Impact investing is going mainstream. Want proof? It’s no longer a contradiction to say you work in impact investing and that you work for Goldman Sachs. Just ask Julia Matsudaira, MBA ’14, a private wealth adviser for Goldman’s Private Wealth Management group in San Francisco. Along with her team, she helps manage the wealth of approximately 50 families, many of whom made their money in the Silicon Valley tech sector.
Matsudaira had built a career in nonprofits before business school, including a role as program director for a youth education and development organization called Summer Search, where she helped board members and donors “understand the impact their dollars were having from a philanthropic perspective.” When she heard about impact investing, she saw it as a way to draw on her programmatic skill set to scale her positive impact in the business world.
As an Environmental Finance and Impact Investing (EFII) Fellow at Johnson, Matsudaira channeled her passion for helping individuals meet their particular investment goals into private wealth management. She says it was clear that Goldman was committed to investing in solutions that address social issues like affordable housing, education, and economic development — it had a foundation and an Urban Investment Group, which spawned a Social Impact Fund in 2012.
With $1.31 trillion in assets under supervision as of June 30, 2016, Goldman brings big money to every investment it makes. But when the investment banking giant acquired impact investing and philanthropy advisers Imprint Capital in 2015, it took its commitment to impact investing to the next level, while sending a signal to the broader market. “Now we have this team of really focused and experienced practitioners who are doing due diligence on options across all asset classes to help Goldman Sachs clients incorporate environmental, social and governance (ESG) and impact factors into their portfolio,” says Matsudaira.
The Growth of Sustainable, Responsible, and Impact Investing
With a huge transfer of wealth from baby boomers to millennials —particularly women — on the horizon, impact investing is poised to play an ever-larger role in addressing the most pressing challenges of our time, like climate change, affordable housing, and natural resource preservation. That’s why Johnson, in collaboration with the Cornell Institute of Public Affairs (CIPA), launched the EFII Fellows program in 2011: to prepare the next generation of business leaders to finance this transformational redistribution of resources.
Millennials want to know how their money will be used and that it won’t do damage to the environment or to people. In fact, 36 percent of millennials believe the role of business is, in part, to improve society, and they are expected to pursue social objectives in addition to financial returns, according to a World Economic Forum survey of more than 5,000 millennials across 18 countries, “From the Margins to the Mainstream.”
In recent years, the amount of money invested in sustainable, responsible, and impact investing (SRI) has been skyrocketing. After maintaining modest growth in professionally managed assets for the past decade or so, total U.S. SRI assets rose 33 percent between 2014 and 2016, from $6.57 to $8.72 trillion [see chart]. That equates to one in five dollars invested under professional management in the United States, according to the US SIF Foundation's biennial “Report on U.S. Sustainable, Responsible and Impact Investing Trends 2016.”
And while some in the investment community assume impact investments generate lower returns, some early comparisons indicate relative parity. In one notable study, the Impact Investing Benchmark created by Cambridge Associates and the Global Impact Investing Network (GIIN) demonstrated that impact investment funds launched between 1998 and 2004 returned 6.9 percent to investors, versus 8.1 percent for the comparative universe.
The Coming Wealth Transfer
The coming wealth transfer will be monumental in scale. Ultra high-net-worth individuals alone, those with assets over $30 million, will transfer $3.9 trillion to the next generation by 2026, according to “Preparing for Tomorrow: A Report on Family Wealth Transfers,” a recent report by global wealth consultancy Wealth-X and insurance brokerage and consulting firm NFP. Goldman Sachs, Accenture, and others estimate a total of about $30 trillion to be transferred to millennials over the next several decades, and Deloitte estimates that number to be $41 trillion over the next 40 years.
Aside from sheer volume, this transfer of capital also includes demographic shifts that are likely to shake up the entire investing industry. Women stand to inherit some 70 percent of that $41 trillion, according to the Boston College Center on Wealth and Philanthropy. The 2015 U.S. Trust “Insights on Wealth and Worth Survey” found that 71 percent of high-net-worth (HNW) women with at least $3 million in investable assets say the environmental impact of the companies they invest in is important to their investment decisions, compared with 49 percent of HNW men. Similarly, 40 percent of HNW women own or are interested in social impact investments, compared with 26 percent of HNW men.
