Welcome Remarks: Capital Markets for Impact at Scale
October 4, 2012
Thank you, John.
Good morning everyone, and welcome to this forum on scaling capital markets for impact. I’m delighted to join so many investing pioneers and leaders, to kick off what promises to be a very thought-provoking discussion.
This is an exciting day—and not just because the Giants beat the Padres last night and the Niners shut out the Jets.
As it turns out, today is a red-letter day in the history of our country’s currency.
Exactly 55 years ago, on October 1, 1957, the first paper currency bearing the words “In God We Trust” entered into circulation. Many of them would have come from right here at the San Francisco Fed.
It was not, in fact, a newly-minted motto, having been added to our coins during the Civil War. But it was the first currency design change since 1929, and an important enough event that when the first bills rolled off the presses, both the outgoing and incoming Treasury Secretaries were on hand to mark the occasion.
Half a century later, we have a crucial new opportunity to direct our capital in service of our most fundamental values.
From the Tenderloin to the slums of Mumbai, we see hunger… homelessness… environmental degradation. These grave and pressing social challenges seem all the more insurmountable when we consider that, even adding up all our philanthropy and foreign aid, we have trillions in social needs and only billions with which to
But we’re joined today by some amazing, creative investors who have developed a new approach. They’ve realized that for-profit capital markets hold more than $100 trillion. And they’ve asked themselves, “How can we tap into these enormous
private capital flows to create both financial profit and social return?”
Enter an innovation that holds the promise of scaling solutions in an unprecedented way—the emerging field of impact investing.
Simply put, impact investments are those intended to create positive impact beyond
financial returns. They can be financial-first or social-first—or a combination of both. As this incredibly diverse group of attendees illustrates, the money comes from private equity and public pensions… foundations and major corporations… governments and community development banks.
In fact, community development banks—with their commitment to making a profit while serving the people around them—were really among the original impact investors. Many of you are represented here today. It’s essentially your business model being adapted into a broader and more diverse industry with world-changing potential.
There are challenges in this approach, to be sure. Impact investments are often complex to negotiate. They sometimes entail tradeoffs—whether in terms of higher financial risk or lower social return. As you all know, there are few free lunches— not in this business, not in any business. Though I hope you do enjoy the lunch we will be providing later.
But from the Rockefeller Foundation’s perspective—and the perspective of the partners who are with us today—the heavy lifting of building an impact investing industry is well worth the effort.
Consider just a few snapshots of what impact investing looks like, what partnerships it involves, and what outcomes it can achieve:
In the heart of New York City, low-income families are moving into quality, affordable housing units capitalized by the for-profit, JP Morgan Urban Renaissance Property Fund. This $165 million tranche targets America’s poorest urban communities—and it earns its investors market-rate returns of 15 percent on average.
This is an investment that focuses first on rate of financial returns, with a secondary but significant focus on social impact.
In the Eastern Congo, farmers are earning a living by harvesting and selling vanilla and coffee to Gourmet Gardens, a Ugandan exporter. Gourmet Gardens secured a working capital loan for these purchases from Root Capital, a non–profit, which lends to farmers’ cooperatives and agribusinesses that promote sustainable agriculture and stewardship.
Investors—including companies like Starbucks—earn a small financial return to provide investment capital to Root for this lending. By taking on loans from impact investors to leverage the grant money they raise, Root Capital has been able to grow to the point where they now lend more than $110 million annually—enabling them to improve the incomes of more than 200,000 producers and their families.
This is a social—first investment that also requires a satisfactory financial return.
Both of these funds have been in existence for some time but new ideas and new types of funds are emerging as the evidence base and innovation grows. For example, here on the West Coast, the Rockefeller Foundation is working with governors and treasurers to develop a tri-state infrastructure exchange that will help state and local governments to streamline the planning, financing and construction of vital projects. In the coming decade, California, Oregon and Washington will need to invest an estimated $1 trillion to improve their roads, rail, power grids, and other infrastructure. That’s tough to do on a state-by-state basis during a budget crisis and with less financing from the federal government.
