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The shortage of affordable housing for low, moderate, and even middle income households is at crisis levels in major cities around the world, from Hong Kong to London to New York City. In the Bay Area, the housing crisis may well even be worse. San Francisco is now the most expensive rental market in the United States, with the median rent of a one-bedroom apartment at $3,500 a month and the median house price at 6 times the US median.
The Bay Area’s extraordinary economic growth has contributed substantially to the housing crisis. Between 2011 and 2015, the region added more than 500,000 jobs but added only 65,000 housing units. Not surprisingly, researchers at UC Berkeley found that more than half of low income households are at risk of experiencing gentrification or even eviction (through California’s Ellis Act). For government workers — teachers, firefighters, police, transit workers — and essential service providers — plumbers, electricians, ambulance drivers — that $3,500 monthly rent (if their family could fit in a one bedroom apartment) would take more than 60% their average starting salary. And, a family of four with an income of $85,000 earns too much to qualify for affordable housing program subsidies.
If we do not deal with this housing crisis, the people whose work ensures the wonderful quality of life in the Bay Area will be forced to move elsewhere. Essential services will not be provided, quality of life will decline, and the companies that have created the economic boom will leave too. The housing crisis is everyone’s problem and it will take cross-sector partnerships and broad based community support to make affordable housing for all a reality.
We need to think big and act boldly, which should come naturally to this home of Silicon Valley and some of the greatest thinkers and humanists in the world. And there is much we can learn from other places that have faced similar widespread housing shortages. While New York City still faces an affordability challenge, it has developed a series of successful programs based on the cross-sector partnership model. Beginning in the 1980’s, New York City government seized large numbers of poorly maintained residential properties for non-payment of taxes. It then worked with tenant organizations, community groups, and non-profit and for-profit developers to rehabilitate the buildings and convert them into affordable co-ops and rental units. And this is not an isolated example.
In the 1990’s, New York State and New York City created the Housing New York program. This effort dedicated a significant portion of the payments made by private market rate developers of the publicly owned site now known as Battery Park City to rehabilitate and construct affordable housing units across the NYC in partnership with nonprofit housing developers and owners. Recently, a community organization called Friends of the High Line and the city government under former Mayor Mike Bloomberg worked together to create a phenomenal new park — which is now attracting over 7 million visitors annually, bringing in a massive number of new, market rate apartments, as well as affordable units using the government’s zoning powers. This is also protecting and preserving two thousand units of low income public housing in the neighborhood. And many other similar examples can be found around the country.
Here in the Bay Area, some of the best affordable housing developers in the world — BRIDGE, Mercy Housing, MIDPEN , Resources for Community Development, and others — have created and preserved thousands of units of affordable housing for close to half a century and they will be key partners in a new regional housing plan. Despite their collective best efforts, working on their own, without an overall plan and the full commitment of all the key regional stakeholders — multiple local government elected officials, housing and buildings departments, zoning authorities, state government, the federal government, community leaders, advocates, business leaders, philanthropies, potential long term investors such as pension funds and insurance companies — their preservation and creation efforts is meeting only a fraction of the growing need.
If we all come together, create a cross-sector, regional partnership, collaboratively create a comprehensive, multi-year plan and identify specific projects to implement that plan, we can ensure that future generations will experience an even more beautiful, more prosperous, more inclusive and more just Bay Area. As stewards of the present, I believe that is not only our opportunity, it is our solemn responsibility. So, how do we get this done?
First, we need to bring representatives of all the key stakeholders together at same table. We need the right leadership in place including some entity with convening power to bring everyone together. Certainly, some of the leaders of the Silicon Valley giants and the philanthropies they have helped create and support have that convening authority. And several these leaders are already individually exploring ways that they might help solve our affordable housing crisis. Not only do these leaders have financial resources, a collective genius for innovation and a self-interest to act, they will likely receive strong encouragement and support from the local and national media for this initiative — the San Francisco Chronicle, The New York Times, Wall Street Journal, Huffington Post, Fortune, and SF Curbed, to name just a few — have recognized the severity of our housing crisis and the immediate need to do something about it.
Second, this new regional, cross-sector partnership needs to develop a comprehensive plan using a process that is both inclusive and transparent — and the media can help with this, particularly if we recognize that they are also a stakeholder and needs to be at the table and a member of the partnership. The plan needs to recognize the unique characteristics and culture of the many communities throughout the region. There needs to be close collaboration between the regional partnership and each community; at the same time, every community should recognize its responsibility to contribute to meeting our collective affordable housing needs.
Third, the plan needs to align the partners and the implementation process precisely, as in a value chain. Each one of the many partners — government, communities, developers, business leaders, and philanthropists, among others — have a specific role to play. Partnerships can be very effective but they require collaborative leadership and clear roles and responsibilities. Equally important, the plan must include precise measures of success, documented and audited relentlessly, including locations, numbers of units, affordability levels, quality, and timetables for completion and occupancy.
Fourth, a financial portfolio must be assembled, stacking capital to assure maximum leverage and efficient management of risk. Philanthropic dollars are essential in the beginning, helping to accelerate the process and enabling the partnership to innovate without fear. And we will also need patient long term capital, willing to take reliable but more modest return on their investment and stay invested, guaranteeing affordability is maintained for decades to come.
Finally, and most importantly, the plan should include a wide range of housing solutions, prioritizing home ownership whenever possible, providing existing residents with sweat equity opportunities as much as possible. Governments must step up and make its under-utilized buildings and lands available for affordable housing as the preferred use and aggressively pursue local, state, federal and private subsidies and tax incentives. The plan should include rehabilitation, preservation, and creation of new units. New construction can add to number of affordable units only if we protect and revitalize the affordable units currently available (but imminently threatened by gentrification and market pressures). And we should experiment — both New York and Hong Kong are using modular construction of micro apartments to provide a bridge for younger workers and to free up larger apartments now filled with three or more younger workers for families.
Many of the products and services provided by Silicon Valley companies that we now cannot live without, were barely imaginable twenty years ago. Providing affordable housing for all in the Bay Area is not beyond our collective capacity over the next twenty years. We just need to come together as partners and get it done.
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The internet is abuzz today with the latest in what seems like a never-ending stream of stories about silly Bay Area start-ups.
Bodega hopes to replace brick and mortar neighborhood stores with wired vending machines but upon announcing itself to the world drew swift condemnation from those who like their neighborhood bodega and the people who work at it (often hard-working and entrepreneurial immigrants who would no longer be needed if their business succeeds).
This comes on the heels of the Juicero debacle — the wifi enabled juicer which I wrote about in April and which went out of business two weeks ago while its founder partied at Burning Man.
What do Bodega and Juicero have in common?
Their founders sought profit without purpose.
Here’s a prediction…
The most celebrated entrepreneurs of the next ten years will be those who found companies which solve the world’s biggest problems.
There are plenty to choose from; energy, water, housing, human rights, education…the list goes on and on.
At i(x) we call this “Profit With Purpose” and our focus is on investing in companies which address the most pressing areas of global need.
We need the greatest minds of our age addressing the greatest problems we face. Enough with the juicers. Leave the guy with the neighborhood bodega alone.
It’s time for entrepreneurs to build companies that solve the problems that matter.
Sarah Bloom Raskin joins board of impact investing firm.
The impact investment firm i(x) investments, known for its structure as a permanent holding company, has appointed Sarah Bloom Raskin to its Board of Directors.
From 2014 to 2017, Raskin served as Deputy Secretary of the U.S. Department of the Treasury — the first women to serve in that role — where she worked to strengthen the nation’s financial infrastructure and establish consumer safeguards in the financial marketplace.
“The great challenge of our time is harnessing the power of markets and economic growth to address the social and environmental problems of humanity,” said Raskin, who has also served as a Governor of the Federal Reserve System.
She added that at i(x), co-founded by Howard Buffett (the grandson of Warren E. Buffett) and Trevor Neilson, “social, economic, and environmental progress will be the baseline return on our investments.”
i(x) investments, a multi-strategy social impact investment firm, today announces the appointment of Sarah Bloom Raskin to its Board of Directors. From March 2014 through January 2017, Ms. Raskin served as the Deputy Secretary of the U.S. Department of the Treasury. In addition to the broad range of policy, operational and organizational functions she oversaw and directed as second-in-command at the Treasury Department, Ms. Raskin focused on bolstering the country’s critical financial infrastructures, creating the conditions for fostering inclusive economic growth and prosperity, and establishing consumer safeguards in the financial marketplace.
“Sarah Bloom Raskin is an excellent addition to our board of directors. Her guidance will be essential as i(x) builds the world’s first institutional scale permanently capitalized, multi-strategy, impact investing platform. Our investors believe in the power of capitalism to create positive social change and her leadership in the next phase of our growth will help us achieve our goals,” said Trevor Neilson, i(x) co–founder and CEO.