“[Clients] don’t just want to generate a return. They want to know what they are supporting to get that return.” — Julia Matsudaira, MBA ’14
Financial technology, including peer-to-peer lenders and robo-wealth advisers, is poised to gain wallet share, particularly among millennials, in the coming years. But more and more wealth managers are betting that rising concern over social issues, as well as climate change and increasing water and resource scarcity, will push many to invest in entities that address their concerns and values. “With this generational change and new gender lens opportunities, we’re seeing major family office and institutional investors deploying significant capital into impact-driven enterprises,” James Macon, MBA ’08, managing partner at Closed Loop Capital, a venture capital fund focused on growing sustainable food and agriculture startups. “It does feel like a convergence of all the key elements of building a new industry,” Macon says.
For the younger generation, separating their investments from their desire to do good doesn’t add up, says Don Shaffer ’91, president and CEO of RSF Social Finance, a nonprofit social impact lender. Ten years from now, we’ll look back at 2016 and see a turning point, where incremental progress turned exponential, he says. “Millennials will be saying to their advisers, ‘Don’t talk to me about a 5 percent carve-out of the portfolio [for impact investments]. We’re all in,’” says Shaffer, pointing to a study of 100 percent impact-driven portfolios by nonprofit network Toniic as proof that impact investing is coming of age. “The people who say you can’t create a diversified portfolio in impact will be dinosaurs. It’s just not true,” Shaffer says.
“The people who say you can’t create a diversified portfolio in impact will be dinosaurs. It’s just not true.” — Don Shaffer ’91
For her part, Matsudaira says she’s already seen a tipping point occur with her clients, many of whom are in the midst of such a wealth transfer. “We’ve definitely seen a shift in people moving from skepticism to curiosity, even in the past two years. Not only from the next generation, but also from the wealth creators themselves, we are hearing more and more interest in understanding exactly what they own,” says Matsudaira. “They don’t just want to generate a return. They want to know what they are supporting to get that return.”
The Evolution of SRI and Impact Investing
SRI traditionally conducts positive and negative screens for companies to invest in, filtering out the bad, seeking out the good, or some combination of the two. While investors and analysts develop methods to better screen companies, there’s a hunger for more direct impact investments that make clear and measurable impacts on communities and ecosystems. “I think that the real carrot out there — the brass ring so to speak — is figuring out how to not just look at which firms to avoid, but who’s going to do something revolutionary and move toward real solutions?” says Glen Dowell, associate professor of management and organizations at Johnson, who also teaches Sustainable Global Enterprise. “Who is approaching this as a strategic issue rather than a defensive one, figuring out how to fill a gap and address a market demand?”
Though challenging to calculate the exact amount of capital devoted to these more direct impact investments, the Global Impact Investing Network annual Impact Investor Survey suggests significant growth. The amount of managed impact investing assets rose to $77.4 billion at the end of 2015, compared to $46 billion two years earlier — a 68 percent increase over that span.
Indeed, as impact investing goes mainstream, the pursuit of impact is more often becoming part and parcel of the company, rather than a badge in itself. “Impact is in our DNA. We didn’t go out and say we are launching an impact investing fund. We do early investing in food and agriculture, but every investment we look at is rooted in addressing a social or environmental challenge,” says Macon, who points to Beyond Meat, a producer of plant-based meat alternatives, as an example of a company with a distinct social and environmental mission that’s rapidly scaling. “The environmental and social components are going to fly if we build a great company where impact is correlated with operational and financial success.”
Big Banks Entering Impact Investing
Large financial institutions are entering the impact space in such rapid succession it’s like dominoes falling. With the Goldman acquisition of Imprint Capital in 2015 and the creation of BlackRock Impact and Merrill Lynch sustainable impact portfolios that same year, compounded by the more recent acquisition of SRI pioneer Calvert Investments by mutual fund giant Eaton Vance in October of 2016, the market is changing fast.
“Big banks are scrambling to offer products,” says Thomas Bishop, MBA ’16, a tax credit investment analyst with Bank of America’s Community Development Banking group. Although an industry leader for 30 years, Calvert now has to compete on the same playing field with these new players, “because socially responsible investing is becoming so mainstream,” says Bishop, an EFII Fellow who did his summer internship at Calvert Investments.
