The Rise of Integrated Sustainability Reporting

By Lars Horburg

With the rise of ESG investing, investors are seeking more information relating to a firm’s social and environmental activities in addition to financial success. As a result, there has been an increase in corporate sustainability reporting. In December, the Sustainability Investment Institute released research that stated that 78% of S&P 500 companies issue a sustainability report. Reports are wholly voluntary and can cover issues ranging from water use to social impact in supply chain. While some reports are extremely helpful for investors, others are empty statements meant more as a marketing tool than an in depth exploration of social and environmental risks and opportunities. The introduction of integrated reports may be the solution to such a problem. These reports combine social and environmental issues directly into financial disclosures, leading to a more holistic view of material sustainability issues as equivalent to financial matters. Integrated reports provide more credible and helpful knowledge to investors looking to maximize the triple bottom line: social, economic, and environmental success.

Companies like Unilever, discussed in Sofia’s last post, have lead the charge in this type of reporting, with a 100% increase of companies in this category from 5 years ago. Yet even with such an increase, integrated reports are still not widespread. This is likely a result of the lack of unified sustainability reporting standards. Thankfully, a more unified framework is being created by a coalition including the Sustainability Accounting Standards Board, the Climate Disclosure Standards Board, and the Global Reporting Initiative among others. We can expect this framework sometime in Q3 of this year. Hopefully, it will lead to a much steeper increase in integrated reporting and therefore more effective tools for impact investors in the future.

Uber in Mexico City

By Sofia-Marie Mascia

To what degree is a foreign company obligated to civic accountability under local laws? Uber launched in Mexico City in 2013, gaining 500,000 users in its first two years of operation. While the company has since become subject to threats of regulation charges by the Mexican government, it has arguably generated more social good in the nation’s capital than any multinational company.

Uber provides the Mexican commuter a degree of safety that the regular taxi industry does not offer. The Uber App works in the same manner, regardless of the nation it operates in. GPS tracking has become indispensable to Mexican citizens in a city where kidnappings, shootings, and assault are synonymous with the taxi industry. Digital receipts through the Uber app — as opposed to inefficient paper transactions — have created fewer opportunities for theft, extortion, and confrontations over unpaid fares. Due to the consistency of the company’s regulations, Uber drivers undergo stringent criminal background checks and drug screenings, which of course is not the case for privately owned taxis. Taxi drivers often forgo any regulatory requirements due to lack of active enforcement by the city government.

However, some critics have argued that Uber poses ethical problems on labor grounds, as the company’s presence in Mexico City threatens an entire transportation industry and the workers in its unions. After receiving legal complaints from local Mexican Taxi Union workers in 2015, Secretary of Mobility Rufino León Tovar suggested requiring Uber drivers pay for a permit, though he also praised the service for giving the people of the city “a perception of great security.” However, Uber simply met this controversy by offering 150 pesos worth of free rides to its users — boosting overall usage by 2016.

Since the threats of 2015, the Mexico City government fund threatening to collect 1.5% of revenue from car-hailing services such as Uber has still not been created. The taxi industry, plagued by fraud and assault has not adjusted to the market incomer offering safe rides, backed by an international GPS and payment system. While a company must comply with domestic regulation charges to fully claim corporate responsibility, Uber’s larger responsibility lies in changing the landscape of transportation in the name of safety and efficiency.

Creating Shared Value, Looking to Unilever

By Sofia-Marie Mascia

There are several ways to define a responsible business. The concept of creating shared value focuses on the connections between societal and economic progress. Instead of focusing on what a company does with capital, the shared value model focuses on how the company makes its money. The model is at the minimum compliant with all rules and regulations, but mostly identities external risks and added costs that irresponsible business practices create. Creating shared value (CSV) is a different concept from a company purely identifying social costs (i.e. societal externalities which can be positive or negative), that they believe they don’t have to bear. When a firm creates shared value, it is the choice to do business without producing negative externalities.

Unilever is an exemplary case of a company that has designed its ESG strategy around the concept of shared value. The Unilever Sustainable Living Plan asserted the company, whose products are used by 2.5 billion people per day, would double its growth by the year 2020. This growth will not be facilitated through mergers and acquisitions, but rather by changing the business model by improving health and well-being for more than 1 billion people through health and hygiene schemes, cutting down their products’ negative environmental impact by nearly a half, and enhancing the livelihoods of employees along the supply chain as the company doubles in size. With 160,000 employees, 80,000 suppliers, 2 million farmers on the supply chain, Unilever is the fastest moving consumer goods employer of choice in 44 of the 52 countries they recruit from.

If changes are implemented to grow the value of the company by improving the environmental cost of their products and production, in addition to livelihoods workers on their supply chain, the number of people whose lives could be positively influenced reaches billions through a multiplier effect. Unilever’s goals address three critical elements of creating shared value: development, the value chain, and relevant markets. One of my professors once likened the concept of creating shared value to Henry Ford reducing the price of his cars so his employees could afford them. It is this humanistic approach of highly influential, globalized businesses that could make all the difference in how capitalism affects our daily lives into 2019.