Prior to serving as Deputy Secretary, Ms. Raskin served as a Governor of the Federal Reserve Board, where she conducted the nation’s monetary policy as a member of the Federal Open Market Committee. In addition, Ms. Raskin also previously served as Commissioner of Financial Regulation for the State of Maryland from 2007 to 2010, where she and her agency were responsible for regulating Maryland’s financial institutions during the height of the Great Recession.
“The great challenge of our time is harnessing the power of markets and economic growth to address the social and environmental problems of humanity. I am very excited about joining the board of i(x), a company that is devoted to unleashing the force of capital markets to make sure that social, economic, and environmental progress will be the baseline return on our investments,” said Raskin.
With the appointment of Ms. Raskin, the i(x) investments board will consist of five members, including: Trevor Neilson, Todd Morley, Dave Sams, and William Eimicke.
The world of finance has had a very bad week. With the recent news of scandal at Binary Capital it seemed like a good time for me to explain why i(x) investments is called i(x) investments — and what that might mean for you.
As math people notice immediately, i(x) is written in the form of an equation — “X” is the factor and “i” is either the individual or their investment.
The equation is also a question: how will you use your time and your investment(s) to make the world a better place?
The unfortunate reality for most investors is that they are not using their investment capital to make the world a better place. Plagued by the myth of concessionary returns, many people who care about the world and have active philanthropic lives fail to use their investment capital as a tool for social change.
Investment advisors are a big part of this problem. Most have little or no experience in the philanthropic world and as a result react with an impulsive negativity when the idea of making the world better and simultaneously creating profits is raised.
There are notable exceptions to this, for example:
Ascent — the high net worth group at U.S. Bank has an active and involved advisory practice in impact investing;
The CAPROCK Group represents over 100 families and routinely offers them impact investing opportunities without concessionary returns;
Through its acquisition of Imprint Capital, Goldman Sachs has entered the impact investing space in a meaningful way with a very smart and very focused team;
Encourage Capital was one of the pioneers in the space and continues to innovate with financial products addressing critical issues like forestry and the oceans;
Some of the most exciting innovations in finance are happening in early-stage investing in San Francisco — Obvious Ventures and Uprising are leaders in the space — blending innovative investments with social impact.
At i(x) investments, we believe that we must align our investments with our values and that in doing so there’s no need to forsake above market returns.
That’s also what the data shows. A Cambridge study showed that impact investing funds launched from 1998 through 2004 performed in line with or better than the comparative universe of non-impact investing funds.
In many ways, we have built i(x) investments for all of us, and I believe our timing is good.
A recent Bank of America study found that 85% of millennials consider their investment decisions as a way to express their social, political and environmental values, and 93% indicate that a company’s impact in these areas is an important consideration when they make investment decisions. These emerging investors don’t buy into the old dichotomy of nonprofit vs. for profit and they certainly aren’t looking to Washington D.C. to solve any of the problems we face.
Simply put, this represents a revolution in the world of finance.
You, as an individual, have the power to create change in the world — the way you invest is one of your most powerful tools.
Don’t let news about the world of finance create an impression that investors are either amoral…or worse. A new group of powerful and innovative investors is beginning to use capital as a tool of morality — aligning their investments with their values and using the power of the markets to address the world’s biggest problems.
ON SATURDAY MORNING, the white stone buildings on UC Berkeley’s campus radiated with unfiltered sunshine. The sky was blue, the campanile was chiming. But instead of enjoying the beautiful day, 200 adults had willingly sardined themselves into a fluorescent-lit room in the bowels of Doe Library to rescue federal climate data.
Like similar groups across the country—in more than 20 cities—they believe that the Trump administration might want to disappear this data down a memory hole. So these hackers, scientists, and students are collecting it to save outside government servers.
But now they’re going even further. Groups like DataRefuge and the Environmental Data and Governance Initiative, which organized the Berkeley hackathon to collect data from NASA’s earth sciences programs and the Department of Energy, are doing more than archiving. Diehard coders are building robust systems to monitor ongoing changes to government websites. And they’re keeping track of what’s been removed—to learn exactly when the pruning began.
Tag It, Bag It
The data collection is methodical, mostly. About half the group immediately sets web crawlers on easily-copied government pages, sending their text to the Internet Archive, a digital library made up of hundreds of billions of snapshots of webpages. They tag more data-intensive projects—pages with lots of links, databases, and interactive graphics—for the other group. Called “baggers,” these coders write custom scripts to scrape complicated data sets from the sprawling, patched-together federal websites.
It’s not easy. “All these systems were written piecemeal over the course of 30 years. There’s no coherent philosophy to providing data on these websites,” says Daniel Roesler, chief technology officer at UtilityAPI and one of the volunteer guides for the Berkeley bagger group.
One coder who goes by Tek ran into a wall trying to download multi-satellite precipitation data from NASA’s Goddard Space Flight Center. Starting in August, access to Goddard Earth Science Data required a login. But with a bit of totally legal digging around the site (DataRefuge prohibits outright hacking), Tek found a buried link to the old FTP server. He clicked and started downloading. By the end of the day he had data for all of 2016 and some of 2015. It would take at least another 24 hours to finish.
The non-coders hit dead-ends too. Throughout the morning they racked up “404 Page not found” errors across NASA’s Earth Observing System website. And they more than once ran across empty databases, like the Global Change Data Center’s reports archive and one of NASA’s atmospheric CO2 datasets.
And this is where the real problem lies. They don’t know when or why this data disappeared from the web (or if anyone backed it up first). Scientists who understand it better will have to go back and take a look. But meantime, DataRefuge and EDGI understand that they need to be monitoring those changes and deletions. That’s more work than a human could do.
So they’re building software that can do it automatically.
Later that afternoon, two dozen or so of the most advanced software builders gathered around whiteboards, sketching out tools they’ll need. They worked out filters to separate mundane updates from major shake-ups, and explored blockchain-like systems to build auditable ledgers of alterations. Basically it’s an issue of what engineers call version control—how do you know if something has changed? How do you know if you have the latest? How do you keep track of the old stuff?
There wasn’t enough time for anyone to start actually writing code, but a handful of volunteers signed on to build out tools. That’s where DataRefuge and EDGI organizers really envision their movement going—a vast decentralized network from all 50 states and Canada. Some volunteers can code tracking software from home. And others can simply archive a little bit every day.
By the end of the day, the group had collectively loaded 8,404 NASA and DOE webpages onto the Internet Archive, effectively covering the entirety of NASA’s earth science efforts. They’d also built backdoors in to download 25 gigabytes from 101 public datasets, and were expecting even more to come in as scripts on some of the larger datasets (like Tek’s) finished running. But even as they celebrated over pints of beer at a pub on Euclid Street, the mood was somber.
There was still so much work to do. “Climate change data is just the tip of the iceberg,” says Eric Kansa, an anthropologist who manages archaeological data archiving for the non-profit group Open Context. “There are a huge number of other datasets being threatened with cultural, historical, sociological information.” A panicked friend at the National Parks Service had tipped him off to a huge data portal that contains everything from park visitation stats to GIS boundaries to inventories of species. While he sat at the bar, his computer ran scripts to pull out a list of everything in the portal. When it’s done, he’ll start working his way through each quirky dataset.
The release of carbon dioxide (CO2) and other greenhouse gases (GHGs) due to human activity is increasing global average surface air temperatures, disrupting weather patterns, and acidifying the ocean (1). Left unchecked, the continued growth of GHG emissions could cause global average temperatures to increase by another 4°C or more by 2100 and by 1.5 to 2 times as much in many midcontinent and far northern locations (1). Although our understanding of the impacts of climate change is increasingly and disturbingly clear, there is still debate about the proper course for U.S. policy—a debate that is very much on display during the current presidential transition. But putting near-term politics aside, the mounting economic and scientific evidence leave me confident that trends toward a clean-energy economy that have emerged during my presidency will continue and that the economic opportunity for our country to harness that trend will only grow. This Policy Forum will focus on the four reasons I believe the trend toward clean energy is irreversible.
ECONOMIES GROW, EMISSIONS FALL
The United States is showing that GHG mitigation need not conflict with economic growth. Rather, it can boost efficiency, productivity, and innovation.
Since 2008, the United States has experienced the first sustained period of rapid GHG emissions reductions and simultaneous economic growth on record. Specifically, CO2 emissions from the energy sector fell by 9.5% from 2008 to 2015, while the economy grew by more than 10%. In this same period, the amount of energy consumed per dollar of real gross domestic product (GDP) fell by almost 11%, the amount of CO2 emitted per unit of energy consumed declined by 8%, and CO2 emitted per dollar of GDP declined by 18% (2).
