agencies, but reasonable given the overall size of the housing portfolio (not to mention the crisis that has affected this sector in recent years). Given the scope for conflict of interest and limited mandate/budget for supervision and management, these programs do a reasonable job of managing tax-payer resources. The real question is, however, are they achieving the results that were intended through these financing programs?

Which brings me to my second point. Why are these various non-financial government agencies pursuing financial activities in the first place? Isn’t there a fundamental conflict between DOE’s role as a regulator and policy-making organization versus the fiduciary responsibilities of a creditor? Does it make sense that USDA administers rural broadband financing because agriculture happens in rural areas? And how many decades of HUD scandals will it take before the agency begins to collect hard data on what’s working & what isn’t?

Setting aside the muddled question of politics, there is only one answer – US government agencies provide financing for priorities in their sectors because there is no alternative. We don’t have a domestic development bank. If you want to build low-income housing in the third world, you can turn to OPIC. If you want to export your goods and services, you can look to Eximbank for support. Small businesses have access to a variety of programs through the SBA. If, however, you want to finance domestic infrastructure, including infrastructure related to telecommunications, energy, transportation, housing and education, you’re pretty much on your own. Projects with high profit potential can (sometimes) attract commercial financing, although that’s been harder since the global financial crisis. Projects that offer modest financial returns but potentially significant long-term returns to people and planet are stuck between a rock and a hard place. Programs like the DOE loan guarantee program, or the USDA rural broadband guarantee program are meant to fill this gap – which they do, but not necessarily as effectively as possible.

Let’s stop pretending that the land of the free and home of the brave is a perfectly developed economy, and let’s stop asking government agencies to be creditors as well as regulators and policy-makers. The US needs a domestic development bank – let’s call it “Home Bank” – that can leverage taxpayer dollars to encourage private financing of quasi public goods. A single financial intermediary that covers energy (especially renewables), housing, telecommunications, infrastructure and perhaps social innovation as well would provide better control and coordination of financing activities. Collecting and analyzing performance data would also be easier, since we’d be looking at metrics on a single portfolio instead of comparing diverse numbers from a range of portfolios scattered across different non-financial actors.

I’ve worked in economic development my entire career, focused on emerging markets. Almost every country I’ve ever worked in had some type of domestic development bank, agency or financing window that centralized access to finance and allocated resources based on appropriate, policy-related criteria. Sure, there’s corruption and waste in many of those countries, but recognizing that something is difficult to do well is no reason not to try at all. The United States of America is an amazing country, but we’re not perfect. Instead of protecting a status quo that’s working only for the 1%, let’s aim higher and look for ways to use our resources more effectively.

We need Home Bank now. Don’t limit it to infrastructure – instead, let’s consider this the domestic equivalent of Eximbank. Any business trying to finance a market-driven policy-mandated outcome (like universal rural broadband access) should be able to turn to a single, well-managed, domestic development finance organization. We encourage and fund this type of activity in other countries through the World Bank, the International Finance Corporation, the Inter-American Development Bank (and other regional development banks) and even through the Millenium Challenge Corporation. Let’s give us much attention to funding progress at home as well.

The term “sustainable consumption” has recently started popping up on the radar. My gut response is to cheer loudly! I had an electric mixer that my folks purchased in the 1970s – in that horrid color of avocado green that was so popular then. After more than 30 years of perfect functioning, I was finally forced to give it away so that I could buy one in a more pleasing color. That operational track record epitomizes sustainable consumption for me and contrasts to the fact that no matter what brand I buy, I seem to end up needing to replace my blender every two – three years.

Advocates of sustainable consumption often sigh over consumer fondness for the latest gadgets and suggest that people need to moderate their behavior, consume less and do without more. While there is an element of truth in this statement, something I learned at Wharton makes me believe that this is only a small part of the story. WHY are we buying new gadgets so often? Did any of us NEED to replace our VCRs with DVD players and then Blu-Ray players? Is a company like IKEA “good” because it works hard to be green and sustainable, or is it “bad” because (design elements aside) its low cost, low quality products are replaced regularly due to wear-and-tear or consumers’ desire/ability to upgrade their household goods?