The Issue of Public Relations in ESG: Does it lead to meaningful change?

By Sofia-Marie Mascia  

On the HCIIG Blog we’ve already established that in a globalized age where the influence of the private sector is so salient, multinational corporations have the power to influence the lives of the millions of people associated with their business. Workers and shareholders rely on ethical practices of these companies as employers, but consumers often take away more than a product or a service from their purchases. When companies are so visible, consumers who associate their services or goods with a personal life choice or brand are more likely to care when a firm doesn’t make responsible choices in production.

An example of this is when international human rights groups criticised FIFA for employing slave labourers in building the Qatar stadium in preparation for the 2022 World Cup. To combat the public relations scandal, FIFA created a Human Rights advisory board and established guidelines for labor regulations. Under pressure from such a large international corporation, the Qatar government changed its labor laws to be more comprehensive, especially in regard to banning slave labour. This case seems like an ideal example of humanitarian actors facilitating real change in corporate responsibility until you question what impact these changes had on the ground and in real time.

FIFA would argue that Qatari workers now are empowered to contact FIFA if they feel their rights are being infringed upon. However, it is more likely that because of a language barrier and the intimidation of appealing to a corporation as powerful and pervasive as FIFA stopped the changes from being effective in the long-term. Not to mention a lot of the workers don’t even know their rights and are so desperate for income they would hardly ever risk losing their jobs.

This brings up an interesting concern when analyzing the role of corporate social responsibility in human rights. Must a public relations scandal facilitate all change to ESG attitudes in corporations like FIFA? Would change have occurred in Qatar if viewership of millions of football fans was not at stake? What about industries that are less likely to attract publicity? The modifications implemented at a high corporate level appease the public, but often don’t improve the quality of life of laborers in the Global South. In the future HCIIG may look at cases where public relations are less of a motivator, to see if a meaningful change in adjudicating human rights abuses is possible while maintaining a successful business platform.

Bottle Your Water, It’s Better

By Michelle Zhang

Boxed Water Is Better. You must have heard it by now. The judge and jury have spoken—boxed water is, in fact, better. But better than what? Sure, boxed water might be marginally better for the environment than plastic water bottles. And who can argue with their claim!? With such a snappy logo and aesthetically appealing product, I’d believe anything! But Boxed Water is just another case of greenwashing, because what’s really better is a reusable water bottle. They tout that their sustainable packaging and high efficiency shipping reduces their carbon footprint, but their carbon footprint is massive compared to that of drinking tap water from a reusable water bottle. Singe serve water bottles have been called the “most wasteful indulgence in the first world,”1 as landfills are overflowing with more than 2 million tons of discarded water bottles a year.2 Efforts to curb water bottle consumption are producing little change. Over 480 billion water bottles were sold in 2016, and this number is expected to jump to 583.3 billion by 2021.3  And at $1.89 a pop, Boxed Water is doing nothing to decrease that number.

A similar company, Rethink Brands, recently secured $6.7 million in funding for their line of boxed “unsweetened organically flavored water” for children. If this is not the most pompous, supercilious product you have ever heard of, let me know. Over-the-top products for people with money coming out of their ears are good and fine, but when they are branded as impactful, I take issue. The best thing any consumer can do for the environment is to avoid these products at all costs and simply buy a reusable water bottle. And the most impactful thing an investor can do when confronted with a product like this is to run in the opposite direction.

Global Opposition to Tech Monopolies

By Evelyn Donatelli

Protests against the power of tech companies like Amazon (AMZN), Google (GOOG), Facebook (FB) oppose the massive consolidation of power under the monopolies from which these companies profit in their respective end-markets. Comparisons have been drawn between the current consolidation and the inequality and polarized distribution of the Gilded Age US in the 1920s. Current pushback occurs against the backdrop of increased worries about personal security, caused by privacy breaches on large social media platforms, as well as possible election interference (FB breaches, FB preparation for election interference, Twitter deletes accounts and loses users).

As mentioned in previous posts, the US and, often more aggressively, Europe, are working to regulate social media companies through hearings and legislation. Globally, both activists and governments are working to take power back from big tech. China, another powerful player in the battle between government and big tech, has its own “FAANG” (FB, AMZN, AAPL, NFLX, GOOG) companies, sometimes referred to collectively as “BAT” (BIDU, BABA, TCEHY) - Baidu, Alibaba, and Tencent. Alibaba’s Ant Financial, along with Tencent, applied in February 2018 to create a nation-wide “social credit” score, using a scoring system which it denies stealing from Equifax IP. The Chinese government, aware of the already-consolidated power by its tech giants, responded to the credit score proposal by denying applications from all private companies for a credit scoring system, and instead creating its own. The credit scoring system intersects with China’s pre-existing problem of “shadow banking” - including off-the-books lending to borrowers with low credit. The People’s Bank of China (PBOC), together with the Chinese government, also responded to Tencent and Alibaba’s initiatives by delaying the release of a portion of Tencent’s games this past quarter, for which Tencent cited almost $1bn in losses in its August 2018 earnings. The nationalization of one of the “BAT” companies by the Chinese government has been suggested, but is still considered unlikely.