The importance of this trend cannot be understated. This “decoupling” of energy sector emissions and economic growth should put to rest the argument that combatting climate change requires accepting lower growth or a lower standard of living. In fact, although this decoupling is most pronounced in the United States, evidence that economies can grow while emissions do not is emerging around the world. The International Energy Agency’s (IEA’s) preliminary estimate of energy-related CO2 emissions in 2015 reveals that emissions stayed flat compared with the year before, whereas the global economy grew (3). The IEA noted that “There have been only four periods in the past 40 years in which CO2 emission levels were flat or fell compared with the previous year, with three of those—the early 1980s, 1992, and 2009—being associated with global economic weakness. By contrast, the recent halt in emissions growth comes in a period of economic growth.”
At the same time, evidence is mounting that any economic strategy that ignores carbon pollution will impose tremendous costs to the global economy and will result in fewer jobs and less economic growth over the long term. Estimates of the economic damages from warming of 4°C over preindustrial levels range from 1% to 5% of global GDP each year by 2100 (4). One of the most frequently cited economic models pins the estimate of annual damages from warming of 4°C at ~4% of global GDP (4–6), which could lead to lost U.S. federal revenue of roughly $340 billion to $690 billion annually (7).
Moreover, these estimates do not include the possibility of GHG increases triggering catastrophic events, such as the accelerated shrinkage of the Greenland and Antarctic ice sheets, drastic changes in ocean currents, or sizable releases of GHGs from previously frozen soils and sediments that rapidly accelerate warming. In addition, these estimates factor in economic damages but do not address the critical question of whether the underlying rate of economic growth (rather than just the level of GDP) is affected by climate change, so these studies could substantially understate the potential damage of climate change on the global macroeconomy (8, 9).
As a result, it is becoming increasingly clear that, regardless of the inherent uncertainties in predicting future climate and weather patterns, the investments needed to reduce emissions—and to increase resilience and preparedness for the changes in climate that can no longer be avoided—will be modest in comparison with the benefits from avoided climate-change damages. This means, in the coming years, states, localities, and businesses will need to continue making these critical investments, in addition to taking common-sense steps to disclose climate risk to taxpayers, homeowners, shareholders, and customers. Global insurance and reinsurance businesses are already taking such steps as their analytical models reveal growing climate risk.
PRIVATE-SECTOR EMISSIONS REDUCTIONS
Beyond the macroeconomic case, businesses are coming to the conclusion that reducing emissions is not just good for the environment—it can also boost bottom lines, cut costs for consumers, and deliver returns for shareholders.
Perhaps the most compelling example is energy efficiency. Government has played a role in encouraging this kind of investment and innovation: My Administration has put in place (i) fuel economy standards that are net beneficial and are projected to cut more than 8 billion tons of carbon pollution over the lifetime of new vehicles sold between 2012 and 2029 (10) and (ii) 44 appliance standards and new building codes that are projected to cut 2.4 billion tons of carbon pollution and save $550 billion for consumers by 2030 (11).
But ultimately, these investments are being made by firms that decide to cut their energy waste in order to save money and invest in other areas of their businesses. For example, Alcoa has set a goal of reducing its GHG intensity 30% by 2020 from its 2005 baseline, and General Motors is working to reduce its energy intensity from facilities by 20% from its 2011 baseline over the same timeframe (12). Investments like these are contributing to what we are seeing take place across the economy: Total energy consumption in 2015 was 2.5% lower than it was in 2008, whereas the economy was 10% larger (2).
This kind of corporate decision-making can save money, but it also has the potential to create jobs that pay well. A U.S. Department of Energy report released this week found that ~2.2 million Americans are currently employed in the design, installation, and manufacture of energy-efficiency products and services. This compares with the roughly 1.1 million Americans who are employed in the production of fossil fuels and their use for electric power generation (13). Policies that continue to encourage businesses to save money by cutting energy waste could pay a major employment dividend and are based on stronger economic logic than continuing the nearly $5 billion per year in federal fossil-fuel subsidies, a market distortion that should be corrected on its own or in the context of corporate tax reform (14).
MARKET FORCES IN THE POWER SECTOR
The American electric-power sector—the largest source of GHG emissions in our economy—is being transformed, in large part, because of market dynamics. In 2008, natural gas made up ~21% of U.S. electricity generation. Today, it makes up ~33%, an increase due almost entirely to the shift from higher-emitting coal to lower-emitting natural gas, brought about primarily by the increased availability of low-cost gas due to new production techniques (2, 15). Because the cost of new electricity generation using natural gas is projected to remain low relative to coal, it is unlikely that utilities will change course and choose to build coal-fired power plants, which would be more expensive than natural gas plants, regardless of any near-term changes in federal policy. Although methane emissions from natural gas production are a serious concern, firms have an economic incentive over the long term to put in place waste-reducing measures consistent with standards my Administration has put in place, and states will continue making important progress toward addressing this issue, irrespective of near-term federal policy.
Renewable electricity costs also fell dramatically between 2008 and 2015: the cost of electricity fell 41% for wind, 54% for rooftop solar photovoltaic (PV) installations, and 64% for utility-scale PV (16). According to Bloomberg New Energy Finance, 2015 was a record year for clean-energy investment, with those energy sources attracting twice as much global capital as fossil fuels (17).
Public policy—ranging from Recovery Act investments to recent tax credit extensions—has played a crucial role, but technology advances and market forces will continue to drive renewable deployment. The levelized cost of electricity from new renewables like wind and solar in some parts of the United States is already lower than that for new coal generation, without counting subsidies for renewables (2).
That is why American businesses are making the move toward renewable energy sources. Google, for example, announced last month that, in 2017, it plans to power 100% of its operations using renewable energy—in large part through large-scale, long-term contracts to buy renewable energy directly (18). Walmart, the nation’s largest retailer, has set a goal of getting 100% of its energy from renewables in the coming years (19). And economy-wide, solar and wind firms now employ more than 360,000 Americans, compared with around 160,000 Americans who work in coal electric generation and support (13).
Beyond market forces, state-level policy will continue to drive clean-energy momentum. States representing 40% of the U.S. population are continuing to move ahead with clean-energy plans, and even outside of those states, clean energy is expanding. For example, wind power alone made up 12% of Texas’s electricity production in 2015 and, at certain points in 2015, that number was >40%, and wind provided 32% of Iowa’s total electricity generation in 2015, up from 8% in 2008 (a higher fraction than in any other state) (15, 20).
Outside the United States, countries and their businesses are moving forward, seeking to reap benefits for their countries by being at the front of the clean-energy race. This has not always been the case. A short time ago, many believed that only a small number of advanced economies should be responsible for reducing GHG emissions and contributing to the fight against climate change. But nations agreed in Paris that all countries should put forward increasingly ambitious climate policies and be subject to consistent transparency and accountability requirements. This was a fundamental shift in the diplomatic landscape, which has already yielded substantial dividends. The Paris Agreement entered into force in less than a year, and, at the follow-up meeting this fall in Marrakesh, countries agreed that, with more than 110 countries representing more than 75% of global emissions having already joined the Paris Agreement, climate action “momentum is irreversible” (21).
Although substantive action over decades will be required to realize the vision of Paris, analysis of countries’ individual contributions suggests that meeting medium-term respective targets and increasing their ambition in the years ahead—coupled with scaled-up investment in clean-energy technologies—could increase the international community’s probability of limiting warming to 2°C by as much as 50% (22).
Were the United States to step away from Paris, it would lose its seat at the table to hold other countries to their commitments, demand transparency, and encourage ambition. This does not mean the next Administration needs to follow identical domestic policies to my Administration’s. There are multiple paths and mechanisms by which this country can achieve—efficiently and economically—the targets we embraced in the Paris Agreement. The Paris Agreement itself is based on a nationally determined structure whereby each country sets and updates its own commitments. Regardless of U.S. domestic policies, it would undermine our economic interests to walk away from the opportunity to hold countries representing two-thirds of global emissions—including China, India, Mexico, European Union members, and others—accountable.
This should not be a partisan issue. It is good business and good economics to lead a technological revolution and define market trends. And it is smart planning to set long-term emission-reduction targets and give American companies, entrepreneurs, and investors certainty so they can invest and manufacture the emission-reducing technologies that we can use domestically and export to the rest of the world. That is why hundreds of major companies—including energy-related companies from ExxonMobil and Shell, to DuPont and Rio Tinto, to Berkshire Hathaway Energy, Calpine, and Pacific Gas and Electric Company—have supported the Paris process, and leading investors have committed $1 billion in patient, private capital to support clean-energy breakthroughs that could make even greater climate ambition possible.