The dark force lurking below the surface of these questions is Planned Obsolescence. How do you encourage continual sales growth? Planned Obsolescence is one of the answers. First, don’t build things to last forever. Second, introduce new versions of your product that are at least slightly better than the old version and encourage people to upgrade. You can plan your innovation cycle so that periodic offerings will entice existing customers to purchase new products. In its most sinister form, you can engineer your product quality to be just good enough to last through warranty so that customers are forced to acquire replacements periodically.

Why is planned obsolescence such a huge problem for sustainable consumption? I’d like things to last longer (like the freaking iPod battery that can’t be changed except by Apple, at a high cost) and for upgrades to be more affordable and useful (this means you Microsoft!) or share resources at an industry level (universal cell phone chargers, anyone?). I suspect many of you feel the same way.

Here’s the rub: if everything we buy lasts longer and/or shares universal standards and platforms, what happens to the growth paradigm? How fast can we reasonably expect businesses – and therefore the economy – to grow if sustainability reduces repeat revenue streams and prospects? How will markets respond and perform if sustainability turns out to require a steady 3-5% growth rate rather than a continual push for double digit growth? In other words, for corporations, sustainable consumption presents serious challenges to “best practice” business models and, depending on market reaction, may threaten higher financing costs as well.

Alexander Stille’s recent @NYT article The Paradox of the New Elite (http://www.nytimes.com/2011/10/23/opinion/sunday/social-inequality-and-the-new-elite.html?pagewanted=all) notes that US society has become more heterogeneous and much more inclusive in recent decades, while at the same time, income distribution has become more unequal at every level. The top 1% is earning close to $370,000 a year – but the top 0.1% earns more than $ 9 million a year. Now add in the fact that the bottom 50% is getting by on around $31,000 a year and the problem is evident. The top 1% is earning 10 times more than bottom 50% – and the top 0.1% earns close to 300 times as much. I have nothing against high income, nor even against unequal distribution of income, as long as what that bottom 50% earns is covering a reasonable and humane lifestyle, and I doubt that’s happening on $31k. My health insurance alone costs more than a third of that amount and no doubt I’m lucky to have it.

Getting back to the question of whether how and why we consume is a driver or a response (maybe both), the flip side of my sustainability is that we all need to consume certain things – like food, clothing, household goods – despite a shrinking resource base. I would argue that most of the world’s population needs to consume more than they already do! Moving the majority out of poverty and into a stable and reasonably pleasant state of socio-economic well-being means that a lot more basic goods, services and productivity enhancing tools need to be made available for consumption. The Ecologist’s insights into Ikea’s sustainability report (http://www.theecologist.org/green_green_living/behind_the_label/1098324/behind_the_brand_ikea.html) highlights this tension between good (social justice) and green. For the record, I think Ikea has got it right. Companies need to put as much effort into making their operations socially and environmentally aware as they do into greening what they sell. In fact, there are three different levels of social and environmental impact that I look for when screening investments – and the brief integrated term sheet (ITS) presentation (https://www.ideaencore.com/item/integrated-term-sheets-tool-impact-investing) on IdeaEncore offers insights in this context.

As long as we need to consume – and presuming some reasonable standard of “equality of condition”, why shouldn’t we figure out ways to consume “better” – durable, high quality, aesthetically pleasing, socially and environmentally responsible goods and services? Why can’t we – and our capital markets – learn to accept a slower, more sustainable growth pattern? The midst of this global recession is the perfect time to talk about slower, sustainable growth – especially since we may be stuck with slower growth in the foreseeable future regardless of sustainability concerns. Understanding the connections between sustainability and growth is a critical aspect of long-term thinking. We only have the one planet. If we don’t find better ways to share and sustain its resources, our future – or at least, our childrens’ futures – will be pretty grim.

1. Social enterprise programs typically exclude financial services innovators, as do most innovation focused programs;

2. Programs for women entrepreneurs typically exclude financial services ventures. This may not apply to you, but I, for one, was shocked to discover that I am not a “woman entrepreneur” despite my gender;

3. Investment banks are ramping up their effort to reach emerging managers (yeah!) with at least – wait for it – US$ 1 Billion under management (boo!);

4. Unintended consequences of Dodd Frank vis-á-vis innovation, small business & social enterprise investment are only beginning to come to light now. It’s hard to walk the line when nobody really knows yet where the line is, so I expect a lot of money will be fence-sitting for a while; and

5. Downward market volatility means that even passionate, multi-bottom line investors are scaling back their commitments. Dipping into new investment themes, especially potentially risky ones, is lower on most investor priority lists these days. Notional interest in (and need for) impact investment aside, more people are now chasing less money. Need I tell you that is is not a recipe for happiness or sustainability, much less scale?

