NB Financial Health
Weekly Roundup 10-23-15: Impact Investing Recovers from ‘The Cooties’
Most people don’t associate Department of Labor policy changes with excitement. But this week’s announcement of changes to the Employee Retirement Income Security Act (ERISA) has primed the impact investing movement to party like it’s 1994.
That’s the year when ERISA – which sets standards for private pension and health plans aimed at protecting investors’ money – was updated to allow fund managers to consider social and environmental impact alongside financial returns (as long as these returns weren’t compromised). That move promised to mobilize a huge amount of capital, as private pension plans governed by ERISA manage about $8.4 trillion in assets.
But the Department of Labor changed its mind in 2008 when, in the midst of the global financial crisis, it declared that pension managers’ investment decisions had to be based only on financial factors. That guidance made managers wary of socially responsible investments, which had the reputation (now increasingly outdated) of delivering lower returns. But on Thursday, the Department of Labor reinstated the 1994 standards. As Secretary Tom Perez memorably explained in announcing the change, “We’ve been told [the 2008 policy] has had a chilling effect. It gave cooties to impact investments.” Meanwhile, he added, non-ERISA investments in ESG funds have exploded, growing from $202 billion in 2007 to $4.3 trillion in 2014. “Our government hasn’t kept pace.”
Now that the cooties are gone, what can the sector expect? Some impact investing proponents have sky-high hopes. As Jean Case put it, “When you look at the history of any major movement – or any niche concept or technology that successfully ‘crossed the chasm’ into the mainstream – what you’ll find is a series of important moments. We believe this is one of those moments [for impact investing].” And it could well be – unlike in 1994, there are now plenty of socially responsible investment options with proven financial performance for funds to choose from. So the boost for impact and ESG investing could be huge – as long as these investments reliably live up to their promise of competitive returns.
– James Militzer
Inspired: The Pulse of the Entrepreneur
This week NextBillion contributors Heather Esper and Yaquta examined the sometimes broken binary model of assessing impact. Their observations and suggestions pertained mainly to established companies, NGOs and investors. That’s important, but there’s a more fundamental, internal measurement process every social entrepreneur must execute first. In a Q&A with Entrepreneur, Soushiant Zanganehpour articulated it nicely.
“The top things I would focus on are answering the following: what is the pain you are solving? What proof do you have that the pain is real? How is your solution functionally better than alternatives? What benefits does it provide users? How is your solution economically sound and economically more efficient than all alternatives? Why are you the entrepreneur to solve it? In other words, what makes you tick?”
Zanganehpour serves as a judge for The Venture, a global effort to fund social entrepreneurs that is heavily focused on the MENA region. He was also the Strategy and Operations Manager of the Skoll Centre for Social Entrepreneurship at the University of Oxford’s Said Business School. His advice may sound elemental, but more social entrepreneurs could stand to follow it.
“(Social entrepreneurship) isn’t just a trendy place for millennials to park themselves for a few years before they figure out their career,” he added. “The field affords this new generation the independence they’re looking for to experiment with new approaches to business and social development and the freedom to integrate values that are important to them, making it an ideal way of building a future career.”
– Scott Anderson
Why Gordon Gekko isn’t invited to SOCAP
We’re in the camp that believes ethical private enterprise is the best way for the world to solve its problems and reach its goals. Donor dollars will take us only so far.
The ideal way forward is a socially responsible economy led by companies that recognize and value social and financial returns. That’s a fancy way of saying that business ethics matter. And that’s where a lot of people, including Edward L. Queen, jump off the optimism train.
Citing ethical lapses that led to the Volkswagen emissions mess and Turing Pharmaceuticals’ price-gouging, Queen writes in New Republic that “corporate leadership is driven by moral midgets who have been educated far beyond their capacities for good judgment.” It continues, Queen maintains, because business schools emphasize the Milton Friedman model “that the only duty of a corporation is return on investment (regularly ignoring his caveat of doing so within the law and social norms).”
That seems very 1980s of Queen. Sure, there are a few Gordon Gekko’s in the business world, but then there’s SOCAP15, where there was a traffic jam of social-minded investors and entrepreneurs literally running into each other for three days. There’s a connected workforce that prioritizes impact. There’s the B Corps movement, which has gone international. We could go on, but we’ll refer you here; NextBillion can scarcely keep up with all the social entrepreneurship and impact investing stories that come our way.
“Shareholder primacy” once ruled, but a new term is called for. How about “shareholder contentment” – financial security wrapped in a cozy ethical blanket.
– Kyle Poplin