We have long known, on the basis of a massive scientific record, that the urgency of acting to mitigate climate change is real and cannot be ignored. In recent years, we have also seen that the economic case for action—and against inaction—is just as clear, the business case for clean energy is growing, and the trend toward a cleaner power sector can be sustained regardless of near-term federal policies.
Despite the policy uncertainty that we face, I remain convinced that no country is better suited to confront the climate challenge and reap the economic benefits of a low-carbon future than the United States and that continued participation in the Paris process will yield great benefit for the American people, as well as the international community. Prudent U.S. policy over the next several decades would prioritize, among other actions, decarbonizing the U.S. energy system, storing carbon and reducing emissions within U.S. lands, and reducing non-CO2 emissions (23).
Of course, one of the great advantages of our system of government is that each president is able to chart his or her own policy course. And President-elect Donald Trump will have the opportunity to do so. The latest science and economics provide a helpful guide for what the future may bring, in many cases independent of near-term policy choices, when it comes to combatting climate change and transitioning to a clean-energy economy.
References and Notes
↵T. F. Stocker et al., in Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, T. F. Stocker et al., Eds. (Cambridge Univ. Press, New York, 2013), pp. 33–115.
↵Council of Economic Advisers, in “Economic report of the President” (Council of Economic Advisers, White House, Washington, DC, 2017), pp. 423–484; http://bit.ly/2ibrgt9.
↵International Energy Agency, “World energy outlook 2016” (International Energy Agency, Paris, 2016).
↵W. Nordhaus, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World (Yale Univ. Press, New Haven, CT, 2013).
↵W. Nordhaus, DICE-2016R model (Yale Univ., New Haven, CT, 2016); http://bit.ly/2iJ9OQn.
The result for 4°C of warming cited here from DICE-2016R (in which this degree of warming is reached between 2095 and 2100 without further mitigation) is consistent with that reported from the DICE-2013R model in (5), Fig. 22, p. 140.
↵U.S. Office of Management and Budget, Climate Change: The Fiscal Risks Facing the Federal Government (OMB, Washington, DC, 2016); http://bit.ly/2ibxJo1.
↵ M. Burke, S. M. Hsiang, E. Miguel, Nature 527, 235 (2015). doi:10.1038/nature15725pmid:26503051CrossRefMedline
↵ M. Dell, B. F. Jones, B. A. Olken, Am. Econ. J. Macroecon. 4, 66 (2012). doi:10.1257/mac.4.3.66CrossRef
↵U.S. Environmental Protection Agency, U.S. Department of Transportation, “Greenhouse gas emissions and fuel efficiency standards for medium- and heavy-duty engines and vehicles—Phase 2: Final rule” (EPA and DOT, Washington, DC. 2016), table 5-40, pp. 5-5–5-42.
↵DOE, Appliance and Equipment Standards Program (Office of Energy Efficiency and Renewable Energy, DOE, 2016); http://bit.ly/2iEHwebsite.
↵The White House, “Fact Sheet: White House announces commitments to the American Business Act on Climate Pledge” (White House, Washington, DC, 2015); http://bit.ly/2iBxWHouse.
↵BW Research Partnership, U.S. Energy and Employment Report (DOE, Washington, DC, 2017).
↵U.S. Department of the Treasury, “United States—Progress report on fossil fuel subsidies” (Treasury, Washington, DC, 2014); www.treasury.gov.
↵U.S. Energy Information Administration, “Monthly Energy Review, November 2016” (EIA, Washington, DC, 2015); http://bit.ly/2iQjPbD.
↵DOE, Revolution…Now: The Future Arrives for Five Clean Energy Technologies—2016 Update (DOE, Washington, DC, 2016); http://bit.ly/2hTv1WG.
↵A. McCrone, Ed., Clean Energy Investment: By the Numbers—End of Year 2015 (Bloomberg, New York, 2015); http://bloom.bg/2jaz4zG.
↵U. Hölzle, “We’re set to reach 100% renewable energy—and it’s just the beginning” (Google, 2016); http://bit.ly/2hTEbSR.
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ACKNOWLEDGMENTS: B. Deese, J. Holdren, S. Murray, and D. Hornung contributed to the researching, drafting, and editing of this article.
More and more investors are looking beyond just financial returns
WHEN investors gathered in Amsterdam in late 2016 for perhaps the largest annual conference on “impact investing”, the mood was upbeat. The concept of investing in assets that offer measurable social or environmental benefits as well as financial returns has come a long way from its modest roots in the early 2000s. Panellists at the conference included, among others, representatives of two of the world’s largest pension funds, TIAA of America and PGGM of the Netherlands, and of the asset-management arm of AXA, a French insurance behemoth. A niche product is inching into the mainstream.
In the past two years BlackRock, the world’s biggest asset manager, launched a new division called “Impact”; Goldman Sachs, an investment bank, acquired an impact-investment firm, Imprint Capital; and two American private-equity firms, Bain Capital and TPG, launched impact funds. The main driver of all this activity is investor demand. Deborah Winshel, boss of BlackRock Impact, points to the transfer of wealth to women and the young, whose investment goals, she says, transcend mere financial returns. Among institutions, sources of demand have moved beyond charitable foundations to hard-bitten pension funds and insurers.
The sector has also been boosted by increased attention from policymakers and the development of industry standards. International organisations—such as the UN, and a global task force founded under the aegis of the G8—have promoted impact investment. Bodies such as the council of investors and borrowers that sets the Green Bond Principles, guidelines for bonds earmarked for environmental projects, have helped set common standards.
Definitional squabbles still plague the impact community. For sticklers, investment only deserves “impact” status if it delivers both near-market level returns and strict measurement of the non-financial impact: eg, of the carbon emissions saved by a renewable-energy project; or of the number of poor people who borrow from a microcredit institution. Others, however, include philanthropic investment, where financial returns are sacrificed for greater social benefits; or less rigorous types of do-good investments.
Such disagreements make it hard to gauge the true extent of impact investment. For instance, BlackRock Impact and Goldman both also offer two looser investment categories: “negative screening” (ie, not investing in “bad” sectors—say, tobacco or oil); and “integrated” investments that take environmental, social or governance (ESG) considerations into account (eg, by selecting for firms with, say, good working conditions). Neither firm, however, provides a complete breakdown of these categories by assets under management.
The industry is also held back by a restricted choice of asset classes, and by the limited scale of investment opportunities. According to a survey by the Global Impact Investing Network, which organised the conference in Amsterdam, investors were managing $36bn in impact investments in 2015. But the median size of investment remained just $12m. Urban Angehrn, chief investment officer of Zurich Insurance, says the Swiss firm has had trouble fulfilling its pledge to commit 10% of its private-equity allocation to impact investments.
Cynics may still dismiss impact investing as faddish window-dressing. Of Zurich’s $250bn-plus in assets under management, only $7bn-worth are classified as impact investments. At Goldman’s asset-management arm, impact and ESG-integrated investments combined only make up $6.7bn out of a total $1.35trn in assets under management.
But that is to ignore the scale and progress that large institutional investors have brought to impact investing. Although $7bn is a tiny slice of Goldman’s portfolio, it is huge compared with the investments of even well-established impact specialists, such as LeapFrog, whose commitments total around $1bn. And the entry of hard-nosed financial giants sends an important message about impact investing: that they see it as profitable for themselves and their clients. It is not enough to make investors feel good about themselves; they also want to make money.
This article appeared in the Finance and economics section of the print edition under the headline “Coming of age”
Originally aired on Fox Business Network, Mornings with Maria on October 25, 2016
Brava Investments CEO Nathalie Molina Nino on investing in businesses that are benefiting women financially in a measurable way.
The last time Nathalie Molina Niño set up a retirement savings account, she wanted to stash her money in an ethical portfolio, one that could improve the planet — and her net worth. She clicked a button that would attach her 401(k) to companies that rejected, say, pollution and sweatshop labor. A message appeared: Expect lower than market returns.
Molina Niño, a serial entrepreneur, recalls frowning. So, doing good amounted to charity?
She had noticed a similar quandary with investing efforts meant to boost women-owned enterprises. The reason why, she said, boils down to math: An investor who exclusively backs female-run start-ups, a slim minority in the business world, is less likely to reap jackpot returns than someone who puts their money behind a broader range of companies.
“The pool of possibilities is just smaller,” Molina Niño said. “If you have good intentions, and you say, ‘I only want to help women founders,’ you’re less likely to hit the next unicorn, the next Google.”
Molina Niño, 40, just unveiled a project she believes will lift women and yield profit: a holding company called BRAVA Investments. She hopes it will become the new model for socially responsible investing, a way to do good while making money. BRAVA aims to create a billion-dollar portfolio from scratch by bankrolling start-ups on one condition: The businesses must disproportionately benefit women.