Fortune tellers and investment managers have a lot in common. Both need to read the tea leaves; sorting through bits and pieces of disconnected information to come away with the right message. I generally consider this one of my most useful skills. If, however, you follow the global economy, you won’t need to connect too many dots to understand that the world’s in a bit of a mess. For my #impinv financial services initiative, One Planet Investments (OPI), the congressional shenanigans and US debt downgrade of August led off a series of market signals that screamed out “stop now!”

I set up a conference call with the team to run through the facts and see if we could brainstorm a way to proceed with our planned September Series A round despite the negative signals. Short of counterfeiting, no viable pivots could be found that made sense in terms of our available skills and resources. Kicking my own ego to the curb, I knew that the tea leaves were telling me that it was time to wind up OPI in an orderly fashion and move on.

In normal circumstances, I would prefer to highlight my successes and let the failures slip quietly into the past. We are not, however, living in normal circumstances. Sustainability, social justice and impact investment are attracting increasing mainstream interest, yet the same economic downturn that makes these themes so critically important also makes it hard for them to gain traction. I can name half a dozen smart, experienced and passionate social and environmental innovators who have thrown in the towel in recent weeks and that stings as much as the OPI No-Go decision. I can name another half dozen or so who soldier on, living on fumes and hope. Yet, at the same time, there is a real scarcity of the right kind of senior talent in the sector!

So, why am I formally closing OPI rather than putting it on the shelf and dusting it off in a few months when – perhaps – conditions have changed? Several reasons actually:

1.  I work in area of finance in which “fiduciary responsibility” carries a serious moral and ethical burden. I am therefore mindful that timely dotting of “i’s” and crossing of “t’s” is a key driver of meaningful reporting and transparency. Knowing that the OPI biz plan won’t fly in this regulatory environment, I feel it’s my duty to execute an orderly windup, extract as much high level value from the process as possible, and then move on.

2.  In my investment career, I’ve found that most people and organizations know that many businesses fail (or fail to meet expectations), but some will become shining stars. You have to tout your star capacity to raise money, but in the process, some of us cease to believe that it’s OK to fail. When you can’t “fail”, you may end up throwing time and good money into what is essentially a sunk cost issue — and missing the next star opportunity elsewhere. Sharing my “fail” is my way of validating that I do indeed believe in the importance of failure for both innovation and investment — and especially in early stage and growth social impact investment! In fact, I have now quite thoroughly “put my money where my mouth is”.

3.  I have a lot of cool ideas of  what might come next, but I need to do some homework before I can think about making a decision. In the meanwhile, the world of impact investment is evolving rapidly, so might as well make sure people know that I’m open to new ideas these days. Announcing the no-go on OPI means that more people will think of me as opportunities arise. Shameless self promotion? Are you kidding? I’ve just shared my biggest personal failure to date with all of you This is about transparency, sharing knowledge  and, yes, about finding the best next use of my skills, talents, interests and passions. Oh, and honestly, I don’t think I failed just because my company didn’t launch! I accomplished a lot, just perhaps not everything. I’m OK with that.

Despite, or perhaps because of, a high degree of awareness with regard to my own strengths and weaknesses, I can’t help worrying that if someone with my skills and track record can’t pull off #impinv financial services innovation in the current environment, the odds are stacked pretty high against most of us. If you are not already sitting on enough capital to field the right team and hit your launch targets, now might be a good time for a rethink. As someone who spends a lot of time thinking about ethics, values clarification and good governance, I know that deciding to stop is often harder than plowing onward, market signals be da**ed – and that’s also part of why I’m sharing my “dirty laundry” with you.

In the spirit of collaboration, you can read the swan song letter I sent to my friends, advisers, colleagues, partners and miscellaneous supporters below.  We’ll be releasing a “Lessons Learned” white paper before year-end. Don’t be afraid to “fail” if moving on is the wiser decision to make! We can’t learn and innovate unless we’re willing to make – and correct – mistakes.