As US consumers, a silver lining appears in that legislation appears imminent - even the tech giants themselves, Amazon, Google and Facebook, have stated that legislation looks like the next step. The efficacy of this legislation will ultimately rest on the cooperation of tech lobbyists with the US government in creating regulations for platforms, which protect the privacy of consumers and the integrity of the data on the platform as a whole.

Impact Investing: A Spectrum

By Michelle Zhang

Impact investing was introduced to me as a part of a spectrum—the spectrum of funding sources for social problems. On one end are social issues that should be addressed with philanthropic dollars and can’t make financial returns at the moment — for example, building better primary and secondary education infrastructure in developing countries requires public funding and large amounts of charitable donations. On the other end of the social problem spectrum are those which have become mainstream and therefore have access to mainstream sources of funding — good example of this is solar energy, which has become very popular and lucrative. Solar panel companies are raising millions in venture capital and private equity funding before going public. I see impact investing somewhere in the middle of this spectrum. Impact investing dollars are targeted at social issues that show promise for financial returns that aren’t quite high enough to attract mainstream investors (although this is rapidly changing).

Every social problem has a place on this spectrum, and there is real danger when entrepreneurs or investors try to push a problem farther up than it belongs. This can produce exploitive business models, flat out bubbles, or make empty promises to consumers. As much as social enterprises try to make the world a better place, we must take our time and address each issue with the care and attention they deserve.

International Finance Corp Sets New Minimum Standards for Impact Investing

By Evelyn Donatelli

On Thursday, Oct. 11, the IFC set a new global minimum standard for “Credible Impact Investing” at the International Monetary Conference (IMF) in Bali, Indonesia, in a release of a draft of its Operating Principles for Impact Management. In an article on the topic, Forbes defined impact investing as “investing with the goal of environmental and social impact in addition to financial return”, which succinctly encapsulates the symbiotic combination that I and so many others find attractive about the field. In fact, over just the past year, money in the impact investing field has doubled, from $114 billion to $228 billion AUM, excluding ESG investments, which are measured separately. ESG investments (Investments in accordance with Environmental, Social, Governmental principles), represent a larger, but slower growing pool, with over $22 trillion AUM and a 17% CAGR (according to McKinsey 2016 estimates). The IMF’s new consultation draft standards include 9 principles focusing on strategizing how to maintain discipline across firms’ approach to impact investing portfolios, part of a larger effort to streamline and advance private sector investment in impact investments. Comment period is open for stakeholders through the end of the month.

This new minimum strives to prevent “impact washing,” the use of impact positioning to raise capital without any social or environmental benefit. A sign of the progress of meaningful impact investing, Leapfrog Founder and CEO Andy Kuper commented that a minimum global standard for impact investors would have been inconceivable a decade ago.

From Impact Investor to Impact Investee: The Story of Breaktime

By Connor Schoen

As some of you might know, I’ve been working in the impact investing space for the last year or so — conducting research at Harvard Business School, writing articles about current impact investing topics, etc. However, recently, I’ve transitioned to another side of this world: actually being the investee.

After working at the Y2Y Harvard Square shelter, my friend Tony Shu and I became inspired to go out and start our own company around the issue of homelessness: Breaktime is a social enterprise that builds cafes to provide stable employment, vocational training, and career-based education to young adults experiencing homelessness. We do this by establishing wholesale partnerships with food vendors, like Union Square Donuts, to expand their brand and serviceable addressable market to a store we manage in another location. On the employment side, we partner with homeless shelters, such as Y2Y Harvard Square, to address the issues of access, experience, and flexibility that young adults experiencing homelessness confront in the employment process.

After discussion with various non-profit leaders, Breaktime has specialized into being a second-stage employer for at-risk youth. This allows us to (1) focus on being great employers and (2) not overlap too much with what other companies are doing (Pine Street Inn, More Than Words, etc.). It also means that Breaktime’s primary goal is to grow and create as many quality jobs as possible for our target population — representing a direct alignment of impact and profit incentives.

Overall, it has been such a fulfilling, engaging process creating my own social enterprise. I get to actually take what I’ve learned about impact frameworks and the double bottom line, and put these lessons to action. I’m extremely excited for Breaktime’s first cafe to open in Cambridge this fall, and I look forward to continue putting my words to action in this space.

How Do You Solve a Problem Like Measurement?

