Bonding Success, Or Not: The ROI of investments in social scorecards

Some $44 trillion in available wealth will be circulating in the coming years. What if nonprofits could tap into that as donors earn equity-market returns on investments? That’s the premise behind Impact Shares, which is set to be the first nonprofit exchange-traded fund (ETF) when it launches later this year.

According to founder Ethan Powell, a 20-year veteran of the financial services industry, most recently with a Dallas, Texasbased hedge fund, an estimated $30 trillion in wealth will be transferred to Millennials in the coming years. It’s an important development as the great majority of surveyed members of that generation have indicated that they wish to add social considerations to their investment portfolio. Another $14 trillion is sitting in savings mechanisms such as 401(k)s and individual retirement accounts (IRAs).

The question is how to attract such private capital to social concerns. Powell said the answer is indexes similar to that of the S&P 500 where individuals can invest in companies that meet the values of causes that are meaningful to them. Powell expects between three and six participating nonprofits by year’s end, but would not disclose potential participants other than to say that he expects representation in the health, arts, and domestic services fields.

Powell described Impact Shares as issue agnostic and guided by the United Nations Sustainable Development Goals. The hope is, down the line, to offer ETFs for more specific causes such as gun control.

“The goal, for me, is the social scorecard,” Powell said, referring to the criteria companies would be rated on for each ETF. “What’s the issue? Put your money where your mouth is. That’s further down the line. The thing to remember is that asset management is the effective use of capital toward societal goals.”

Powell used the NAACP to illustrate how the ETFs will work. The NAACP already has a social scorecard it uses to rate companies on multiple factors including hiring practices. Using such a scorecard, the hypothetical NAACP ETF would rate between 200 and 300 businesses based on how those standards are met. Supporters would then invest in those companies, providing firms with an incentive to strive for best practices and be seen as a leader in the space.

Net proceeds from the ETF to Impact Shares, a 501(c)(3), will go to the nonprofits, 50 to 95 percent of all proceeds depending on operating costs. Nonprofits will have a non-voting seat on the board of the ETF they are a part of as a transparency measure and will be provided with all budget information. Powell estimated that about $700,000 will be annualized and provided to the corresponding nonprofit for every $100 million invested in the respective ETF. The total might not sound like wealth, Powell admitted, until one thinks about the trillions of dollars available for investment.

Powell sees annualized revenue as a short term benefit to nonprofits with longer-term benefits in the form of relationships built with investors and companies, an option outside the standard check. Non-monetary benefit such as corporations committing to joint social causes is another gain. Powell posed an example of corporations that might provide employees 40 hours of worktime per year to volunteer with social causes. ETFs are also scalable, he said, by both growing revenue and influencing societal priorities.

Impact investing might be a tool that few nonprofits are versed in outside of the occasional conference session, but potential products are advancing at a rapid rate, according to Adam Connaker, program associate for the Rockefeller Foundation in New York City. Rockefeller Foundation provided a $300,000 grant to Impact Shares for early-stage research and development.

Working on the foundation’s finance team, Connaker has spent the past two and a half years focused on finding new ways to use private capital to fund cutting-edge nonprofit initiatives, including Sustainable Development Goals.

Connaker’s team vets between 20 and 50 products of varying types during any given quarter. Opportunities such as insurance and fixed-income options are products that have not traditionally been inside the realm of impact investing, but are cropping up, he said, referencing products in the foundation’s portfolio such as insuring coral reefs. Efforts are also being made to improve upon familiar products such as green bonds.

Rockefeller shifted focuses during the past year toward capturing retail investors, which has traditionally been a challenge given the fact that retail investors tend to be more skeptical that their investments can make a difference and the dearth of existing products. Impact Share came on Rockefeller’s radar because the concept of ETFs is simple enough for the average retail investor to understand and the model featured the added benefit of passing along to a nonprofit the fee the ETF manager would otherwise collect.

“While we might be on the edge of the first rung of the ladder, I think it’s really important to take these steps,” Connaker said of retail investor products. “I think it opens up a wide array of conversations years away.” What retail investors lack in resources as compared to higher-level investors they make up for in numbers, he added. Large numbers of retail investors banded together can influence the front-end of companies by influencing changes to corporate behavior.