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Dear Friends of One Planet Investments,

I write this with a bit of a heavy heart, since just as we prepared to issue our Series A, August 2011 turned into a perfect storm of negative signals. Downward market volatility, exacerbated by the US sovereign credit rating downgrade (and the foolish behavior that led to that decision) and the Greek inspired Eurozone crisis had a clear impact on our potential investors. Ongoing implementation of Dodd-Frank led to regulatory issues that we had previously believed would be moot until 2014. Other factors, related to partner organizations, the changing availability of OPI team members and performance-related strategy issues, all combined to force a “no go” decision by the end of September. Knowing when to walk away from a deal (even your own!) is a critical investor skill. As much as I want to be a change agent for impact investment, I don’t believe this can be done under the original OPI business plan.

So what happens now? Impact investment as a “theme” strategy is gaining traction, but for most institutional investors, an increased SRI focus (positive and/or negative screening of listed instruments) will fill the need to support the “greater good”. International social impact investments looks at direct investments in smaller, earlier stage companies in emerging market geographies, operating in sectors that are only now developing viable market-driven business models. This is a high risk, exotic niche within a new investment theme, but one that offers tremendous opportunity to enhance quality of life for the working poor. Overall investor demand for these types of investments, however, will represent only a small percentage of aggregate demand for general impact investments. A great deal of confusion and uncertainty exists, especially as a range of slightly different sectors (venture philanthropy, social capital, impact investment, sustainable investment and so on) face convergence issues.

OPI was not only focused on this exotic impact investment niche, we have been proposing process innovations related to achieving operational excellence; product integrity innovations that offer better risk-return trade-offs for investors and portfolio companies alike; and fee structure innovations to support enhanced alignment of interests across stakeholders. In other words, we’ve been working on a better business model for intermediation of multi-bottom line investments as well as on new products that this intermediary would offer. On aggregate, we have been working toward innovating simultaneously across the majority of innovation trends supported by asset managers and other institutional investors. This major rethink of the status quo is unprecedented. Change doesn’t happen overnight, however, and although we see signs that the market is catching up with our views, regrettably, we do not have the capital to muscle through until market evolution intersects with our strategic vision.

Compounding this situation is that fact that as Dodd Frank implementation moves forward, it has become clear that although OPI could claim exemption under the Advisor Act, the One Planet Growth Social Spectrum fund would need to be regulated as of March 2012. This reality affects the planned budget (on which basis the Series A was structured) and the timing and prioritization of pre-launch activities. In order for potential OPG investors to start writing checks, regulatory filings and compliance must be a done deal, in addition to the investment and reporting readiness requirements that we have been pulling together. An alternative to tackling regulation would be to relocate to Luxembourg or Lichtenstein where requirements for listed impact investment vehicles are more manageable. Physical relocation would be necessary due to the scope of US regulation, which again represents a significant variance from the planned budget and work schedule. These options are feasible, but not within the original business plan and budget shown to prospective investors.

Accordingly, what would have been OPI now moves into wind-up phase. We will be finalizing our original research on human capital and organization development for impact investment, and preparing a short white paper study around lessons learned, both of which will be published and disseminated to appropriate audiences. We hope these documents will help illustrate the obstacles to creating scalable impact investment intermediaries as well as the critical role these intermediaries play in the emerging ecosystem.

Although the OPI team has dispersed in light of economic reality, we still aim to finalize our knowledge building work by the end of 2011. I’d like to extend special thanks and recognition to the brilliant and amazing people who, as team members or advisors, have worked nights, weekends and vacation days to help build the OPI model and the OPG Social Spectrum Fund product, sepecially: Claire LaBrunerie, K.C. Soares, Sherin Gobran, Jyoti Patel, Beezer Clarkson, Fabricio Soares, Mai Yasuhara, Don Terry, Roberto Dañino and Hasan Almedar. The intellectual capital and moral support that these individuals have provided (and will in most cases continue to provide through year-end) is invaluable. In addition, the fact that you are reading this letter suggests that you too have provided intellectual and or moral support to OPI over the past year. Your spontaneous offerings of thoughts, comments and contacts are deeply appreciated.