But by establishing a center of expertise to provide technical assistance and investment information, and simultaneously advancing new mechanisms for project finance with the potential to attract private investors, we’re creating the space for large institutional investors to get involved in a big way. CalPERS or CalSTRS could fund toll lanes, a water project or an alternative energy plant—improving the lives of residents in California and the West—while reaping a 10-15 percent annual return over the next several decades.. As the SEIU’s Dennak Murphy puts it, “Infrastructure is an important way for pension funds to help grow the economy, and only when the economy grows do the pension funds grow.” And if it can work here, across three states and a thousand miles, it can work in the northeast corridor, or across the Midwest, or anywhere.
So I am pleased to announce today Rockefeller’s intention to support the next stage of work in developing the West Coast Infrastructure Exchange, something my colleague Bill Lockyer, California State Treasurer, will speak to when he joins us later today. The leaders of these three states are committed to realizing the potential of the Exchange, namely promoting near-term job creation and long-term economic competitiveness by accessing private capital. Rockefeller is proud to continue to support them in that effort.
We believe that impact investing is a diverse field with broad, transformative opportunity.
Committed, as Rockefeller has always been, to building new fields, we worked with the Monitor Institute to identify the missing elements necessary to make this sector take off, and with JP Morgan to describe the purpose and types of impact investing.
At that time, four seemed most urgent:
First, we needed ways for industry pioneers to collaborate, using well-developed platforms and shared infrastructure to partner and pool their investments.
Rockefeller has been active in helping to develop these platforms, such as the Global Impact Investing Network, or GIIN, which you will hear about in a few minutes, to serve as a forum for identifying and then overcoming systemic barriers that hinder the industry’s efficiency and effectiveness.
Second, investors have been eager for the basic tools necessary to vet, measure and then generate the greatest possible social impact.
To that end, we funded work on a new global reporting standard, known as IRIS, for measuring and communicating the performance of impact investments. We are also supporting a new company called GIIRS, with Deloitte and USAID, to provide objective and credible third-party ratings of the social and environmental impact of companies, making social due-diligence easier.
Most recently, we funded the launch of the Sustainability Accounting Standards Board, which promises to one day make the disclosure of corporate social and environmental performance as commonplace as standard financial reporting. With better tools to measure social impact, investors will have the metrics they need to gauge where their capital will get more social and environmental “bang” for the “buck.”
A third element needed to help this sector soar were mechanisms to connect impact investors to the “demand side”—the businesses and entrepreneurs who can put this capital to work to create both solutions and profits.
To address this need, Rockefeller has helped fund the Impact Investment Exchange in Singapore, which will soon launch Asia’s first stock market for social capital.
This is a promising development because, typically, profit-first investors have overlooked the handful of social enterprises listed on traditional stock exchanges— or worse, redirected and undermined their social mission.
By aggregating social businesses on a single exchange, and linking interested investors to it, IIX social stock exchange will allow socially conscious investors to more readily direct their capital to social enterprises.
That will enable the social enterprises to lift and leverage this greater liquidity, amplifying their impact on a wide range of social problems. And fourth, to incentivize further innovation, Rockefeller is supporting basic research and policy development to facilitate the role of government in unlocking impact investments among institutional asset owners.
To that end, we funded a report called “Impact at Scale” that outlines strategies for state and local governments to encourage public pension systems to make double- bottom-line investments that produce financial returns for the fund and social returns for the communities in which their pensioners live.
So this really is a moment of profound transition and opportunity.
I hope you will consider how you can support a new century of innovation to match a new century of challenges. This is still a very young industry that has yet to realize its potential.
Turning all this potential into kinetic, lifesaving flows of capital will require a concerted effort by all of us, especially those essential institutional investors—the CalSTRS, the UCs—to developing this space and harnessing it. But the demand is there. As Kevin Jones, a leader in the field of impact investing and creator of this week’s SOCAP conference has observed, “There is a true moral hunger for a new asset class.”
We finally have a chance to give our assets still greater value, by indelibly stamping them with our deepest values.
So, roll the presses.