Research shows gender bias stymies female founders in Silicon Valley and beyond. Women led only 8 percent of the 205 companies that received between $3 million and $15 million in the San Francisco Bay area last year, according to the Female Founders Fund. Molina Niño, who launched her first web company at 21 and has worked in technology for the past two decades, said the scene is a boy’s club.
“Most of the venture capitalists are white men,” she said, “and they tend to give money to people who remind them of themselves.”
That’s why funds that target women-run firms have popped up over the years — to help right a social wrong, and to toss cash at good ideas that might be otherwise overlooked. They’ve helped entrepreneurs get off the ground, Molina Niño said, but they don’t exactly generate billions.
Her method targets women at the bottom of the economic ladder, who might not have resources to pursue corner-office aspirations. Making women wealthier as a gender, she said, would give them more cushion to explore their passions and hone their skills. Sustained profit, she’s betting, could attract non-social justice warriors to her cause.
BRAVA’s structure borrows from Berkshire Hathaway, Warren Buffett’s monster conglomerate that owns Dairy Queen, Fruit of the Loom and Helzberg Diamonds — the roster is long and diverse. Buffett, 86, has said he built his fortune by backing businesses “forever,” as opposed to supplying shorter-term funds. As the companies grew, so did shareholders’ pockets.
Molina Niño envisions building similar relationships. Here’s how it works: BRAVA will pick up companies that already churn out profit but need a serious cash infusion to reach their potential. The average investment would be between $10 million and $15 million, she predicts, though the company could occasionally give smaller amounts to newbie enterprises with special potential. (BRAVA is currently accepting money from friends-and-family investors, Molina Niño said, and aims to pick a handful of investments next year.)
One start-up on the shortlist digitizes medical-device prescriptions, a process that often relies on handwriting, and is therefore prone to error. Molina Niño said she realizes this concept is not sexy. But she’ll consider backing it if the founder can prove the majority of people who use crutches, for example, are women, and that they’d ultimately save money because of his business.
Another contender for BRAVA funds updates factory conditions so that manufacturers can meet the standards necessary for green certifications, the kind that would help them ink deals with brands like Nike. The firm would be eligible if the founder can show most of the workers are female, and that they make a living wage.
In the United States, women on average earn less income than men and hold fewer leadership positions across virtually all industries. Last year, female workers in full-time jobs typically took home 79 cents for every dollar paid to men — a figure economists say can be explained by both career choice and discrimination. Disparities persist even among men and women in the same roles. And women slip into poverty at higher rates than men, often when they’re responsible for children.
Molina Niño drew inspiration for BRAVA from her childhood and her two-decade career in technology. She grew up in Los Angeles, where her mother pushed aside college dreams to work as a supermarket cashier; their family needed the health insurance. She started her first web company at 20.
Molina Niño wonders what women like her mother could achieve if they generated as much wealth as men. Even those with Ivy League degrees and promising business models, she said, struggle to attract as much capital as their male counterparts in Silicon Valley. Progress crawls, a 2014 study found. Over the past 15 years, the amount of early-stage investment in companies with a woman on the executive team has grown from 5 percent to 15 percent.
BRAVA has found support from financial and philanthropic juggernauts. One partner is Howard Buffett, grandson of the Berkshire Hathaway billionaire. Another is Trevor Neilson, co-founder of the Global Philanthropy Group, which advises charity-running celebrities, including Madonna and Angelina Jolie.
Molina Niño met Neilson at a Utah technology retreat a couple years ago, as he worked with Buffett to develop (i)x, a socially conscious holding company with a focus on clean energy, water scarcity and sustainable agriculture. They discovered their values aligned and decided to work together on BRAVA, with Molina Niño at the helm.
“We wanted to take a step back and invest in what we thought actually creates meaningful change,” said Neilson, (i)x’s chief executive, “with the belief that change will create top-tier returns.”
Both entities harbor world-changing ambitions. Whether they will pay off for humanity or investors remains to be seen, though. Neither Molina Niño nor Neilson will disclose how much money they’ve raised.
Returns Pope Francis has little good to say about capitalism but has championed impact investments
The finance industry presents a bewildering array of options for anyone looking to increase their savings, from “60-40” portfolios to newfangled concepts like “smart beta”, but rare is the investment strategy that has been blessed by the Pope.
When the Vatican assembles investors, entrepreneurs and academics for its second Impact Investing Conference later this month, it will do so as the mainstream wealth management industry has started to catch on to the term. Impact investments are made with the aim of generating not just a financial return but also a measurable social or environmental one. It is an alluring — if often elusive — proposition: doing good while also making money.
Pope Francis has made it a theme of his papacy that capital markets should be redirected to help the poor, and the conference will explore how the Catholic Church might channel some of its riches to impact investing. Wealth managers are perhaps more concerned with mammon than with God: they have watched as some very rich clients pulled their money from firms who cannot offer impact investing advice.
Across the industry, executives are looking at ways to cater to the millennial generation, which seems far more attuned to the idea of investing as a way of improving society. And while they may not have much in the way of assets yet, millennials will inherit some $30tn — the biggest-ever transfer of wealth.
“Fifty-eight per cent of baby boomers say that social and environmental impact is important” with regards to their investments, says Jackie VanderBrug, investment strategist at US Trust. “Ninety-three per cent of millennials will say that. In fact, millennials are starting to say, why are you even asking me this question?”
Until recently, impact investing has been the preserve of rich families, philanthropic foundations and a few, often faith-based, institutional investors. In contrast to wider concepts of socially responsible investing (SRI) or environmental, social and governance (ESG) investing — for instance, attempts to screen out firearms or tobacco companies, or to engage with companies to improve their social policies — impact investing requires explicit work to set targets for, measure and compare the social effects of one’s asset allocation.
The Global Impact Investing Network, set up to track and promote the field, can find only $77.4bn as of the end of last year, specifically in impact investment funds. These are most often channelled to microfinance programmes, like those lending seed capital to female entrepreneurs, and developing infrastructure projects. Other asset classes include affordable housing and sustainable forestry, where the number of “teachers housed” or “hectares planted” can be easily counted. Private equity-style funds also channel money to for-profit companies whose products aim to aid the environment or provide jobs for underserved populations.
Asset management groups have scented an opportunity and are racing to develop products that can be sold under the impact investing umbrella to a wider range of clients, promising market rates of return. In the philanthropic sector — the term impact investing was coined at the Rockefeller Foundation a decade ago to refer to market-based solutions to social problems — there is hope for a wave of new money that could amplify charitable spending.
But on both sides there are voices urging caution. Will investors get the financial returns or make the impact they are promised? How can someone quantify the positive effects of their money? And can impact investing be scaled up to retail investor scale without making a mockery of the original concept?
Rich families believe they are blazing a trail others will follow. Justin Rockefeller, great great grandson of John D Rockefeller, and other wealthy scions have set up The ImPact to share investment ideas and urge wealthy families to consider “all the tools on their tool belt” to tackle the world’s problems. Networks of impact investors are springing up in many countries, from Clearly Social Angels in the UK to Silicon Valley entrepreneur Charly Kleissner’s Toniic in the US (set up as a counterpoint to GIIN — “pun intended”).
The Rockefeller Brothers Fund, a family foundation set up by descendants of the oil baron, ditched its investment adviser for Perella Weinberg, which will help the fund extricate itself from funds that invest in fossil fuels and move more heavily into impact investing.
Liesel Pritzker Simmons, scion of the Pritzker family, decided after the financial crisis to shift all her assets to impact investing. Wealthy families, she says, are in a position to support new impact investing funds while they establish a track record — essential if they are to catch on with investors. “Previously it had been seen as tree-huggery,” she says. “As a millennial woman, I’m a walking example that it’s not just marketing.”
The G8 nations have promised to encourage impact investing; in the US charitable foundations have been given more clarity on the tax treatment of such investments, and pension funds have been told they can include social and environmental factors without breaching their fiduciary duties.
Asset managers are responding. Goldman Sachs has acquired an impact investment boutique called Imprint Capital. And Bain Capital has tapped the former governor of Massachusetts, Deval Patrick, to launch an impact investing fund, in what could be the biggest move yet by a traditional private equity firm into the sector.
‘Little hardcore experience’
The key to making good impact investments in private equity is finding ventures where the social return is at the core of their business model, said Brian Trelstad a partner at Bridges Ventures, a £600m impact fund manager co-founded by Sir Ronald Cohen, who started Apax Partners.
“We try to select businesses where, if they are having impact, it drives more commercial returns and if they have more commercial returns it drives more impact,” Mr Trelstad said. That way, the pursuit of profit is not going to derail a company from its mission, he said.