Needless to say, I personally remain committed to improving the socio-economic well-being of the working poor and the health of our planet. I’m working on a new high level strategy that can be executed within the evolving US regulatory environment and will be doing research and market soundings over the next few months. There is absolutely an interesting private equity play looking at the capital markets environment and impact investment growth needs, but the degree of PE industry interest and my ability to reach interested decision-makers needs to be tested further.

In the interim, I must also return to the reality of earning a living. If you are aware of interesting leadership positions related to social impact, multiple-bottom line or ethical investment, please do let me know. For now, my consulting firm, One Planet Ventures, enables me to engage in interesting and relevant activities on behalf of the “impact investment industry” while I explore options. I will continue to represent the MIF on the Board of microinsurance company Paralife, have agreed to join the Advisory Board of Mission Markets and, of course, will continue to tackle financial intermediation through my blog “The Money in the Middle” (guest posts and interviews welcome!).

Kind regards,

Lauren A. Burnhill
@LaurenOPV

As you would imagine, given that “ESG” stands for “environmental, social and governance”, governance was a major focus of discussion. In the exchange-traded universe, this means emphasis on issues of executive pay, shareholder proxies and defining the nature of Board responsibility with respect to the pursuit of social and environmental goals. Only this last topic would make it onto my list of governance priorities for non-exchange traded ventures with social impact. Other priorities? Protecting minority rights, controlling or eliminating related party transactions; ensuring that Board composition can create value for the company (including appropriate independent representation); establishing Board level Committees that provide effective oversight of key risk areas (finance, audit, governance, etc); developing succession and disaster recovery protocols; and last but not by any means least, managing conflicts of interest.

Why should we care about the difference in governance concerns between publicly traded and privately held companies? I would argue that the size and scope of public markets puts us in a bit of a “chicken before the egg” situation. Most public companies start life as privately held concerns and move into the public space once their operations have reached a certain scale and profitability. Securities regulations dictate how public companies must behave with respect to reporting, minority rights and governance. An increasing body of research suggests that good governance, as well as a concern for social and environmental impact, translate into better long-term corporate performance, so this regulations-driven approach to corporate stewardship clearly has its merits.

Private companies generally enjoy greater freedom to define Board functionality and the extent to which they will report on their operations and results. In emerging markets, private concerns are often held by families whose governance practices may be quite informal compared to public company governance practices. How though do we expect private companies to move from relatively fluid, convenience-dictated governance to a more transparent, responsible and responsive governance style in advance of a public offering? Is it OK if companies adopt wholesale changes in governance at the time of a public offering, or does effective governance change require a more pro-active approach? I would argue that the work of defining and embodying “’good governance” in privately held companies can have a significantly positive impact on how these companies grow and how they perform once they become publicly held concerns, which should matter to us as investors.

Granted, my “evidence” for the importance of active good governance is largely based on personal experience and therefore anecdotal in nature. Nevertheless, if we accept the importance of good governance in publicly held companies, understanding how good governance applies in the context of privately held companies would seem worthy of greater discussion and debate.

If you are investing in a privately held mobile payments company (for example) in an emerging market, you should be prepared to attend all (or the vast majority) of Board meetings whether monthly or quarterly. In addition, it’s worth arriving before the Board to talk with other Directors and outside sources of industry information and staying on after the Board to recap any pending issues with company management. Number one complaint I hear from General Managers of ventures with social impact about their Boards is that Directors fly in on the red-eye, fall asleep halfway through the Board meeting and then depart immediately afterwards leaving all parties none the wiser for the visit.

Bearing in mind that your role as a Director is to act in the best interests of the company (and not on behalf of the Shareholder whom you represent), you should also take the time to understand the company’s industry and stakeholders both within the local context and in a broader view of global competitive forces. Understanding and managing the tensions between potential synergies and conflicts of interest (or the appearance of conflicts of interest) is also likely to require time and energy. When I sat on the Board and Governance Committee of an African financial services firm, I found that the Governance Committee work took far more time, energy and creativity than my primary Board responsibilities. In this particular instance, Committee work fell heavily on those Directors who took an active view of governance engagement, with a substantial minority of Directors preferring not to get involved. As a Board, we would have been more effective had we all been equally engaged and explicitly (rather than implicitly) aligned with regard to the goals and objectives we should be supporting and monitoring.