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Harvard College Impact Investing Group Blog Guest Post: Jeff Seidl

“Our intuition about the future is linear. But the reality of information technology is exponential, and that makes a profound difference.” – Ray Kurzweil

Impact measurement is an essential component of impact investment performance tracking, but the practice currently lies at the intersection of inaccuracy and pain. Investors receive crusty PDF reports with irrelevant information. Fund managers don’t have time to research best practices, causing frustration and inaccuracy. Investment bankers are de-incentivized from asking their clients serious ESG-related questions like asking someone about their health on a first date. Public market ESG rating firms conflate disclosure with responsibility (this coal-fired utility company is reporting its Scope 3 emissions – gold star!), reward larger companies for CSR-related PR, and allow head-scratchingly irresponsiblecompanies into ESG indices. Private market ratings firms don’t have the data access of their public market counterparts, despite the fact that impact in private markets is more directly attributable to individual investors. Benchmarks are hard to find, and to make matters worse, there aren’t universally-accepted metrics that span all asset classes, as there are for financial performance.

Fortunately, the torrent of funding and attention flowing into SRI/impact has begun to extinguish this dumpster fire. We’ve seen firms from across the nonfinancial performance landscape, including MSCI, Sustainalytics, ISS, CSRHub, TruCost, and OwlAnalytics, improve their analysis either through R&D or consolidation (e.g. ISS’s recent acquisition of Oekom). Asset coverage is also increasing, as firms like Beyond Ratings create new ESG-related frameworks to rate sovereign debt issuers’ creditworthiness. Consortiums such as Bridges’ Impact Management Project, of which Flat World Partners is a member, are working with a variety of stakeholders to try to address these issues.

As a firm dedicated solely to sustainable investments, we’ve had the chance to survey a wide variety of software products, methodologies, and frameworks while looking to improve the impact reporting we provide our clients. We’ve found that the most effective impact reporting answers the questions:

1.     How much impact is being delivered, and when? 

2.     How badly is this impact needed? 

3.     What would happen in the absence of this investment? 

Our guiding principles to reduce the confusion of impact measurement are as follows:

  • Make it relevant – different stakeholders have different concerns when it comes to social/environmental performance. For example, an endowment’s investment committee must report to board members (how is social performance interacting with financial performance?), beneficiaries (how is the endowment furthering their mission?), and external groups (how can this investment strategy influence investors who are similar to us?). Reporting should be tailored to address the concerns of each group, which means first understanding what those concerns are.
  • Make it defensible – as with any model-based conclusion,third-party datasets are necessary to create a rigorous analysis. Government sources such as the Census, Bureau of Economic Analysis, EPA, and Energy Information Administration have troves of data that can help contextualize both the social and environmental impact of an investment opportunity. Models should also account for the time value of impact – that is, that impact now is worth more than impact in the future. We use a social discount rate from the Office of Management and Budget to work this into our model. 

Who Cares?
The field of impact measurement has a long way to go. But if done right, it could allow impact investment to realize its initial promise: directing the approx. $8.7b in SRI strategies (which dwarfs the $615m in philanthropic capital – US numbers, 2016) toward opportunities that provide the most benefit to society and the planet.

Let’s take Social Impact Bonds (SIBs) as an example. SIBs are favored by many impact investors because they provide clearly defined and measured social impact as well as returns (that is, when the interventions work). The problem is, the SIB market is still tiny – about $300m in 2017. SIB issuances are chronically oversubscribed, leaving impact-seeking money without a high-impact home. What if we could satisfy this demand in the $3.8T municipal bond market? 

To test this idea, we used our impact measurement model to compare a social impact bond (DC Water) to a muni with a similar maturity and sector focus (NYS Clean Water and Drinking Water Revolving Funds Revenue Bonds). We found that the muni was projected to produce even more societal value than the SIB, normalized to amount of proceeds – approx. $2b of societal value from the $500m investment in the muni, and $30m of value from the $25m SIB. Of course, though municipal bonds are supposed to be in the public interest, many are far from environmentally or socially beneficial (looking at you, KMPA). Defensible impact analysis could allow investors to separate out the municipal bonds that deliver the highest impact. At the same time, ESG risk analysis could illuminate alpha from emissions data and climate change risk factors. FWP is building capacity in order to accomplish these goals not just for munis, but for all asset classes.

The field of impact measurement has no shortage of wailing and gnashing of teeth. But if the field of financial performance measurement is any indication, standardized, investor-focused solutions may soon reduce the pain.

Jeff Seidl ‘16 is an Analyst at Flat World Partners, an advisory firm focused solely on sustainable investments, where he leads the firm’s impact measurement initiatives. He is the cofounder and alumni chair of the Harvard Health Data Working Group, a group of Harvard faculty, students, alumni, and administrators dedicated to improving health data empowerment for Harvard students and alumni. Email: jeff@aflatworld.com.

