This is a guest post from Tommy who is a rising junior at the University of Notre Dame where he studies Finance, Entrepreneurship, and Education, Schooling and Society (ESS). He is co-founder and co-president of Unleashed, Notre Dame’s impact investing initiative.
Interest around impact investing is beginning to percolate from all corners of the world. Fascinated with how to use investment capital to address environmental and social issues, the number of players entering the impact investing space is rapidly increasing. The momentum behind this emerging market is coming at a critical point. Members of the Rockefeller Foundation point out, “In a world where government resources and charitable donations are insufficient to address the world’s social problems, impact investing offers a new alternative for channeling large-scale private capital for social benefit. “ But there remain many obstacles to overcome before impact investing can be institutionalized, allowing common investors to participate in this market. Many parties, including social entrepreneurs, researchers, and politicians, are working through these issues. Most recently, colleges are finding ways to get involved.
The Global Impact Investing Network (GIIN) and J.P. Morgan released a study earlier this year showing that impact investors are worried there is too much capital being deployed in this field and not a sufficient number of quality investments. In addition to business plan competitions and grants for budding social enterprises, schools are finding other ways to take promising ideas and turn them into investable products. Harvard recently opened a Social Impact Bond Lab that is working with state governments around the country to find ways to utilize these new innovative financial tools in a way that will tackle issues ranging from homelessness and early childhood education to diabetes and malaria. Social impact bonds (SIBs) are among the most promising developments in this field, garnering the attention of not only social entrepreneurs and impact investors, but also Wall Street banks and politicians. Goldman Sachs, for example, has invested in an SIB each of the last three years. President Obama, for the first time in U.S. history, included $300 million in our 2014 federal budget to incentivize the use of these “bonds” that bring a private sector mentality to public affairs. SIBs encourage investment in cost-saving preventative services and bring experimental creativity to addressing social ills, something governments with increasingly tight budgets are struggling with.
In addition to Harvard, Northwestern is another university that has joined the cause to help supply impact investors with potential investments. Their own Kellogg Business School has partnered with INSEAD Business School and Morgan Stanley to create “The Morgan Stanley Sustainable Investing Challenge,” a pitch competition for graduate students with the goal of developing institutional-quality investment vehicles. Its goal is to “harness the power of capital markets and student creativity to create positive impact in a world of perpetual resource scarcity and continued population growth.” With more impact investors entering the space every day, a sufficient supply of quality investments will be necessary for the success of the field as a whole.
Despite a perceived lack of investment opportunities, social entrepreneurs are claiming that they are being “starved of capital.” Responding to these complaints are colleges entering the market from the buy-side. Columbia, the University of Michigan, and the University of Utah are just a few schools that are experimenting with student-run funds dedicated to impact investing. Thus far, the University of Utah has the biggest student-run fund, measuring up at $15 million. With two full- time fund managers and their partnership with Mission Markets, a NYC-based impact investing platform, undergraduate students volunteer their time to run this for-profit fund. Differences in the way these funds are structured prove there is room for creativity. Whereas the University of Utah runs a for-profit fund that targets market-rates of return, Columbia’s 118 Capital is set up as a non-profit that provides “loans and capital raising support to social enterprises in need of early- stage, risk tolerant capital.” Another varying factor in these different student-run funds is the level of involvement from undergraduates versus that of graduate students. Although graduate students have more real-life experience and knowhow, undergraduates have more free time and less turnover. Involvement from both seems to be the optimal mix.
As more players enter the market, issues and questions that need answering are becoming evident. How to structure deals with social entrepreneurs with novel business structures, how to compensate fund managers of impact investing funds who are pursuing double- and triple-bottom line investments, and how to measure social benefit of these investments are just a few of the major questions that still remain largely unanswered. Other universities are focusing on research to answer some of these questions, most notably, Stanford, Duke, and the University of Pennsylvania. Stanford’s Social Innovation Review has published countless magazines, blog posts, and related content in fields like impact investing and social entrepreneurship. Duke, a long time leader in social entrepreneurship, published their two-year research project in union with InSight at Pacific Community Ventures and ImpactAssets in a report called, Impact Investing 2.0: The Way Forward. In addition to this report, they are continuing to do research, recently looking into how to involve university endowments in impact investing. The University of Pennsylvania is also deeply involved in the space in several ways, recently publishing an article, “De-Risking Impact Investments.” The mitigation of risk for impact investments is crucial for those who hope to involve fund/endowment managers, who have fiduciary duties to provide the greatest return at the lowest risk, in a major way.
Characteristic of any young market, there exists a disconnect between impact investors and the investments they are seeking, evident from arguments over whether there is too much or too little money in the field. Impact investments are currently difficult to find and, when found, difficult to analyze using traditional methods because of their unique structures. An initiative hoping to increase deal flow and capital in the impact investing space was started by undergraduates at the University of Notre Dame. Notre Dame’s impact investing initiative, Unleashed, is partnering with wealth management firms, connecting the increasing numbers of affluent individuals interested in this space with potential investments. To accomplish this objective, Unleashed is hosting an internal case competition to find various impact investments, with each team specializing in different areas. Upon completion, the wealth management firms will be provided with a video of the presentations along with written analyses of the proposed investments and other helpful assistance. Although the group’s ultimate goal is to establish a fund, they are starting by helping to increase deal flow and provide impact investments with exposure to interested parties.
Historically, “doing well” and “doing good” existed in bifurcated worlds. But things are changing. No longer must we accept the idea that our investments and charitable activities work at cross-purposes. Pope Francis praised these innovative forms of intervention that “acknowledge the ultimate connection between profit and solidarity.” Impact investing is gaining incredible momentum. It is bringing together groups that have historically had minimal overlap. Wall Street bankers and philanthropists are forming partnerships that contradict the perception that they must exist in disparate worlds. We are realizing, increasingly so, how powerful involving the private sector is when markets are put to work in the fight against our world’s most pressing and entrenched social issues. Despite its relative complexity, the aforementioned initiatives show the potential for students to be involved in meaningful and significant ways. We are entering unchartered territories, allowing room for involvement from people with little to no prior experience. What is required is a desire to inspire change in a world that desperately needs it. Instead of watching from the sidelines, I challenge you to join in.