1. Investing in the 21st Century Impact and Capital at HBS
Caitlin Reimers Brumme
September 14, 2018

2. Personal Introduction
Consulting, hedge fund
HBS 2012, Section D
Social Finance
HBS, Impact CoLab
Good day – thank you all for joining. Im delighted to have the chance to start a discussion with you all today on investing for impact at HBS.
I am an HBS graduate, class of 2012 section D. Like so many HBSers, pre-HBS I did my time as a consultant and as a financial analyst at a hedge fund, but perhaps more novel, post-graduation I joined start-up nonprofit called Social Finance – where I spent five years in the trenches of the emerging impact investing field working on an impact investment product called a social impact bond.
I was recruited back to HBS in 2017 to help design an effort here aimed at accelerating the practice of “Investing in the 21st Century,” including sustainable, ESG and impact investing. In the face of significant student and alumni interest and almost daily announcements from large institutional players about “impact practices” – we identified the opportunity to provide world class thought leadership, research and educational platforms in collaboration with industry practitioners. For me personally, it was the opportunity to tackle many of the challenges I had experience at Social Finance, from the macro, rather than micro platform.

3. Introduction Massive and urgent social and environmental needs
There is a rapid growing interest in practice of investment to promote social and environmental goals
This takes many forms
Activist hedge fund trying to change corporate behavior
Venture funds providing capital to company offering solar lanterns
Contingent payment contracts to finance nonprofits
Style (with many variations) not an asset class
Before we dive in , let me just frame the context of our work:
There is the growing phenomenon of people using investment capital for financial and social goals. This comes is all sorts of shapes and sizes, which we generally refer to as “investing for impact.”

4. Opportunity for HBS Leadership
Investing for Impact holds promise…inspire creativity, discipline and capital markets to solve social problems….
And tremendous challenge/uncertainty
What is impact?
Can profit-motivated activity effect social problems?
Can impact-motivated investment generate returns?
And more practically…
How do you integrate traditional and non-traditional objectives into portfolio construction? Investment strategy? Investment diligence? etc
There is much promise
But also many unknown – theoretical, strategic and quite practical. You see some of the many open questions on this slides.

5. What Can HBS Contribute?
Our objective is to become the leading academic institution on investing for impact through the development and dissemination of world-class educational offerings and research which markedly influence practice
Education
MBA
Exec Ed
Research
Academic
Practical
Field Building
Funds, Asset Owners, Alum
We have gathered a multi-disciplinary team to start to tackle these questions. The “core faculty I work with include both practioners and faculty and include even faculty who have for years researched and taught on related topics such as Josh Lerner and George Serafeim’s whose reserach
HBS is uniquely positioned to both shed light on bleeding edge practices through case studies, but also bring rigorous and objective research to the conversation to balance the excitement if not hype. The hope that we will better equip practioners, managers and leaders to more effectively work at the intersection of social and financial objectives and helps validate and organize a rapidly evolving market that is still without clear definition.

6. How We Will Spend the Hour
Building the next generation of talent and leaders
Research underway to inform and advance practice
My plan is to talk for no more than 30 minutes, ill skip may skip over some slides but all the materials will be posted following. Ill talk first on the course that was launched and then on pending research and then hopefully have a conversation. Hopefully you will take away from this presentation reasons to be excited and learn more. As I mentioned, this field is yet nascent so what Ill share reflects our perspective of potential frameworks and trends.

7. Investing in the 21st Century: Return, Risk and Impact

8. Why “Investing in the 21st Century?”
More than 25% of assets globally allocated with some non-traditional goals and/or criteria (values, ESG, impact), collecting “investing for impact”
Growth outpaces that of “traditional” asset management
Our perspective is that every finance and management professional (even skeptics) will need to be conversant. “Believers” should be informed and nuanced
Last spring we launched a second year course re-titled Investing in the 21st Century.
In addition to being better marketing than say social investing, the positioning reflects our belief that there is a change underway and that all individuals going into investment or entrepreneurship will have to be conservant in these topics. It is also reflects our perspective that the beleivers should have an informed and nuanced perspective

9. A New Course: Investing in the 21st Century: Return, Risk and Impact
Second year EC course; finance course – builds on Fin 1 with heavy dose of (practical) investment skills
Major effort for HBS
~20 new cases in in
Large investment to affect teaching of this subject world wide
Course note, three module notes, many teaching notes
Equip students to enter the world with their own informed/nuanced perspective on the space
This course reflected a major push by HBS (namely Shawn Cole, Vikram Gandhi, myself and a team of case writers) – a zero to sixty effort– it includes over 20 new cases on leaders in the industry including early pioneers such as acumen, DBL and SJF Ventures and new comers such as TPG Rise, Social Finance and Jana. We have also invested background notes, course notes, teaching ing notes – which makes the content relevant and accessible not only to HBS and our students but to faculty around the world.
Our effort was not only to ensure high quality content for our students, but materials and frameworks to affect how investing for impact is taught worldwide