Perhaps because of the anecdotal nature of how good governance works in ventures with social impact, the concerns that I find myself highlighting when I define governance training programs are rarely discussed in industry forums. “Good governance’ for many means asking for a Board seat to ensure access to information, but rarely includes a defined plan to make effective use of that Board seat. Is it just because traveling to Board meetings in emerging markets is time consuming and expensive? Or are we perhaps failing to realize that we need to play a more active role on some types of Boards than on others? Is the notion that Board members of ventures with social impact should not be compensated for their time creating positive value or precluding the active engagement of those whose households or organizations are not wealthy?

If securities regulations stipulate governance, reporting and minority rights conventions for firms that go public, do we really need to worry about how these issues are addressed before the firm goes public? From my optic, developing a good governance culture and learning how to guide strategy without micromanaging operations can never begin too soon. How we behave when we have internalized certain values is different than how we behave when we are complying with regulations or requirements that have no personal resonance.

Here’s a recent piece of anecdotal evidence. The second in command (and son of the Founder) of a large specialty financial services firm in Mexico serves on the Board of a regional specialty microfinance firm with me. We’re a tough Board in terms of requiring timely information disclosure, frank discussion of problem areas, contingency planning and so on. Despite the occasionally tense Board sessions, this 2nd in command commented to me recently that he can really appreciate the value to the company in having an informed and vigilant Board. He noted that Board meetings in his company usually consist of himself, his father and mother sitting in the family kitchen discussing what they ought to do. While the ease of decision-making this provides had worked well for the family, he could appreciate that bringing broader collective wisdom to the table might compensate for a more complex decision-making environment. Having seen “good governance” in action and perceived its value, this gentleman is inclined to push for changes in his family’s company that will enhance both performance and transparency going forward.

Would a legal requirement with regard to Board composition have produced the same results? On paper, sure it would. A formal Board would be conformed, probably consisting of a number of close family friends, and the letter of the law could be complied with, but the intrinsic value of good governance would not necessarily inform the Board’s functioning in any way.

Good governance isn’t just about following a certain set of rules. It is fundamentally about understanding ethics, corporate values, competitive environment and how all of these elements need to inter-relate with regard to strategy and operations. Good governance requires knowing when and where there are grey areas and helping the company move out of the grey in a positive manner. Public and private markets function in different ways. Increasingly visible and vocal public debate on what good governance means in publicly held companies is a positive and important trend. Let’s complement that trend by exploring how good governance differs for privately held companies and what we can do, as investors, to strengthen that function and add value to our portfolio companies.

Upon reflection, we seem a little stuck in the dichotomy of sub-market wages versus outsize executive pay. Philanthropists balk at paying high salaries to the leadership of #non-profits and social enterprises, and in one sense, they’re correct to do so. What matters though is not necessarily the salaries of top execs, but the ratio of the highest compensation in the organization to the lowest. Cap the ratio (we set ours at 15 to 1) – if you want to pay yourself more, you will have to pay everyone else more too. An Executive Director of a non-profit earning 300x what a junior staffer makes generally wouldn’t meet my standards of equitable and reasonable compensation practices – even if we’re talking a salary of $60k versus $20k. You’d be hard pressed to meet your basic needs (like housing and food) on $20k in most US cities, much less construct a decent and stable middle class lifestyle.

It’s neither fair nor equitable to ask people to try to get by on sub-market compensation because they want to do something constructive for people and/or planet in their professional lives. I don’t know about you, but my goal is not to make the poor and disadvantaged a little less miserable, it’s to help make everyone better off. And by better off, I mean continuously improving measures of socio-economic well-being across all social classes.

Returning to Dan’s “Get Rich” article, I would note that I object to the word “rich”, but am in agreement with his basic proposition for four main reasons:

1. A Living Wage should cover Life, Liberty AND the pursuit of Happiness: If we want economic growth, our general definition of living wage needs to include enough beyond the cost of basic needs to permit capital accumulation. Sound dirty? Capital accumulation = savings =investment = engine of economic growth, or at least, that was one of my take-aways from Econ 101. If we don’t insist on true living wages for social sector work (and yes, this does include teachers!), we are (a) actively harming our do-gooders; and (b) preventing them from saving toward retirement, the kid’s college funds, starting a small business or #socent etc. etc. Can you truly be an ethical philanthropist or impact investor if you are harming one group of people to help another? Why do the ends justify these particular means?