My Journey to Impact Investing

By Connor Schoen

“How did you even get into this stuff so early? Most people don’t find impact investing until late in their careers,” asked Jeff Seidl of Flatworld Partners. His own journey to impact investing will be discussed next week, but his question got me into deeply thinking about how I got here and what impact investing means to me.

To anyone who knows me well, it’s no secret that I love to talk impact. I’ve worked in the non-profit sector for about six or seven years now, and I can’t imagine life without service involved.

But I’ve also always loved thinking about large governmental and corporate institutions that shape how the world operates on a macro level. I used to feel like these two things were in conflict. Internally, like many people, I was fighting with myself over whether changing lives or making money was more important to me. It’s the classic Harvard prototype: wants to go to Wall Street, “change the system,” and then donate all his money and make the world a better place.

Eventually, that narrative grew old to me. I didn’t want to have to separate those two parts of myself anymore; I didn’t want to delay creating impact for the sake of money. It felt like my identity was being pulled apart, like I had to lose one half of me to salvage the remains of the other.

Impact investing was an extremely important discovery for me in that it provided me with a remedy to this internal problem. In early 2017 at a social impact conference in NYC, Scott Taitel of the NYU Wagner School of Business introduced to the subject in a long conversation about how to create sustainability in change-making. I had started the Service Learning Initiative to empower students in grades K-8 by teaching them how to lead their own service projects, but I was incredibly frustrated with the exhausting and all-consuming task of creating sustainability in this project before heading to college.

To alleviate these frustrations, Scott told me about “the best kept secret on Wall Street:” the ability to confront social and environmental issues while driving market-rate returns. I then went and worked for Matt Camp, another guest of the conference, on the Goldman Sachs 10,000 Small Businesses Team at the Initiative for a Competitive Inner City and learned how a non-profit’s direct involvement in augmenting the profitability and growth of inner city businesses could radically transform these communities.

Ultimately, these lessons stayed with me at Harvard, and I found a lot more security in my identity and what I wanted with my life. I joined the Harvard College Impact Investing Group to get more involved in this fascinating subject, and I also worked to start my own for-profit social enterprise, Breaktime. In these endeavors, I witnessed and demonstrated how essential conflating business and a impact-oriented mindset is to create true, long-term change.

I guess, at the core, I’m perpetually drawn to that beautiful, transformative intersection between philanthropy and business. From social entrepreneurship to impact investing, I believe that you can change lives and make money while doing it. The idea that this is not possible is a self-fulfilling prophecy perpetuated by those who are still helplessly trapped by the delusion that their impulse to create impact must be suffocated to make a buck. Sorry, but I just don’t buy that.

Facebook Privacy Debacle: Update

By Evelyn Donatelli

This update starts with events in the EU, the effects of which are being felt in the US. The European Union’s new data privacy regulations (known as GDPR), are set to go into effect May 25, 2018. These regulations will be the new standard until US Congress decides to pass new legislation. US Congress demanded a 10-hour public testimony from Zuckerberg (April 10-11), but has yet to indicate how it plans to move forward following.

What is Facebook doing to increase user privacy post-GDPR? Upon close inspection, the updates revealed this week do not appear to have increasing user privacy as their goal.

Starting this week, Facebook ($FB) asked users to agree to its new terms of service and data policies. But rather than minimizing features which jeopardize user privacy, Facebook is actually unveiling new potentially privacy-endangering features under the new EU regulations. In the EU, Facebook will now prompt users to opt in to the company’s use of facial recognition software, which Facebook previously had not used in Europe because of regulation concerns.

Facebook’s April 17 blog post announced its plans to start “complying with new privacy laws.” By this, Facebook means it will alert people to features the company already offers. The appearance and design of these alerts is what calls into question their actual purpose.

Issues with these alerts include: design features (ease of accepting vs. rejecting Facebook’s request to access the data in question) and language used in these alerts which blatantly incentivizes opting in. As you may (or may not) have noticed while accepting Facebook’s new privacy alerts, the questions are framed in a way which only mentions the potential benefits to the user of accepting Facebook’s access to your data.

This raises certain questions - how much control do regulations have over the steps companies take to correct privacy infringement? How much control should they have over the design of new features intended to address new regulations? The ideal balance between government interference and protection of user privacy here is unclear.

Impact Investing in Human Rights: A Case Study

By Sofia-Marie Mascia

In continuing with my exploration of how impact investing can curb human rights abuses, I will look at a case study regarding supply chain transparency using Blockchain.

Humanity United is a foundation dedicated to solving problems long considered to be intractable. Launched in 2008, HU is part of The Omidyar Group - a philanthropy established by Pierre Omidyar, founder of eBay.

HU goes beyond traditional financial support and includes network development, advocacy, strategic communications, and HU-led initiatives. One of these HU-led initiatives is their newly founded impact investment sector. According to their mission statement, “Impact investing, and other financial interventions are of growing importance as we seek to scale innovative solutions that address key supply chain challenges, including worker empowerment, product traceability, and ethical recruitment.”