Advocates of impact investing point to a study by the Wharton Social Impact Initiative, based on data stretching from 2000-14, to demonstrate that it can work. The study found that the pooled internal rate of return of 170 investments made by 32 impact private equity funds was 12.9 per cent. That matched small-cap benchmarks, though it might seem low compared to the risks associated with private equity. Either way, the sample is small, given the nascent state of the industry.
Julia Balandina-Jaquier, who ran one of the first impact investment funds for AIG before becoming an adviser to the sector, says the arrival of established private equity players is a welcome development. “A lot of funds were started by NGO guys or people with good intentions but little hardcore investment experience,” she said.
Other recent work has focused on creating fixed income products, which are broadly known as social impact bonds. Green bonds might finance a solar project, for example, at a guaranteed rate of interest while others might fund services for a government, such as an asthma prevention programme and pay a return based on how successful it is in saving the government money.
In another innovation, the Calvert Foundation, a non-profit organisation, is issuing bonds to fund an impact investment portfolio it is running with the MacArthur Foundation of Chicago, which will itself invest in social ventures aimed at revitalising the city’s economy. It is a reminder that, while many of these instruments promise “market rate returns”, they might be underwritten by non-profit groups willing to take risks traditional investors would not.
‘I bless your work’
Fraught debates about what constitutes impact are never far from the surface. The GIIN lists 559 metrics from “greenhouse gas emissions avoided due to products sold” to the “number of suppliers who were minority/female/low income”.
Others say simpler frameworks are needed, a point made by Howard Buffett, grandson of Berkshire Hathaway founder Warren Buffett. Sixty years ago, the elder Mr Buffett developed his value investing approach under the tutelage of Benjamin Graham at Columbia University; today his grandson is lecturing on impact investing there, and developing his own system to predict future impact per dollar invested for similar investments. That system, the younger Mr Buffett says, “is adapting value investing principles to the world of impact investing”.
With a co-founder, Mr Buffett has started an impact investing fund of his own, called i(x) Investments, which will put money into companies dealing with water scarcity or sustainable agriculture, among other areas.
“The impact investing field needs to continue deciding on and simplifying some broad definitions, and also needs to continue drawing some boundaries and scope around what is and isn’t impact investing,” he said.
For wealth managers and asset management firms, the broader the definition the better since, as a marketing term, “impact investing” trumps ESG, SRI and the other acronyms associated with investing with a conscience. However, there is debate about how far the term should be applied to stock market investments, since a purchase of shares in the secondary market from another seller hardly has the same impact as directly funding a start-up.
To Deborah Winshel, poached last year by BlackRock from the metrics-obsessed New York anti-poverty charity Robin Hood Foundation to run its impact division, placing too many restrictions on the investments ultimately limits the possibilities of impact investing. Semantic debates — “splicing words”, she says — are also seen as unhelpful.
“I have tremendous respect for the impact sector and the work they have done but it is very hard to scale and mainstream those kinds of investments,” she said. “For BlackRock, given our scale and our size, it is about creating those opportunities that are available to all of our investors.”
BlackRock says it manages $200bn of assets in impact products, counting equity funds that simply screen out “sin stocks”. In the past year, it has launched two public equity funds that pick stocks using an impact scoring system for “green innovation, corporate citizenship, high-impact disease research, ethics controversies and litigation”.
As he prepares to address the Vatican conference, Amit Bouri, chief executive of the GIIN, says his goal is for investors to think “about the direct and indirect impacts of the investments they are making”.
It was a point Pope Francis made at the Vatican’s first impact investing conference two years ago. “It is increasingly intolerable that financial markets are shaping the destiny of peoples rather than serving their needs, or that the few derive immense wealth from financial speculation while the many are deeply burdened by the consequences,” he told attendees then. “With great affection I bless you and your work.”
Additional reporting by Mary Childs in New York
Recently I had a conversation with a financial advisor who represents several billionaire clients—all well-known tech leaders in the San Francisco Bay Area. After giving him an overview of our new impact investment company and its business model, and background on everyone involved, he said, “It’s sounds very impressive, but we just don’t do impact investing.”
In another meeting with a wealth advisory firm in Los Angeles, one of the advisors said their advice to a client who had created their wealth through cause-related companies was to “diversify”—in other words, invest in companies that don’t make the world a better place.
Why did they say these things? One reason is that there is a culture within finance that perceives anything that “does good” as something that doesn’t make money. This is simply not true.
The Global Impact Investing Network reports significant returns for impact investors: “Impact investment funds that raised under $100 million returned a net IRR of 9.5 percent to investors. These funds handily outperformed similar-sized funds in the comparative universe (4.5 percent).”
And according to Morgan Stanley:
Sustainable Equity Mutual Funds had equal or higher median returns and equal or lower median volatility for 64 percent of the periods examined over the last 7 years, compared to their traditional counterparts … Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception (10.14 percent, compared to 9.69 percent for the S&P 500; July 1990-Dec. 2014).
So if the data shows that impact investments are routinely out-performing companies that have no social impact or negative social impact, why are finance professionals hesitant to embrace them?
In search of an answer, I turned to the world of psychology—specifically, the study of “self-schema.” Philosopher Immanuel Kant was the first to discuss self-schema, and pioneering clinical psychologists, including Jean Piaget and Frederic Bartlett, evolved it.
In its simplest terms, self-schema is the way we see ourselves in the roles we play. We develop our self-schema in our childhood, and then our education, career, friends, and relationships continuously reinforce it through our lives. Examples of differing self-schemas include:
Profit-driven vs. passion-driven
Businessperson vs. do-gooder
Independent vs. interdependent
Dominant vs. cooperative
In reading the work of Kant, Piaget, and Bartlett, and attempting to apply self-schema to the psychology of finance professionals, it became clear to me that many finance professionals have a limited sense of self.
Reinforced and conditioned by the “type” of people most of us associate with finance—the hard-nosed businessperson whose life is really only about making money—many finance professionals develop a self-schema that limits their view of who they can be in the world. A career focused purely on the pursuit of profits—with no focus on or responsibility for addressing the world’s problems—has conditioned many to believe that solving social issues is simply not their problem.
It’s understandable why this would occur. Finance is a cutthroat business, where one’s ability to make a profit is rewarded over everything else. The industry celebrates those who make money and forgets those who don’t.
There are, of course, exceptions: Ray Chambers, the legendary private equity investor who has dedicated his life to ending malaria and has achieved astounding results; Paul Tudor Jones, the hedge fund manager who founded the Robin Hood Foundation and has recently launched JUST Capital; and David Tepper, who was ranked as the number-one hedge fund manager in the world in 2012 and who donated $67 million to his alma mater so that others can get the kind of education that brought him success.
These people decided long ago that a part of their role in the world—a part of their overall identity—would be to use the tools they have to make the world a better place. We need them, and we need others. So how can we—including educators, impact investors, and philanthropists—help traditional investors and other finance professionals evolve their sense of self? There are three initial steps:
1. Create opportunities to expose them to social issues first-hand. Seeing a poorly functioning school or walking for miles to find water changes how we think about problems. When meeting with potential investors who may have not experienced the social issue(s) an investment addresses, impact investors and others should help arrange site visits and/or first-hand opportunities to better understand what’s at stake and how they might create positive impact.
2. Debunk the myth of concessionary returns. Sharing reports—from Morgan Stanley, Generation Investment Management, Arabesque Partners, and others—with traditional investors can help educate them on how investments focused on sustainable, long-term social and environmental impact often outperform the market.
3. Create a culture of long-term thinking. World Food Program calculates that we need $3.2 billion per year to reach all 66 million hungry school-aged children today. The number of children who need support will only increase as the world population grows if we don’t address the problem now. By not investing in the future today, we allow existing problems to grow, and bigger problems require more resources and time to solve. We need to make the case for thinking long-term and designing sustainable solutions now.
According to the International Energy Agency, meeting the COP21 pledges—binding framework commitments by governments—will require $13.5 trillion energy-saving and low-carbon investments over the next 15 years. We cannot solve global problems unless the greater world of finance plays an active role—and the key to scaling impact investing is to help investors evolve their sense of self.
Ray Kurzweil has made a bold prediction about the future of solar energy, saying in remarks at a recent medical technology conference that it could become the dominant force in energy production in a little over a decade. That may be tough to swallow, given that solar currently only supplies around 2% of global energy — but Kurzweil’s predictions have been overwhelmingly correct over the last two decades, so he’s worth listening to.
Kurzweil’s basic point, as reported by Solar Power World, was that while solar is still tiny, it has begun to reliably double its market share every two years — today’s 2% share is up from just 0.5% in 2012.