Bishop says Calvert is looking at ways to differentiate from other companies with scoring systems and new ways to rate companies as socially responsible. He says big banks’ entrance into the space is not a panacea. “You have to be cautious when you have new players entering the space and understand what the underlying investments are that make up a socially responsible portfolio,” says Bishop. “The term has a very broad definition and can mean very different things from bank to bank," says Bishop.
With big financial institutions in the mix, some investors say mission-driven organizations have a huge role to play in creating the new world of impact investing.“I’m not bullish on big banks playing a leadership role in this,” says Shaffer, who adds that the leadership in impact investing will come instead from the next generation of wealthy investors, along with organizations like The Nature Conservancy that understand how to structure deals to benefit both the environment and the market. Though entering the market is proof there are solid returns to be had in impact investing, “big banks are fast followers at best,” Shaffer says.
For example, as a nonprofit without as much pressure to deliver maximum returns, RSF is able to make slightly more risky loans to promising young companies than big banks, who enter with deeper pockets later, when it’s time to scale, Shaffer says. Take Revolution Foods, an Oakland-based company that provides freshly prepared, nutritious food for schools and families made from high-quality ingredients and no artificial colors, flavors, or sweeteners. RSF made a loan to Revolution Foods early on, when the startup had just $1 million in annual revenue. Now, the company, launched in 2006 to provide nutritious food for school kids, has grown to well over $100 million in annual revenue. While Citigroup ran a television and print ad campaign touting the scale and success of the company in 2014, Shaffer notes that both RSF and Citi played a vital role, albeit at different stages, in scaling a business that now nourishes millions of children a year.
Even with their lower risk tolerance, big banks’ presence and competition can elevate the performance of existing players, as in the case of Calvert Foundation. As impact investing becomes more and more commercial, “we’re becoming more professionalized,” says Songbae Lee, senior investment officer at Calvert Foundation. “It really was a nonprofit culture, and as we’ve grown larger, we’ve had to professionalize our systems. Having business experience and training has become as important as having an interest in impact investing itself.” Calvert Foundation offers the Community Investment Note, an investment product available to both accredited and retail investors that finances nonprofits and social enterprises worldwide while earning a comparable return to other, more traditional products.
Another big financial firm in the impact investing world, JPMorgan Chase, partnered with The Nature Conservancy (TNC) to create an impact investing entity called NatureVest in 2014. JPMorgan recently announced a $6 million funding renewal, confirming its commitment to continue to grow the operation, which invests in water markets, sustainable agriculture, working landscapes, green infrastructure for storm water mitigation, and debt conversion.
As much a sign of mainstreaming as big banks jumping into impact investing, nonprofits like TNC are playing a similarly unexpected role: creating large-scale investment opportunities that further their mission. “We’ve crossed the chasm and shown viability, and having major financial institutions coming in says it’s a valid sector overall,” says Taryn Goodman, MBA, ’09, senior director at NatureVest.
“If you change the way Cargill raises cattle, or how Wal-Mart buys, you can create huge ripple effects.” — Taryn Goodman, MBA ’09
Goodman worked for RSF Social Finance before making the leap to NatureVest, which has a goal of putting $1 billion to work in conservation investments. Although she says it’s important to support innovative, custom investment models, Goodman says it’s equally important to influence large-scale change. “If you change the way Cargill raises cattle, or how Wal-Mart buys, you can create huge ripple effects,” says Goodman.
For Goodman, the current growth of SRI and impact investing means driving at an ideal outcome, where new investment structures can attract mainstream capital while still making what she calls “deep impact.” The TNC mission comes first, says Goodman, but NatureVest’s job is finding new ways to achieve that mission at greater scale using private investment capital.
For instance, NatureVest recently had a first close for a water deal in Australia, which has perhaps the most robust water market in the world. Competition for water during drought years is at its highest, because agricultural irrigators, cities, and natural ecosystems of plants and animals all draw from a limited supply of water. TNC realized the opportunity to prove an investment model that balances the needs of farmers, communities, and nature. The fund trades annual water allocations on a “counter-cyclical” basis: when water is scarce and demand is higher, more water is made available to agriculture. Conversely, when water is abundant and agricultural demand is lower, more water will be donated to the environment.
With a deal like that, TNC only stays in the game if it’s net positive for the environment. “The focus of our deals is to support The Nature Conservancy’s mission and global strategies. The fund is structured so that if we can’t maintain the positive conservation impact, we have the ability to unwind it,” says Goodman.