Their first impact investment was in Provenance, a digital platform that uses Blockchain technology to increase supply chain transparency. They use their technology to track the journey of products from their origin to purchase, allowing users to have a single data source from which to assess which products they purchase or which firms they invest in.

The long-term focus of Blockchain was to create an immutable digital ledger where companies could track payments and securities.

However, “If you talk to supply chain experts, their three primary areas of pain are visibility, process optimization, and demand management. Blockchain provides a system of trusted records that addresses all three," argues Brigid McDermott, vice president, Blockchain Business Development & Ecosystem, at IBM.

Investing in Provenance means investing in a long-term solution for widespread supply chain transparency problems. For example, factories that employ child laborers are only kept in business because companies demand their services.

If socially irresponsible actors in supply chains are identified with Provenance’s technology, the hope is that companies will consciously choose to employ other factories. The same technology that will identify the weakest links in responsible supply chains will also identify those factories that do employ children but do not receive business or foreign investment. If socially responsible actors are identified on every level of the supply chain, we have a hope of establishing a market economy devoid of human rights abuses.

Who Should Lead the Charge in Impact Investing?

By Connor Schoen

From pension funds, like CalPERS and CalSTRS, to boutique firms, like Tideline and Arctaris, the pioneering leaders of impact investing range from large institutional investors to smaller firms who specialize on social impact.

Who should be leading this movement? While large institutional investors might have the most capital to invest, some say that their responsibility to provide consistent, larger returns (i.e., pension payments) impedes them from being successful, effective impact investors. Namely, in a report released last year by the American Council For Capital Formation (ACCF), a Washington-based think tank, claims that the California Public Employees’ Retirement System (CalPERS) is underperforming financially because of their impact investing strategies. Vice President of the ACCF, Tim Doyle, claims that weak public pension fund performance like this is exacerbated by “the growing tendency on the part of those who lead many public pension funds to use beneficiaries’ money as a vehicle to champion certain political causes and issues at the expense of doing what’s necessary to improve fund performance.”

So are long-term, large funds like CalPERS, with around $300 billion assets under management, simply incapable of being effective impact investors? According to the spokesman of CalPERS, Joe DeAnda, funds like theirs have a duty to consider environmental, social, and governance principles (ESG metrics): “[CalPERS has] successfully pushed companies to publicly report on the impact that climate change is having on their business, and we have successfully pushed them to open up their board selection process because companies with a diverse group of talented people on their boards perform better financially.”

Most investors acknowledge some trade-off between returns and societal impact, but funds like CalPERS are important in showcasing how they are not mutually exclusive. Also, a report from Morningstar, a Chicago-based investment research firm, claims that “academic and industry studies are demonstrating that sustainable investing does not underperform conventional investing, and there is mounting evidence that incorporating environmental, social, and governance factors can have a positive impact on performance.”

Moreover, according to David Bank from ImpactAlpha, utilizing sustainable investment techniques help funds like CalPERS, who “own the market,” to mitigate a variety of environmental and governance risks in the long term.

So maybe CalPERS isn’t seeing its highest returns today, but time will tell if their ESG-centric approach to investment will enable enhanced success in the long term. In the meantime, boutique firms may be the only ones who can effectively leverage the impact investing mission, but large institutional investors are the only ones who can push this to the mainstream.

What is Venture Philanthropy?

By Sofia Marie-Mascia                     

In last week’s blog, I talked about identification mechanisms that aid investors and benefactors in selecting which conscious companies to invest in. Human rights abuses in particular often stem from a lack of commitment to ethical practices across supply chains. A factory that illegally employs children cannot operate unless a business is buying what it produces. If these actors are identified, investors have a better chance of choosing to support only ethical enterprises.                     

But what is the role of existing philanthropic organizations in stemming abuses? The EVPA (European Venture Philanthropy Association) describes venture philanthropy as matching the soul of philanthropy with the spirit of investing. This idea was conceived by the Harvard Business Review 1997 when private equity investors found that a new approach was needed to maximize the potential of charities to solve social problems. The EVPA founded shortly thereafter and in collaboration with the European Commission, and its 25 member countries have begun to lead the charge of transforming social enterprise with the Venture Philanthropy structure.                       

Unlike other mechanisms of charitable giving, venture philanthropy is divided into three core practices that ensure long-term impact. The first is tailored financing in the form of grants, debt, and equity hybrid financing. The second is organizational support that improves structures and processes rather than just providing easy cash flow. The third is impact measurement. Research is conducted to measure if impact tailored financing and organisational support made a difference. Venture philanthropists then use the information to ensure more positive outcomes in the future.

The EVPA monitors and communicates European Union developments of relevance to the Venture philanthropy and social investment sector. In future case studies, we will see how their model below has begun to empower the powerless and drive change with capital.