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Many analysts extend growth linearly from that sort of pattern, concluding that we’ll see 0.5% annual growth in solar for the foreseeable future, reaching just 12% solar share in 20 years. But linear analysis ignores what Kurzweil calls the Law of Accelerating Returns — that as new technologies get smaller and cheaper, their growth becomes exponential.
So instead of looking at year over year growth in percentage terms, Kurzweil says we should look at the rate of growth—the fact that solar market share is doubling every two years. If the current 2% share doubles every two years, solar should have a 100% share of the market in 12 years.
Okay, technically, that would suggest solar would have a 128% share of the market in 12 years. Some might love that — but it highlights the fact that Kurzweil’s prediction is only partially grounded in the real world. Even 100% share is extremely unlikely — fossil fuel giants are definitely not going down without a fight.But even those giants ignore Kurzweil at their own peril. He predicted the mobile Internet, cloud computing, and wearable tech nearly 20 years ago — all on the basis of the same principle of accelerating returns that’s behind his solar call.
Impact investing may have gotten off on the wrong foot, with venture-capital style private equity funds that generally have to be liquidated after 10 years.
This season’s new style: Permanently capitalized holding companies with long-term ownership stakes in operating companies that deliver real benefits such as food security, clean water and climate mitigation.
A recent example is i(x) Investments, the investment company backed in part by Howard Buffett, the grandson of Warren, whose Berkshire Hathaway is structured, no surprise, as a holding company.
“We want to create companies, not just have a fund,” i(x) co-founder Todd Morley told ImpactAlpha. Morley earlier co-founded Guggenheim Partners, which now manages more than $300 billion in assets, and also G2 Investment Group, an investor in i(x). “We’d rather raise much bigger pools of capital and attack bigger capital-intensive problems.”
The investment company has just sealed its first partnership with True Green Capital Management LLC in Westport, Conn., which finances and owns distributed power generation. True Green, with roughly $200 million in equity and an equal amount in debt capital, finances commercial solar installations that require between $5 million and $10 million in capital. The company already operates 70 megawatts of solar generating capacity, making it effectively an independent power producer.
“The world is going distributed,” says Panos Ninios, True Green’s co-founder and managing partner. “The common goal here is to change the mindset of institutional investors in distributed power generation.”
Trevor Neilson, the chief executive of i(x), says his company expects to allocate $150 million to True Green’s projects this year, and “significantly more capital over the coming years.” The company is building analogous partnerships in agriculture, real estate, water and other areas.
“You look at any one of those industries and these are assets of infinite duration,” Morley says. “Why would you fund things like that with a one-year lock-up hedge fund or even a 10-year fund? You’d much rather have capital in perpetuity — an investment company that holds assets for a very long time.”
The company’s investment capital has not been raised yet, but Nielsen and Morley say i(x) is structured to appeal to institutional investors such as sovereign wealth and pension funds, as well as to family offices of high-net worth individuals. In a world of near-zero returns, steady yield of even four or five percent returns with upside potential when the economy reflates is “the holy grail,” Morley says.
“There’s a major rotation around the world toward impact investment,” he says, with major yield opportunities in renewables, agriculture, real estate and other sectors with low correlations to the equity markets. “Depending on the industry, you could say these are serious growth businesses. You’re going to have alpha growth moments in businesses that don’t correlate. If you’re a pension fund and need to invest for the long term, or an endowment or foundation and have real cash needs, that’s an attractive behavioral profile.”
Other investment companies also are tapping institutional investor interest in investor-operator models for long-term sustainable real assets.
“We’re talking about real assets, long-lived, current-income oriented, productive — why would you necessarily liquidate that in 10 years?” asks Dave Chen, CEO of Equilibrium Capital, based in Portland, Ore. As the firm builds investment strategies in agriculture, timber, wastewater and other areas, he says, it is exploring: “How do we create receptacles that are long-lived, give investors the opportunity to have semi-liquidity and wrestle with this fact that we have accumulated very valuable assets and we don’t want to necessarily exit them?”
Equilibrium last year closed a $250 million ACM Permanent Crops Fund, which is now a large organic blueberry producer and is also developing hazelnut, table grape and citrus farms in California, Oregon and Washington. Equilibrium’s team manages not only the financing, but the growing, processing, packaging and marketing of the crops, many of them organic. Equilibrium’s wastewater and biogas strategy, Wastewater Capital Management, provides project capital to design, build and operate agricultural and municipal biodigesters. (Hear Equilibrium’s Dave Chen on “Pension Funds Tipping Toward Sustainable Investments” on ImpactAlpha’s Returns on Investment podcast.)
True Green’s ambitions go beyond solar to all forms of distributed power generation, including combined power and heat generation, battery storage and biochemicals. Ninios says True Green identifies project developers and helps them lower their cost of capital by improving their legal and financial structures, along with engineering and getting them ready for low-cost project finance.
“There’s very little capital chasing this opportunity,” he says. “We buy projects in reasonably early days and we make them bankable. We finance them and we own them.”
At 32, Howard Warren Buffett, the grandson of the Berkshire Hathaway founder Warren E. Buffett, has already enjoyed a diverse career.
He teaches at Columbia University, runs a farm in Nebraska, previously oversaw his family’s foundation and worked on economic redevelopment efforts in Afghanistan for the Defense Department.
So far, however, he has steered clear of the private sector investing that made his family’s famous name and enormous fortune.
Now, that is changing. Mr. Buffett has co-founded a permanently capitalized operating company with big ambitions — essentially mimicking the structure of Berkshire Hathaway, the $328 billion conglomerate that owns everything from railways to candy makers.
Although his grandfather has traditionally acquired stalwart companies with timeless appeal, Mr. Buffett is taking a decidedly more forward-looking approach. The plan is for the new company, called i(x) Investments, to invest in early-stage and undervalued companies that are working on issues such as clean energy, sustainable agriculture and water scarcity.
Warren E. Buffett, the chairman and chief executive of Berkshire Hathaway. Credit Nati Harnik/Associated Press
“I’m looking for that sweet spot,” Mr. Buffett said. “How do we improve society through these investments? How can we be creative with capital to address some of the greatest human needs?”
Mr. Buffett’s co-founder at i(x) is Trevor Neilson, who has had a similarly diverse career. Most recently president of the financial services firm G2 Investment Group, Mr. Neilson previously was the director of public affairs at the Bill & Melinda Gates Foundation and served on President Bill Clinton’s advance team.
Mr. Neilson, who will serve as chief executive, also framed the new firm’s mission as a question: “How do you harness the power of business to create social change?”
Though the company is just getting started, the founders are already talking a big game. Mr. Neilson said that friends and strategic partners were investing $2 million to $5 million this year.
Next year, he said, i(x) will accept $200 million from family offices, institutional investors and big companies. Mr. Neilson is on a road show of sorts, pitching i(x) to venture capital firms like Kleiner Perkins and Andreessen Horowitz and tech companies like Google.
Mr. Neilson is similarly ambitious when imagining how i(x) will deploy all that capital. He said the plan was to start slow this year, taking small stakes in early-stage companies. But he hopes the firm eventually will make investments worth $100 million each year. The goal is to file for an initial public offering by 2020.
So far, i(x) has not made one investment, though Mr. Neilson said the firm was close to taking its first two stakes.
One likely portfolio company breeds crickets to produce food for chickens and fish, a more ecologically sound, if somewhat unpleasant-sounding, alternative to traditional feedstocks like corn. Another likely investment will be in Skywater, which makes machines that turn natural humidity into drinking water. Some investments, such as one being considered in the solar energy financing company True Green Capital, could be as large as $100 million each.
Though such companies may sound futuristic, Mr. Neilson and Mr. Buffett believe there is a growing market for these products, and growing appetite to finance such endeavors. Investors, they say, are increasingly factoring ethics into their decision-making.
It was only in recent decades that some investors began avoiding certain morally dubious companies and sectors — hence the divestiture campaigns that focused on companies doing business in South Africa in its apartheid era and more recently have taken aim at fossil fuel producers and gun manufacturers.
Now, the i(x) founders say, investors want to put their capital to work in ways that will not simply avoid doing bad, but actually do some good in the world.
“Investors in the past haven’t seen their investments as an expression of their values,” Mr. Neilson said. “There is an evolving consciousness in the world which presents an historic opportunity for both social change, and profit.”
As i(x) gets underway, Berkshire Hathaway is under scrutiny for investing in enterprises whose products have drawn criticism over social issues.
Berkshire Hathaway is a large shareholder of Coca-Cola, and the elder Mr. Buffett regularly professes his love for junk food, even as American eating habits are changing to healthier fare. This month, the hedge fund manager William A. Ackman, trading public barbs with the Berkshire Hathaway vice chairman, Charlie Munger, said Coca-Cola had “caused enormous damage to society.”