10. Syllabus OVERVIEW Key Topics CASES
Module 1: Overview of Investing for Impact
Cross asset class; proof of concept; returns continuum (some)
OpenInvest, Omidyar Network, Velux Cambridge
Module 2: Private Investments – Emerging Approaches
Structuring and valuing investments; co-linearity (and trade-offs)
Blue Haven, ETF Partners, SJF Ventures, Meridiam Infrastructure, SKS Microfinance, DBL Capital, Vox Capital, Banex
Module 3: Managing and Measuring Impact
Defining, measuring, attributing and managing impact
Root Capital, Acumen, Pi Investment, Social Finance, TPG Rise
Module 4: Public Markets - Mainstreaming Impact
Values alignment vs engagement vs activism
Generation, Wellington, Global impact Fund, State Street, Impact through Activism, Aviva Investors
Module 5 – Leading for Impact
Designing strategies at the intersection of the ideal and the practical
The Nature Conservancy, Goldman Sachs, Morgan Stanley, CalSTRS
The course offers comprehensive coverage of the industry – across assets classes and across tyles. It is a finance class and thus many of the cases builds on Fin 1/Fin 2 with an emphasis on practical investment skills and experience - .
At a high-level the course was designed to
Build skills and judgement
And Help students develop their own informed/nuanced perspective on this industry
Ill post thesyllabus with these materials following – most of the cases are widely available for purchase on HBP

11. Course Framing
“Investing for impact” is the practice of incorporating non-traditional criteria into investment decision making and management.
Wide range of preferences and motivations
Several compelling logics
Impact or ESG lens provides: an investing “edge”
A no (or low-) cost way to live consistent with your values
A better way of obtaining/enhancing a desired social impact
More efficient form of philanthropy (Root Capital)
Market-building or “catalytic” role (Omidyar)
Result is a growing market for impact with optimal structure varying by: sector or “SDG,” asset class, measurement, return
As I mentioned, one of the objectives of the course is for students to develop a nuanced perspective on the industry. We are continuing to evolve a simple framework that moves away from “impact inesting” as “one size fits all”. Rather, throughout the course, the faculty promote a “market” view in which investors have a wide degree of preferences for impact and as a result, there is a growing diversity of products.
We encourage students to analyze funds based on what they are promising investors (as opposed to whether the fund meets their own definition of impact).
EXPLAIN BRIEFLY

12. Categorizing Strategies
Better investing
No cost way to align values
More efficient way to achieve impact
ESG Integration
Generation
Meridiam
Values-driven (screening, thematic)
SHE OpenInvest Morgan Stanley – Green bonds
Market-Rate Impact Investing
Wellington
DBL
TPG
ETF Partners
Vox Capital Blue Haven
Below-Market Impact Investing
Acumen Social Finance Root Capital
Costly Investment in Measurement
Low
Mostly Public
Mostly Private
High
And you can see here how this starts to organize our cases into categories of practice beyond “market and non-market” or public and private.
In the measurement module we explore both the ideal and the practical limitations and propose a hypothesis that the relative importance of measurement increases as funds or investors take more uncompensated risk – the opportunity cost to investors is higher and so they should demand more certainty on impact.

13. What did we learn? Very nuanced topic
Disentangle myths from reality – ESG integration vs screening
Segment by what is being promised (at a minimum)
Multiple “legitimate” approaches (strategy, management, culture)
Asset owners - Blue Haven vs Velux
Asset mangers - SJF vs Vox
Financial institutions - Morgan Stanley vs Goldman
Practice influencing investing and philanthropy dialogues
Stepping back – developing the course has given us an unusual reason to look at micro and macro trends. I thought I would share just a few very simple observations –
First, “impact investing” is often discussed in sweeping statements. There is no trade-off between impact and returns. Impact investing can lead to alpha. In fact, we should probably be more precise in the way that VC is different from buy out. There are distinct and differentiated philosophies and approaches. For course purposes, we started by trying to segregate based on what is being promised – Ill share in a second research that takes this further.
Second, there a multiple strategically valid approaches related to strategy, organizational design, allocation, human capital management, impact measurement. with no clear “best practice” yet.
Lastly, the course focuses mostly on how this is influencing investment – it is clear that impact investing is and will continue to shape the face of philanthropy also.

14. Research

15. Motivation Shed light on emerging practices
Integration of financial and impact management; use of SDGS etc
Systematically document, describe analyze current practices
Resource intensity of impact integration; financial performance
…in order to help practioners make informed decisions
Academics uniquely situated to provide objective and impartial perspective
Let me turn briefly to share some early hypothesis and insights from one of several research efforts underway.
As a former practioner, what has been most interesting to me on this slide is the academic emphasis on objectivity. We don’t have a stake in claiming impact investing is the future of finance or not – this makes our findings and reporting unusually valuable for a field.