AI in Human Capital Management: Privacy

By Evelyn Donatelli

AI (Artificial Intelligence) plays a rapidly growing role in Human Capital Management (HCM). HCM is an industry ripe for disruption, especially within the hiring function of the role, in which HCM employees face with unmanageable numbers of applications. For example, Johnson & Johnson (J&J, $JNJ), a consumer-goods company, receives 1.2m applications for 25,000 positions every year.

Enter: Companies like HireVue, a video interview software start-up (in late stage venture funding) for recruiting and hiring, which is already used by a swath of companies, including Goldman Sachs and Unilever. HireVue reads body language for subconscious cues via recorded video interviews. Applicants may know they are interviewing via HireVue, but may not realize this is a feature of the program. The cues read by the software include facial expressions and voice tones. Supporters of the use of AI in the hiring process claim the software helps applicants by doing a more effective appropriability screening: “Athena Karp of HiredScore, a startup that uses algorithms to screen candidates for J&J and others, says only around 15-20% of applicants typically hold the right qualifications for a job...and that technology is helping to ‘give respect back to candidates.’”

However, there are concerns about inherent biases in the algorithms, and the potential difficulty proving discrimination when a computer is involved in the hiring decision-making process. AI, as a nascent player in the HCM industry, is not currently regulated differently than an “old-school” HCM department would be.

Another application of AI in the HCM role is spurring privacy concerns. Employers are replacing the use of outside consulting firms in favor of using NLP (natural language processing) algorithms to conduct “sentiment analysis” on employees. Privacy is an especially poignant concern here, as the goal of NLP algorithm software like Xander, according to parent company Ultimate Software, functions as follows: “by regularly soliciting feedback from employees and deciphering their true emotions, leaders learn how their employees actually feel and can take steps to facilitate proactive change.”

As technology pushes the barriers of HCM capacity to effectively analyze emotions, and to draw behavioral conclusions reaching beyond the words presented to them, regulators will find themselves in the significant role of protecting the privacy of employees and applicants.

Impact Investing in Human Rights: an Introduction to a new kind of Social Responsibility

By Sophia-Marie Mascia

To link human rights - an issue so hard to quantify - to investment, it’s necessary to shift the way we think about capital market dimensions. Financial intermediaries must move from focusing on two dimensions - risk and return - to three dimensions - risk, return, and impact. Promoting matters of human dignity in investment portfolios have the potential to increase efficiency, embolden company reputations, assure long-lasting relationships with stakeholders, avoid potential risk and liability, and create a shared pool of societal cultural wealth.                

The Corporate Human Rights Benchmark Ltd’ published a methodology and a set of guidelines to encourage greater transparency and evidence-based advocacy.They aim to clear the blurred lines between main actors in human rights abuses: suppliers, supply chains, and business partners in agriculture, textiles, and extractives industries. CHRB weight company performance in each sector regarding factors like responses to serious allegations and human rights due diligence.

CHRB argues that if a business’ purpose is to serve society, respecting human- rights should be a competitive advantage. Initiatives like CHRB Ltd. give firms like Domini, the information to ensure protecting human dignity is a core objective of the corporations in which they invest. Domini, in particular, publishes its proxy voting guidelines to allow its shareholders to hold them accountable for the positions taken on their behalf.                  

The merger between increased transparency of issues and investors commitment to a better world I believe is what will drive change in the future.

Facebook: Data Breach

By Evelyn Donatelli

Is the Facebook ($FB) data breach of 2017 a lesson in idealism? Facebook has lost $100BN in market value (from ~$560 billion market cap in February of 2018 to ~$460BN current) following the discovery of a data breach affecting 87M people. Zuckerberg’s (CEO) statement on the breach included the following: “We’re an idealistic and optimistic company. For the first decade, we really focused on all the good that connecting people brings...But it’s clear now that we didn’t do enough. We didn’t focus enough on preventing abuse and thinking through how people could use these tools to do harm as well.” Zuckerberg specified that these negative uses for which Facebook was underprepared include “fake news, foreign interference in elections, hate speech, in addition to developers and data privacy”, and calls these oversight a “huge mistake.”

What can be learned from Facebook’s loss in value and from the violation of millions of peoples’ privacy? Facebook is taking immediate action not to repeat the same mistakes that have cost the company thus far. The initial misuse of information was by Cambridge Analytica, a British political consulting firm which combines data mining, brokerage and analysis to improve strategic political communications, and whose parent company is Strategic Communication Laboratories (SCL), is a government and military contractor. As of Friday, April 6, Facebook suspended Canadian political consultancy AggregateIQ from its platform, in order to avoid a similar misuse of data as in the CA scandal, after reports that AggregateIQ is also affiliated with SCL.