Berkshire Hathaway also controls Clayton Homes, the nation’s largest homebuilder, which has been accused of preying on the poor. And it owns BNSF Railway, which runs pollutant-spewing trains and transports coal, other fossil fuels and hazardous materials.
Mr. Buffett said that he had not asked his grandfather for advice or money while starting i(x). Neither his father, Howard G. Buffett, who focuses on the family foundation, nor his grandfather is an investor.
“I’m very careful about what I bring in front of each of them, and even more careful about how I portray that publicly,” Mr. Buffett said.
Mr. Buffett said he told Mr. Neilson: “Don’t expect we’re going to be calling Warren up on the phone and getting input on this.”
But it is no coincidence that i(x) is structured as a permanently capitalized operating company. That structure — essentially a holding company that owns independently operated companies, and stakes in others — has allowed Berkshire Hathaway to become one of the most valuable enterprises on earth.
Unlike a private equity firm, which buys and sells companies, Berkshire Hathaway buys and holds. And instead of taking 20 percent of profits for himself and other managers, Warren E. Buffett reinvests profits into the company.
“Compound interest is the miracle of Berkshire Hathaway,” said Todd Morley, a co-founder of Guggenheim Partners, the investment firm with $300 billion in assets, and also founder of G2 Investment Group. G2 is investing in i(x), and Mr. Morley will be an adviser to the firm.
Buying and holding companies, rather than selling them, also allows conglomerates to defer costly tax payments.
“It’s actually the architecture of a permanent capitalized operation company, the ability to compound and defer, that becomes the alpha generator,” Mr. Morley said. “That is why Berkshire has outperformed the S.&P. by absurd percentages.”
Because i(x) will be investing in nascent technologies, a long-term horizon is particularly important.
“A fund structure, with its finite life cycle and investors wanting to see returns, is not the right model for impact investing,” Mr. Neilson said. “The world’s biggest problems have to be addressed through sustained investment.”
In addition to helping find and screen investment opportunities, Mr. Buffett’s role at i(x) will be focused on devising systems by which to measure the contributions to society.
For Mr. Buffett, who has thus far spent most of his career in the public sector and academia, the decision to start a permanently capitalized operating company was not an entirely obvious choice, but one that took full advantage of his family’s legacy.
“Howard is on a search to find where he can have the most impact,” said William B. Eimicke, a professor at Columbia University who taught Mr. Buffett, and now teaches a class jointly with him. “This is an actualization of where he’s been focused.”
For Mr. Buffett, the hope is that i(x) will essentially become a baby Berkshire Hathaway with a conscience.
“We’re looking at the long-term horizon and investments that are doing more than avoiding bad, but are actually trying to improve the world,” Mr. Buffett said. “It’s about taking the potential for capitalism to the next level.”
There is perhaps no more powerful dynamic in economics than compound interest. Albert Einstein called it “the eighth wonder of the world” and Warren Buffett has said “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
In business, compound interest can be thought of as interest on top of interest — the way that a principal deposit or investment grows exponentially over time as money is reinvested.
But in social change, compound interest can be thought of as the exponential, scaled growth of solutions to global problems as money invested in a sustained way.
I propose that we call this “compound impact.”
Ask any nonprofit executive director what their biggest problem is and they will tell you it’s the question of whether funding is sustainable and as a result whether interventions are scalable. Government appropriations and philanthropic donations are critically important but are often unpredictable in their timing. Solely depending on either of them requires short-term thinking — which is the wrong approach when one is trying to solve global problems.
So why has no one in impact investing embraced the very same theory that made Warren Buffett the most successful investor in history? Why have we not developed a theory of compounding social interest and compounding social impact?
Part of the reason is that we have had a simplistic, limited view of the role of business in social change.
This comes from the old silly assumption that profit and purpose can’t really be aligned in a fundamental way. Even some within the impact investing community view impact investing as a little niche of the world of investing but not what could eventually become the majority of all investments made.
We need to think bigger. We need to embrace the notion that capitalism is one of the most powerful forces on the planet, and if we build and invest in businesses that have an explicit social purpose, we can create sustained funding of a type we’ve never imagined.
Impact investing should not be seen as a niche — it should be seen as the norm. We need to assume that all investments can have a positive social impact — and move away from those that don’t.
In addition, impact investors should consider the limited long-term impact of funds and embrace the compound interest and compound impact of operating companies who have highly strategic plans for both profit and social impact.
With the exception of the true innovation that can come from groundbreaking technologies the fund model is often a flawed model for social impact. With the exception of those with a long duration, funds by their very nature encourage short-term thinking and limit the long-term influence and social impact investors can have.
It’s time for permanent capital and permanent change. It’s time for a long-term view. The first step in creating “compound impact” is actually believing we can achieve it.
By Trevor Neilson
CEO, i(x) Investments
Co-Founder, Global Philanthropy Group
How we spend our money is an expression of our values.
Buying power is a moral power and the way we spend has the ability to shape the world.
While most people would agree with that statement many people who care about the environment are simultaneously invested in Exxon Mobil. People who want to see a reduction in gun violence in America may also be invested in arms companies. Those who have lost family members to lung cancer may also be invested in tobacco companies.
The truth is, a vast number of those who are invested in the stock market have very little understanding of what they’re invested in. They rely on fund managers to buy and sell and only pay attention to whether their portfolio is going up or down.
The practice of screening out bad investments called Environmental, Social and Corporate Governance (ESG) is one way to pay more attention and be a little “less bad”.
ESG is a step in the right direction. However,if we believe that how we spend our money is a reflection of our values being less bad, then this is not enough.
To build a better future for our children, there must be a collaboration between all of us who care and all of us who believe it is our responsibility, in order for the future generation think in a new and different way. This new thinking is especially true for the world of finance.
The entire world of investment needs to be reshaped based on the values of those who are doing the investing.
A wholesale reset is needed in the financial approach for millions of people around the world.
Investors who care about making the world a better place should put their investments into companies that proactively address global, national or local problems while simultaneously making a profit.
Commerce should have a conscience. Profit should have a purpose.
The research is clear. Companies that do good in the world return more profits to their share holders than their counterparts — those who do harm:
A factory the dumps toxic materials into the river down the road may profit in the short run but in the long run will destroy not only its reputation but also the health & livelihood of the employees; and customers who live nearby.
An apparel company that pay workers a tiny wage and force them to work in slave- like conditions might make a faster profit in one year but over the long run will pay the price for their short-term, myopic thinking.
A meat producer who abuses the animals that it farms may make more money than its competitors due to its lower cost, until the public finds out about what it has done.
Those who believe that capitalism requires exploitation and domination are a dying breed. They are dinosaurs who operate in an antiquated mindset. The good news is that things are changing.
So what needs to be done?
What’s needed is a financial architecture that allows for proactive, long-term sustained change. While ESG screening can help investors stop supporting companies whose values they don’t share, it doesn’t actively use capital to address social problems.
We need to move beyond ESG to the next era in social impact investing. We must move from passively participating through funds to actively investing in operating companies who return generate long term profits and sustained social change.
By their nature funds encourage short-term thinking.
Funds also have far less power to encourage and monitor social impact than operating companies who will buy and hold a long-term position in other companies.
There’s no question that a fund that generates true innovation– for example a battery that harnesses the power of the sun for longer periods of time–can be very important but most funds back less impactful technologies and companies.
To generate sustained social impact, capital should back companies that have a proven model that can be brought to scale.
I am not aware of any companies with this model. While there are many companies who have deeply incorporated social impact into their business plans, the world of finance has yet to create an investment platform with permanent capital to support them as they grow.
The best model for this in finance outside of impact investing is Warren Buffett’s Berkshire Hathaway–arguably the greatest company in the history of finance.
It is also clear that this model is also the best model for generating real profit. An analysis in the Financial Times of what would have happened had Warren Buffett been a hedge fund manager instead of the owner Berkshire Hathaway shows the dramatic difference between the two:
“The extraordinary mathematical conclusion was that, siphoning off “2+20″ fees and investing them in the same underlying assets as Berkshire – compounded over a 42-year career – would have yielded Mr. Buffett the investment manager a $57 billion fortune. By contrast, the Berkshire fund, reduced each year by the fees and therefore compounding at a much lower rate, would have grown to a meager $5billion.”
The Oracle of Omaha’s model for profit-making should be the model we adopt for impact investing.
How we spend our money is an expression of our values. Buying power is also moral power and the way we spend has the ability to shape the world.
It’s just not enough to only be “less bad”, but it is essential to be “actively good”.
If investors who care about addressing the many problems of the world move their investments into companies who proactively do good in the world over long periods of time, we will unlock a revolution in finance.
By Trevor Neilson
CEO, i(x) Investments
Co-Founder, Global Philanthropy Group