16. Impact CoLab Field Research Project
Field Research project (“descriptive”)
Textured understanding of actions/decision making of subjects
Sample of 8-10 private equity funds
In-depth interviews on fund strategy, process and select successes and failures to generate insights and hypothesis
Fall 2018 white paper(s)
Categorizing and describing segments of fund managers
Describing success and failures
The purpose of this study was to exhaustively study a handful of hand-selected funds in order to develop a layered and nuanced understanding of how fund managers actually work.
Give our relationships with firms, we were able to go under the hood to understand how firms set strategies and, perhaps more importantly how they implement. As a starting point our question was pretty simple – what do impact investors actually do to invest with impact? Can we shed light on different types of funds which may help investors more efficiently funds that align with their philosophies and impact goals. So this was like ayear a half of interviews and site visits and data colletion of 10 funds, collectively representing 33 funds and over #3B in asset

17. Preview Do they care? What is the strategy? How do they implement?
All fund managers “impact motivated” – in their DNA
What is the strategy?
How specific is the operating definition of impact? Return target? Marketing?
How do they implement?
How is impact integrated or not into processing, selection and management?
So what can I share?
So we se that fund managers vary to the extent that impact is core to their investment strategy, and even made explicit to LPs.
Second, we see that fund managers vary to the extent that impact is embedded in how investments are processed, selected and managed.

18. Fund Types? Preliminary Impact-driven Hybrid integrated ConTerminous
Impact-driven
Hybrid
integrated
ConTerminous
Return Profile
Below market
Market
Market to above market
marketing
Impact Fund
Impact fund
Avoid impact classification
Impact Specificity
Sector
Geography
Beneficiary
Mission
Geography Maybe beneficiary
Implementation
Optimization
Integration to Optimization
Integration
Verification
EXAMPLE
Bridges Social Impact; Social Finance
Accion Gateway; Vox
Bridges Sustainable Growth
Equilibrium; SJF Ventures
We see four categories emerging.

19. Why are we hopeful this is useful?
Current state - Impact investing is one term for many things, hard for investors to find what they are looking for
Impact Management Project Impact Matrix excellent allocation tool – but underlying drivers reflect primarily strategy
Our hypothesis :
Funds will similar strategies can make different implementation decisions, which will effect impact (impact as a managed outcome) and may financial performance
Clarity around “sub-strategies” helps in allocation, diligence and assessment

20. The Trade-off Debate?
Non-controversial - likely depends on what you mean by impact
Our (likely less popular) hypothesis -
Presence or absence of “trade-offs” is not static or absolute
Even funds with “inherent” impact explicitly or implicitly calibrate “how much” impact
“How green can I afford?”
Continuous process of choosing “amount” of impact consistent with personal goals and what was promised LPs
Can only understand this by studying “tough situation” decision making
We are also believe our research will contribute to the “trade-off debate”

21. So what next?

22. What’s next for you? Learn more Get involved Ask questions; Experiment
So I hope you have it interesting and inspiring to see how HBS is using its resources to validate and support a market we all hope carries real potential. While impact investing will not solve all the world’s problems, I do believe it will change the face of investment.
If you are exploring – I would encourage you to continue to learn - through these webinars, the case studies or background notes or other industry materials.
If you are farther along – one first step is just to ask your financial advisor or wealth manager – what is in my portfolio? What would it look like if I wanted to move my public equity holdings into values-aligned ETFS or carve our a portion of my private equity allocation for “impact.” You can also look at what products might be available through your retirement plan. These are simple ways to move from abstraction to reality – and hopefully some of the insights here can help you think about what may be right for you.

23. Back-up

24. “Core” HBS CoLab Team Michael Chu, Senior Lecturer, General Management
“Kash” Rangan, Professor, Marketing
Vikram S. Gandhi, Senior Lecturer, General Management
Shawn Cole, Professor, Finance
Cait Reimers Brumme, Director Impact CoLab
KKR, Former President Accion, Founder Ignia, HBS Grad
SEI Co-Faulty chair, founder Business at the Base of the Pyramid
20+ years emerging markets banking, founder Asha Impact, HBS Grad
Board JPAL, founder, Co-founder of Precision Agriculture for Development
Social Finance US, HBS Grad

25. Times are Changing
Greater than 20% of professionally managed assets globally subject to impact screen (c.a $23 trillion); almost 50% in Europe
Growth outpaces traditional investing and asset management
Growing a diverse ecosystem of products (gender ETF, Starbucks green bond, environmental technology VC, homelessness social impact bonds)
Large financial institutions jumping in since 2013….Morgan Stanley, Blackrock, Goldman, UBS, etc., with notable uptick in 2016

26. Another way to look at the spectrum of practices
Competitive Returns
ESG Risk Management
ESG Opportunities
Impact-Seeking
Classic Investing
Positive or Negative Screening
Thematic
Engagement
Market-rate
impact
Below market impact
Venture Philanthropy
Philanthropy
KKR, TPG Growth
SHE Index
Arborview
BlackRock
DBL, TPG, Wellington
Acumen, Root Capital
DRK, New Profit
Research grant
INVESTING FOR IMPACT
Paragraph with Image Top
Source: adapted from Bridges Ventures Content, market size from Global Sustainable Investment Review, 2016

27. Select HBS Convenings Impact Capital Managers (February, 2017)
20 U.S market rate impact investors; on-going research relationship
Roundtable for Institutional Investors (April, 2018)
10 institutional investors including CalSTRS and TIA-CREFF
Private meeting on public market investors and gun violence
Roundtable for GPs/LPs nd Academics
50 senior leaders of asset managers and asset owners and leading academics