Impact investing has also spread to private- public partnerships toward solving social challenges, said Tracy Palandjian, CEO and co-founder of Social Finance in Boston, Mass. Social-impact bonds were pioneered in 2010 by Social Finance’s sister organization, Social Finance UK. Social Finance has gone about trying to bring the funding model — dubbed Pay for Success — into the U.S. mainstream in recent years while also serving as an intermediary between private and public bodies, conducting cost-benefit analyses, and pricing outcomes. There are 90 Pay for Success programs worldwide, including 18 in the U.S.

One recent example of Pay for Success in action is in addressing the influx of refugees and immigrants in Massachusetts. State officials have noted that service industries, such as hospitality, rely heavily on this influx of human capital. But refugees and immigrants coming in lack the language and work skills to earn such jobs. English training classes have lengthy waiting lists.

Through a Pay for Success model, $12.5 million was raised from donor-advised funds, foundations, and other sources to fund job and English trainings for 3,000 individuals. As with all such models, if the project proves successful — i.e., the participants are able to secure greater wage opportunities — investors are repaid their principal plus a return commiserate with the success of the program. Generally, government participants place return money in escrow from the outset. If the program is completely unsuccessful, investors see no return of principal or gain. Win-wins are often built into the model, according to Palandjian, because the private entities would not invest if the terms were too pro-government and vice versa.

As social investing has grown in prominence during the past decade, Palandjian said that she has seen an increased appetite at the consumer level to accomplish environmental and social goals through their purchasing and investing behaviors. Survey data has shown that 60 percent of individual investors would like to have their personal values reflected in their investment portfolio, the percentage increasing among younger investors and women. Similarly, more consumers are making considerations such as whether a product was produced using child labor or whether the company donates products to disadvantaged individuals before making a purchase.

Impact investing might be a tool that few nonprofits are versed in outside of the occasional conference session, but potential products are advancing at a rapid rate. — Adam Connaker, Rockefeller Foundation

“Our vision is that investors think about three dimensions with their investment,” Palandjian said, “in addition to risk and return, also the impact.”

In addition to the diversity of available products, big-name investors such as Bain Capital and the Ford Foundation have entered the space, Palandjian said. Ford committed $1 billion of its endowment over the next 10 years for mission-related investments. The commitment was made with two goals, according to Christine Looney, Ford’s senior program investment officer, to use investment capital to advance the foundation’s mission and to serve as a partner by encouraging more such investments in the foundation space.

Ford has taken the approach of exclusively investing through fund managers as opposed to directly to projects. The thought is the foundation’s reach is greater by working with fund managers, Looney said. For instance, one of Ford’s key focuses is affordable housing. Under this investment model, Ford might invest in a fund that acquires multi-family units and preserves them over time with the help of investment dollars.

Looney stressed that mission-related investing is markedly different from grant support. Grants are used for opportunities that aren’t able to deliver financial returns or don’t have a track record. With investment work, foundation leadership is seeking a financial return and must, in turn, look for more demonstrated strategies and be prudent about where opportunities might be.

In addition to seeking out fund managers with demonstrated success, Looney said that Ford will be looking for diverse management teams with which to partner, noting that the majority of investment dollars go toward primarily white, male teams. Female, ethnic, and racial representation, along with pay equality, will be things Ford looks for as it seeks investment opportunities.

Ford staff in June identified the foundation’s first, and to date only, investment with the program. The investment has been approved, but is still in the closing phase. Foundation leadership has also worked on recruiting a director for the investment team, considered additional staff positions, and sought to create, with the help of a consulting firm, an impact framework with which to evaluate the foundation’s portfolio.

Looney noted the innovation ongoing in the impact investment space and efforts being made to both integrate products that traditional investors understand while finding ways to measure impact. Looney expects more large foundations to enter the space. “That is our hope. We’re following others,” Looney said, referencing organizations such as the W.K. Kellogg Foundation that have been leaders in the space. “And, signs indicate that it will.”

Leave a Reply