2.  The Birth of Impact Investment means Greater Value Creation & Outcome Metrics: The intersection of “social good” and “economic good” is moving closer in public and private markets (ESG, SRI, impact investment, commercial #microfinance). Increasing numbers of non-profits, technical assistance providers (aka consultants) and social financiers are beginning to create serious monetary value through their efforts – usually after long and difficult periods of time. Industry standardized outcome metrics will make it easier to match compensation to value generated, if we want to do so.

If you can sell your skills in VC, PE or I-banking for $500k p.a., why should you work for $100k in a non-profit? If the non-profit sees your economic value as $100k, then take the $500k job and give 20% of your salary to the non-profit as a donation. You’re better off and the non-profit gets the same $100k regardless, right? Yes and No. The problem is that few of the people with those skills, talents and passions are willing to work for that $100k, so the non-profit won’t be able to achieve its goals as effectively or efficiently. If it were “best practice” for non-profits to pay a bit more, offer good health, retirement and professional development efforts, it would go a long way to fixing the human capital shortage and brain drain in the social sector. Can you seriously define these conditions as “pursuing personal gain”?

3. We Know How to Value Jobs and Organizations: In the century or so since Frederick  Taylor brought science to the art of management, we’ve learned a lot about how to develop valuations for both people and firms. I’ll accept that many for-profit firms are focused on profit maximization and their school of thought believes that monetary incentives trump all else. It may not be appropriate to pay a lawyer in a non-profit the same salary as a partner in a law firm. But is it smart to pay the non-profit lawyer less than a first year law firm associate makes?

If you still think it’s okay to pay people in the social sector less than their economic sector peers, be really transparent about it so that the trade-offs are clear. Tell people that you know market salary is X and your intention is to pay 50% of X. At least they’ll know where they stand! Of course, you might also want to tackle the question of whether the non-financial value the position provides is really equal to that other 50%X. If my multiple-bottom line in #impactinv includes both financial and social returns, its not unreasonable to think that I might choose a combo of financial and economic compensation as a professional.

4. Time is Money: Money can buy you time, thereby letting you increase productivity. One of the reasons that microfinance works is that having a branch in her neighborhood can save a micro-entrepreneur a half day or more of travel to the nearest market town with a commercial bank (not that the commercial bank necessarily wants our micro-entrepreneur as its client, but that’s another story). That means a two days extra income over a typical loan cycle, plus the bang for the buck you get from your loan (by buying wholesale instead of retail, upgrading tools and equipment, etc).

The worker who replaces a 2 hour bus commute (ever been on one of the “Combis de la Muerte” in Peru? Minibus of death….) with a 40 minute motor-scooter or car ride gains almost 1.5 hours per day each way for other personal and professional activities. That’s an extra 60 hours per month. A worker making $0.50 per hour earns roughly $80/month. If that worker took a second job with the extra 60 hours, that would translate into additional income of $30/month – or an extra $30 of time dedicated to family, community and work. If working for sub-market compensation means that people can never hope to save for something as simple (to us) as a motor-scooter or car, we as a society are are going to lose out.

The Law of Comparative Advantage applies here too. I’m not good at keeping house; it takes me a long time to produce mediocre results. There are other things – like social impact investment – that I do really well. It makes sense to me to pay someone to come in and clean every other week, freeing a nice chunk of time for me to do things that make more effective use of my stronger skills. Plus, I’m contributing to job creation and stability.

So, is it okay to get rich in charity? The top 400 Americans earn more than the bottom 150 million American COMBINED. If you land in that top 400 from your non-profit work, something’s wrong. If we’re talking about reaching retirement age with enough in savings to live comfortably and perhaps even start a new business, bring it on! We shouldn’t ask those who dedicate their life to the greater good to become martyrs. And it seems unlikely to me that we can tackle the problems of income inequality and poverty if our do-good efforts contribute to greater income inequality and below par living conditions for social sector workers. To borrow from the Hippocratic oath, First do no harm!

