How Investing for More than Profit Can Change the World

May 26, 2015

Cathy Clark is one of the leading academic experts in the world in the field of impact investing, the practice of investing for societal good as well as financial gain. She is an adjunct professor with Fuqua's Center for the Advancement of Social Entrepreneurship (CASE) and also directs Fuqua's impact investing initiative (CASE i3). Clark served on a United States National Advisory Board on Impact Investing and spoke at the White House and on Capitol Hill about how it can accelerate economic growth. In her book, The Impact Investor, Clark makes some creative predictions about how the practice of impact investing could change the world.

Clark explains how that change might happen in this Fuqua Q&A.

Q: The 2008 financial crisis showed that many investors owned investment vehicles they did not understand. What makes the subsequent jump in investor awareness important for impact investing?

It's a small silver lining from the financial crisis that people are now asking about the non-financial impacts of a financial product. Who is its ultimate beneficiary, and how is that product actually creating value? Who could it hurt? The most powerful way to make change is the mindset of people making the change. The mistakes made by people in the financial sector have opened the eyes of a lot of other people who are now asking, 'So wait, what is actually being done with my money? If I give it to a bank or a mutual fund, is it making rich people richer, helping to grow companies I actually admire or is it doing something else of value?' The notion of asking those questions has clearly taken root — every survey we've seen of financial advisors in the past few years that has asked about consumer appetite for impact products has shown exponential growth in demand. Boomers, millennials, family offices, all are asking, 'What good can I do through my investment portfolios?' Many are no longer seeing impact purely as the domain for their philanthropic dollar. The crisis opened the door between investments and impact. Financial service companies are scrambling to educate themselves as a result.

Q: You predict a move toward corporate alignment, with a softening of the distinctions between profit and nonprofit companies. What do you expect to see and why does it matter?

Nonprofits have been acting more like businesses for more than 20 years — that's originally what the social enterprise movement was about. Historically, companies were set up to maximize shareholder value, while nonprofits used extra wealth to maximize benefit for a larger set of constituents. Filling market gaps is the common concept. You have wealth creation and charity and they don't touch. But we need the engine and growth power of business to solve some social and environmental problems, and the constituency and transparency of nonprofits and governments to guide those engines. You can do it after the fact through advocacy and embarrassment, which is costly and painful, or you can integrate that thinking from the top. So as people have been starting to experiment with how that works. There's been recognition that you sometimes need to act like something in-between the nonprofit and for-profit, at least in their ideal forms. The fundamental elements to succeed are not what legal form you are anymore. They are about how you engage constituencies, how transparent you are about impacts and how you measure and communicate what you are learning and achieving. We predict this new frame of corporate behavior and engagement will grow and start to dominate markets around the globe. And we know that millennials are demanding it.
 
Q: You argue that impact investing embraces a nonpartisan agenda, and that for investment purposes, the U.S. is on the verge of a post-partisan era. Given the deep political divisions of the day, how can that be? How can impact investing navigate those waters?

I don't think the post-partisan era is quite yet upon us, but it is at least starting to appear on the horizon as a possibility. Last year, both Republicans and Democrats on Capitol Hill cooperated to back a bill to expand federal funding for so-called 'social impact bonds,' also called 'pay for success' contracts, across the country. Each side saw potential in the idea of helping the government enter into contracts where it only pays for social service outcomes when those outcomes are actually proven to have been achieved. I attended an event for the new bill on the Hill and you could see the enthusiasm. It was a total no brainer. Republicans get to offset government costs and Democrats get better on-the-ground social services. The benefit corporation movement has been similar. Over 25 states have added benefit corporation legislation in the last five years so that new companies can incorporate as a benefit company that provides benefit to its communities and employees, and most have had bipartisan support at the state level. That is a huge change in a really short period of time.  So we can see it's possible for common interests to supersede partisanship when it comes to impact.
 
Q: Since you first identified these and other trends, have any moved faster than you expected? What kind of progress have you seen?

In many ways, the growth of this mindset change around investing for both impact and return is going much faster than we predicted. The new impact products that we see emerging, from green bonds and agricultural loan funds to social impact bonds for education, recidivism and health, are simply fantastic. I would be delighted if our craziest predictions turn out to have been too conservative.

Contact Info

Gregory Phillips
Duke University
The Fuqua School of Business
100 Fuqua Drive
P.O. Box 90120
Durham, NC 27708-0125

Tel: 1.919.660.7801
Email: gregory.phillips@duke.edu

Erin Medlyn
Duke University
The Fuqua School of Business
100 Fuqua Drive
P.O. Box 90120
Durham, NC 27708-0125

Tel: 1.919.660.8090
Email: erin.medlyn@duke.edu