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Jonathan Greenblatt

Jonathan Greenblatt

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Investing for Change: The Emergence of the Impact Economy

Posted: 01/14/11 03:41 PM ET

2011 could be an inflection point in the Capitol. New leadership in Congress. New staff at the White House. Perhaps even a new era of bipartisanship forged out of the tragedy in Arizona.

In the hours after President Obama's seminal speech in Tucson, there are signs that the tone of our public conversation has shifted. We appear to see a transition from a sole focus on short-term political gain to a lessening of the coarse language that has inflamed passions on all sides. Some are sensing a new climate of civility inside Washington.

This would be consistent with a pattern of civic engagement gaining momentum at the grassroots level across the country. Despite the constant media attention on our divisions, there are numerous signs in everyday life that people are rediscovering their commonalities. It's a mega-trend exemplified by many micro-shifts, such as higher levels of community service, the explosion of local gatherings and meet-ups, and the increased focus on charitable giving by our most successful capitalists. This trend is also having a particularly profound impact on the marketplace.

A new set of behaviors is forcing a rethink of old, ossified ideas about cold-blooded capitalism. We are seeing the emergence of a structure best described as The Impact Economy. This is not some bubble-driven phenomenon, but a recalibration of supply and demand based on a more accurate system of measures that internalizes externalities and prioritizes impact. It imagines a new equilibrium predicated on a social contract influenced as much by Adam Smith's Theory of Moral Sentiments rather than only The Wealth of Nations. It conceives of a values-led, mission-driven marketplace wherein true gains are those outcomes that achieve market-rate financial returns without entirely trading off on social good.

At a time when criticism of Wall Street remains pitched, its worth taking note of those signs of the Impact Economy from the landscape of finance and investment.

In one such example, News Corp announced at the end of 2010 that it purchased Brooklyn-based educational startup Wireless Generation in a $360 million cash transaction. Many wondered about whether media mogul Rupert Murdoch was bringing Fox News into classrooms across the country. Others opined that it was an employment program for outgoing NYC School's Head Joel Klein. However, most observers missed perhaps the most fascinating element to this story.

Wireless Generation had many investors, but perhaps the most interesting was the W.K. Kellogg Foundation. Kellogg took a stake in the business as part of its $100 million Mission Driven Investment (MDI) portfolio. This was not a conventional grant or a program-related investment (PRI). Instead, Kellogg had placed a direct equity investment in a for-profit firm. The foundation earned significant returns because of News Corp's acquisition and grew its endowment as a result. This type of socially-minded, return-driving investment behavior is often referred to as Impact Investing.

This risk-return model is not a surefire win. Direct investing is far from a novel concept to mainstream investors, yet such impact investing is a radical, almost revolutionary step forward for foundations traditionally focused solely on creating value through charitable grants. MDI could allow philanthropic investors to preserve their core endowment while recycling capital that achieves institutional missions and drives financial results through Wireless Generation-style exits.

In other quarters, government is stepping up to explore how to leverage markets and engage private sector resources to drive shareholder returns and achieve public good. The new Social Impact Bond that was pioneered in the UK stands out as a compelling model of this trend. Its adoption could herald a new era of reverse privatization, wherein business makes government more effective instead of simply acquiring resources at firesale prices.

The Social Impact Bond is better described as a contract rather than a true bond. Investors provide capital to fund a community-based program whose successful implementation lessens long-term public expenditures. This model shifts the conventional focus on costs of service and emphasizes improved outcomes, allowing government to provide success payments to investors at a fixed rate of return that creates predictable value. This approach still saves taxpayer dollars and addresses a local social concern.

Social Finance, a nonprofit venture launched by former UK Minister Sir Ronald Cohen, is driving the first application of the Social Impact Bond to address recidivism among repeat offenders in Peterborough. Other governments also are contemplating implementations, including New South Wales in Australia and reportedly some municipalities here in the U.S. Our neighbors north of the border also are contemplating its utility as a public policy instrument.

This process will not be easy. There will be failures and lapses. Some of these Social Impact Bonds will fall short of expectations. Wireless Generation might lose its way amid the massive bureaucracy of News Corp. As a result, some philanthropists will discount MDI and fall back on their old habits.

Nonetheless, these seemingly disconnected phenomena are linked and provide a glimpse of the future. They are animated by the same forces of change as those government officials and foundation executives that attempt to drive impact and innovate their fields. It's a first look at the emerging Impact Economy wherein market forces are harnessed both to create wealth and strengthen communities, thereby generating shared value for all.

 
 
 

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