@LaurenOPV

1. Most #impinv managers are new, given that the investment theme itself is new. Don’t use this to justify sub-sustainable fund sizes – find other ways to mitigate new manager risk instead. If you want to reduce the operating risk of a new management team: look for organization cultures that tap high-level mentoring; provide reasonable cost access to financial and reporting systems; include industry association dues in operating budgets and require meaningful, active participation by fund staff; commit to enough funding to keep the investment manager off the capital raising circuit so they can focus on portfolio, etc. The fund and fee structures must be sustainable otherwise the sustainability of portfolio companies and potential returns are both threatened;

2. Reduce reliance on closed-end long-term equity funds and create instead a secondary market-marker to manage liquidity at an industry level. This would free funds from holding scarce capital idle in a liquidity reserve, but enable investors to adjust portfolio holdings as needed. Development Finance Institutions (DFIs) could use guarantee funding to minimize the cash requirements of the market-maker and really leverage private capital. The structure could borrow from Omtrix’ Emergency Liquidity Facility (ELF) – funds and firms register and pre-qualify so that when liquidity is needed, little additional data is needed to respond;

3. Think in terms of multi-round funds (or multi-product firms). Investments that perform will get access to growth capital, your portfolio quality automatically increases over time and you have greater flexibility to pursue the best exit rather than the possible exit. Poor performers, obviously, don’t get follow-on investments, but good performers are less likely to fail or stagnate if we recognize current market gaps and plan for growth funding from day one. There’s no point in creating a robust global network of angel investors if there aren’t early stage and growth investors ready to step in as portfolio companies grow.

4. Think in terms of “investment ready” intermediaries rather than “funds”. We know what front and back office policies, processes and systems are needed. We also know that the quality of the human talent we hire (and how that talent works as a team) plays a significant role in investment management performance. Putting those two sets of requirements together before portfolio investment begins should reduce new manager risk and enhance your performance returns – but it takes capital to do this. Until there are sources of funding for new intermediation business models, most impact investments will cost too much and/or deliver too little.

5. Look for capital markets solutions to issues of scale and tenor. If we create well-capitalized, well-managed intermediaries, these intermediaries can offer long-term bonds/notes to long-term investors (like pension funds and insurance companies) using credit enhancements to ensure an acceptable risk/return profile for investors. The intermediary could then offer a wide range of debt, quasi-equity and equity to impact portfolio companies that are otherwise too small, or local market constrained, to obtain funding on similar terms (if at all). In other words, since most ventures with social impact are too small to access capital markets, we should create scalable and scaled intermediaries that have the necessary size and credibility to tap capital markets funding.

6. Don’t screw the middle class to “help” the poor. The talented investment professionals managing your impact investments are highly educated and highly skilled. They deserve to be paid reasonable wages and benefits, with a potential upside return on good performance. Cutting out expenses like health and life insurance may lower costs, but it won’t garner staff loyalty. Keeping wages at sub-market levels will likewise reduce costs, but may lead staff to moonlight to cover family expenses (bad for performance) or make them vulnerable to poaching by new competitors looking for experienced talent. Your people are your most valuable asset. Nurture and reward talent in ways that boost all of you multiple bottom-line returns.

The corollary to the above relates to how we structure investments in VSIs. If you are offering a zero return/no dividend policy to investors, you may be keeping funding within the VSI, but you are, in fact, losing money for your investors due to the impact of inflation over time. For the middle class, VSIs that don’t offer a return can only be funded from charitable giving budgets, since saving for your kid’s college education or your own retirement requires earning a positive real rate of return on investments. I’d like to be able to invest in VSIs, not just give money away, as would many of my friends who fall within the definition of middle class. That means we’re looking for for-profit, multiple bottom-line investments that we can access despite being too poor to qualify as an “accredited investor”.

400 Americans control more wealth than the 150 million poorest Americans – but that still leaves more than 100 million individuals in the US alone who could participate in impact investments, given appropriate instruments. Zero return social investment structures exclude this middle class market. Do we want to create an elitist system in which only the wealthy can invest in a way that makes people and planet better off? The SEC’s consideration of changes to crowd-funding and private placement regulations is a step in the right direction, as is the movement to incorporate ESG (environmental, social and governance) criteria into all investment, not just so-called “impact” investment.

What kinds of changes do you think are needed to get the issue of scalable impact investment intermediaries on the table? Are you part of a firm trying to grow? Looking to create a scalable structure? Struggling with capital markets access issues? Please share your concerns and experiences as comments, or let me know if you’d like to write a guest post on any of these themes!

@LaurenOPV