The Gap Between Available Capital and Investments
Large deals that create large-scale change are what’s badly needed, with an estimated $200–300 billion funding gap between what is necessary to preserve the environment and what is currently being invested, says John Tobin-de la Puente, a sustainability and finance professor with a joint appointment at the Charles H. Dyson School of Applied Economics and Management and CIPA, who chairs the EFII Fellows program.
To create a “conservation investment market” designed to fill the gap, Cornell has partnered with Credit Suisse, TNC, and International Union for Conservation of Nature (IUCN). Known as the Coalition for Private Investment in Conservation (CPIC), the partnership aims to more rapidly increase the amount of available capital and accelerate its flow into the areas of the market that need it most, like the Australian water deal.
Scaling impact is the name of the game. “The field could grow organically, but the need is urgent enough that it was worth coming together to develop blueprints for conservation-related financial transactions,” says Tobin, who has a PhD in biology and spent nearly 14 years at Credit Suisse, including more than eight as a managing director and global head of sustainability. “Later, the financial institutions will have a chance to compete over deals, but at this point, let’s come together and do some of the R&D required to facilitate the development of the field and the execution of more transactions, which is in everyone’s interest.”
How Cornell is Preparing the Next Generation of Impact Investing Leaders
There’s no doubt that capital is moving into socially and environmentally focused investments and businesses at a rapid rate. That requires more finance professionals who understand the complexities and nuance of sustainability issues and have the ability to shift capital and structure deals in a variety of sectors, says Mark Milstein, clinical professor of management and director of the Center for Sustainable Global Enterprise at Johnson, who advises Johnson EFII Fellows.
“There are alumni in industry telling us that they need grads who know finance and sustainability. It’s no longer enough to know one or the other. We created the Environmental Finance and Impact Investing program to make sure they got them both.” — Mark Milstein
For instance, while the oil, gas, and coal industries continue to contract with falling prices, investment in renewables and clean energy broke new records in 2015 and is now seeing twice as much global funding as fossil fuels, even with low oil prices, according to Bloomberg BusinessWeek. “If we want to displace carbon, then we need to introduce new products and fund new projects. There are alumni in industry telling us that they need grads who know both finance and sustainability. It’s no longer enough to know one or the other. We created the program to make sure they are skilled at both,” says Milstein.
Participation has been increasing over the years, and Milstein says that the EFII Fellows program has reached a tipping point, with 19 students in the 2017 cohort poised to graduate and take their combined finance, investing, and sustainable global enterprise training into industry.
Since the program launched, EFII Fellows have completed their required capstone projects on everything from social impact bonds to affordable housing in India, and they’ve gone to work for an even wider set of organizations, from Calvert Investments and Constellation Energy to Amazon and Google. The common theme is that they are helping structure and fund deals — and build companies — designed to help address the world’s thorniest problems. “None of our EFII Fellows fit into a box,” says Milstein. “Catalyzing new companies and industries requires building something that doesn’t exist right now — that’s fundamentally about investment, that’s capital budgeting, that’s finance.”
Bringing Industries and Organizations Together
An EFII Fellow from the first graduating class in 2013, Siobhan King ’04, MBA ’13, studied environmental engineering as an undergrad but found that environmental engineering jobs were often just “mitigating a mess,” rather than trying to create proactive positive impact, she says. King worked in renewable energy before returning to Cornell for her MBA, where she learned about impact investing and parlayed an internship with RSF Social Finance into her current role as conservation investments project director at TNC.
While she joined the EFII program to get grounded in the financial nuts and bolts of impact investing, King says it also gave her credibility. She says the diverse cohort in the program helped her see impact investing from multiple perspectives. The finance community and conservationists each bring their own expertise and language to the table, and bridging the two groups is critical to success, she says.
With large-scale environmental investments in California as part of her responsibility, King is focused on using new and innovative deal structures — anything from creating markets for fishing rights to bolstering revenue streams with improved water management — to preserve the ocean, water, and land that TNC can’t simply buy and protect. “We need all of the actors in the market building momentum all around us. That big [$200–300 billion] gap in environmental conservation funding can’t be solved by environmental groups alone. You need everyone’s networks working on solutions — investors, the tech industry, the energy sector, policymakers — these players all need to be involved,” says King.
Impact investing’s push into the mainstream means more investors are getting the chance to directly fund the change they want to see in the world.
Illustration by James Steinberg