In the cases of both Cambridge Analytica and AggregateIQ, an overt political motive drove the misuse of personal data on the Facebook platform, Cambridge Analytica was employed by the Trump 2016 US Campaign, and AggregateIQ by a pro-Brexit campaign group before the 2016 referendum.

Spotlight on Tenoli and the Future of Small Business Success in Mexico

By Connor Schoen

While reporting on Mexico might be focused elsewhere due to the current political climate, the country is undergoing a rapid economic transition. Namely, major supply chain issues are barring the country’s approximately one million micro-businesses, or tienditas, from breaking even and servicing over 100 million citizens that rely on them. Unlike the United States, most areas of Mexico have historically had no major wholesale conglomerates dominating their economy; instead, over a million of these tienditas have popped up throughout the country.

Now, as they begin to face competition from growing conglomerates like Oxxo, 7-Eleven, and Walmart, these tienditas struggle to gain collective bargaining power over such major wholesale providers, and they also suffer from the endemic challenges of an extremely inefficient and expensive supply chain. In fact, approximately eight Oxxo chain stores open every hour in Mexico, causing about five small businesses to shut down operations. This coupled with significant productivity declines in the traditional sector is wreaking havoc on the hopes of many retail-oriented entrepreneurs.

Tenoli is a new and growing social enterprise that works to support tienditas through network-building, distributional services, and growth-centric consulting. In an interview with HCIIG, the organization’s co-founder, Rodrigo Sanchez Gavito, discussed the extent of this issue: “What’s going on today in the [wholesale] industry is that in the last 5 or 10 years, there has been an explosion in the retail sector and particularly in the modern market... None of these micro-businesses have the resources to compete against these modern conglomerates.”

Ultimately, Tenoli aims to alleviate this issue by leveraging the collective bargaining power of the 3,000 tienditas in their network. They also provide small-business consulting and manage the supply chains of these stores--physically storing goods in a warehouse and orchestrating all of the transportation to the stores for increased efficiency at scale. In Sanchez’s words, they are “building a network of mom and pop stores to have positive network effects.” He expands claiming that “by aggregating demand, Tenoli can achieve better prices/deals for goods providers while receiving a small fee on [their] services and products for [their] own company’s profitability and sustainability.”

Overall, Tenoli is working to slow down what it sees as an “economic catastrophe.” To Harvey Powell, however, a former business executive and resident of Mexico, this is part of a natural evolution, a “creative destruction” working to modernize the Mexican business environment: “What you’re seeing here is not a new phenomenon. This is a trend that started decades ago in America and has been seen all around the globe.”

Nevertheless, many scholars studying this issue point to factors that make the Mexican situation unique. In an interview with HCIIG, Ximena Castañon, a Masters candidate at the MIT Supply Chain Management Program, stressed that “throughout Latin America, there is a huge entrepreneurial culture out of necessity.” Unlike in the United States, many Mexican entrepreneurs are motivated by financial needs—not a risk-taking, innovative impulse.

As Castañon’s colleague, Rafaela Nunes, puts it: “In America, entrepreneurs are mainly post-MBA grads who saw opportunity. In Latin America, entrepreneurs are predominantly the people who lost their jobs and don’t know what to do and start a business.” Therefore, the destruction of these businesses could be extremely catastrophic for certain lower-income portions of the population.

Whether you see it as an economic catastrophe or a natural modernization of the Mexican economy, this is a large problem for many store owners throughout the country. Thus, this issue presents an impact investing opportunity in companies like Tenoli as well as those organizations that focus on retraining efforts for displaced workers.

Opportunity Zones: One Positive Takeaway for Impact Investors from the New Tax Act

by Connor Schoen

Among all of the recent debate and discussion of the Tax Cuts and Jobs Act of 2017, a key reform has greatly evaded the spotlight: “Opportunity Zones.” Opportunity Zones are areas that are traditionally left out from key investments and support. These inner cities and underdeveloped areas throughout the United States paradoxically need investment the most while receiving the least of it. According to the Initiative for a Competitive Inner City, a Boston-based economic development non-profit, 42% of working Americans are inner-city residents, and the majority of inner-city businesses see their locations as a competitive advantage.

Nonetheless, these pockets of American society receive some of the lowest levels of investments from VC/PEs and other institutions. In response, John Lettieri and Steve Glickman, co-founders of the DC-based Economic Innovation Group, were able to galvanize support for their proposed solution to this problem in the most recent tax act. According to Impact Alpha, another leading impact investing publication, the Governors of each state had to choose “no more than one-quarter of their low-income neighborhoods for investments that will let investors defer and reduce capital gains taxes.” This was done by the end of March, so the new initiative is now ready to go into full swing.

Will it have a tangible impact on America’s economically stagnant areas? Will it bring more support and leverage to minority-owned businesses and reduce economic inequalities nationwide? These are some extensive goals, and only time can tell us the real, substantive impact of these Opportunity Zones.