Impact Investing: The Future is Here

The dynamic realities of a new landscape, what it means for the nonprofit sector, the Jewish State and society at large

(Text of remarks delivered at the Social Finance conference held at Beit Nehama, Israel on June 6, 2017)

Hi there. Thank you for the warm welcome. I want to acknowledge how blessed I feel to be here in Eretz Yisrael and to be among so many friends, in particular Ronnie Cohen and Jeff Swartz, both of whom I deeply respect as entrepreneurs and visionaries, titans in their respective fields, and who I feel fortunate to consider as mentors. I am truly honored to be on the agenda with these giants.

So again I am really delighted to be here with you today. I have been asked to talk about the topic of innovation which is an interesting topic for me to address for multiple reasons.

First, I spent most of my career in business, creating companies and building brands that were focused on the nexus between generating economic value and providing social benefit, either through an innovative business model or system of value delivery. A number of those businesses enjoyed a liquidity event, either an acquisition by a larger firm or public offering on the US stock market. In these cases, a larger corporation or Wall Street saw sufficient value in the asset that we had built, but certainly not because we played by the rules or because we strictly colored within the lines.

Instead, they admired our willingness to push boundaries and break with convention. These were far from overnight success stories or enterprises that I built on my own. Again, these accomplishments came together with partners and colleague, truly team efforts. But for me, I learned firsthand that taking risks can generate outsized returns.

Second, I have spent a fair amount of time in the federal government back home in the US and recently concluded a tour of duty in the White House where I worked for President Obama and ran the Office of Social Innovation at the White House.

For those of you unfamiliar, this office was created during the prior Administration because the President wanted to enlist social entrepreneurs and tech innovators and channel their talents to work for the government. In my role, I was tasked to find new ways to accelerate economic recovery and boost job creation, but not by resorting to the old playbook but instead by finding new ways to solve old problems. We adopted and adapted practices developed in the private sector to the public sector such as outcome-based payments, civic hackathons and hybrid value chains.

I know that these approaches are not novel in much of the world, but they were brand new to government. And I am proud to share that the policies that I introduced and the programs that we created had an impact. They helped to place at-risk populations on pathways to work. They catalyzed new public-private partnerships that facilitated the flow of large-scale capital on long-standing problems, and they stimulated economic growth by driving resources to job-creating ventures.

Today I find myself in a new sector and serving at the helm of the Anti-Defamation League. The ADL as it is known is among the most storied non-profit organizations in the United States and, rather than working for shareholders or taxpayers, I now have a a new constituency and an absolutely critical purpose — to protect the Jewish people. This means fighting anti-Semitism and securing justice and fair treatment to all.

Civil rights leaders at the White House including ADL National Director Ben Epstein (2nd from left); Dr. Reverend Martin Luther King, Jr; US Attorney General Robert Kennedy; NAACP CEO Roy Wilkins; and US President Lyndon B. Johnson (source: John F. Kennedy Presidential Library)

In many ways this is a far harder task than building an effective business or creating policies to stimulate jobs. And yet this is a mission that burns in my core, one that challenges and inspires me every single day. It is an incredibly consequential assignment, particularly in these turbulent times where we as Jews live with tremendous privilege and yet our history tells us that such gains can be fragile, and that we must fight ferociously to preserve them. And so for me, the question that animates me every day is, how can I apply what I learned in business and government to the social sector, how can I infuse our work innovation and impact.

And this work is more vital than ever.

All of us live in a moment of tremendous change and considerable unpredictability. I recently was reading a report regarding labor productivity and the analyst argued that the gains in recent years are dwarfed by those of prior eras. Trends such as industrialization and mass production at the start of the last century transformed Western society in profound ways, reshaping economies and societies to boot. In these early days of the 21st century, the author argued that the advances are less tectonic — Elon Musk’s self-driving, electric car may seem innovative and important and perhaps even affordable to the so-called 1%, but the author contested that it pales in comparison with Henry Ford’s innovation of a mass produced, low priced automobile accessible to the masses we know today as the 99%.

Innovation on the assembly line, from Ford Motor Company (2013) to Tesla Motors (2016)

I agree with this observation in principle, but in practice, we would be wise to take this moment very seriously. We have crossed a threshold that is less about the micro-economics of individual labor markets and more about the meta-economics of our common humanity. Facing planetary challenges like accelerating climate change, shrinking water and food access, and widening income gaps, we urgently need new response strategies. This is a formidable challenge, to say the least.

And while this seems daunting and our televisions and phones seem filled with stories that evoke dread, I see immense reason for hope.

Think about it. What does it mean when a planet of eight billion people is connected via globalization and networks — what insights might be possible and what breakthroughs can occur when every study ever conducted, when any program ever broadcast, when every book ever written in any language at any point in human history is accessible to any single person on the planet with a tap on their phone? This is not the breakthrough of a single Gutenberg bible produced on a printing press. This is the tipping point of infinite information instantly accessible to everyone.

In addition to technology, this moment is differentiated from previous eras by the emergence of a truly interconnected global economy. Now cross-border trading flows are not new — think of the historical networks of our own people, Jewish merchants and financiers, who used their tribal languages and distributed networks to trade and move goods across borders in Europe and Asia for millennia. Today we have a globalized model of trade and investment that has transformed nearly every country on earth, a system based on the free flow of goods and services and a common creed of open capitalism accessible to all.

While it is true that capitalism comes in many shapes and sizes, we need to acknowledge that markets are one of the dominant organizing constructs of our time. This is not to say that ideology is unimportant. There are extremists and radicals on the margins who seek to disrupt this order. But the march of markets has been profound, animated by the energy of fathers and mothers who want a better life for their children or individuals who simply seek their own share. It is the engine driving people and progress around the world.

Considering this reality, maybe it should not surprise that many corporate executives or successful entrepreneurs long have regarded social impact as a distraction, something that interferes with the task of creating shareholder value or optimizing financial returns. Indeed, the famed economist Milton Friedman famously wrote that the social responsibility of business is to increase profits, period. And so hard-charging capitalists typically have thought about doing good as little more than a late-in-life social pursuit.

Nobel Laureate economist Dr. Milton Friedman (center) with students on campus at the University of Chicago, 1971 (source: University of Chicago)

And, at the same time, there are those people on the front line of social change who often hold little regard for the business world. They do not want to speak the language of markets. They see its fruits as little more than sources of value to be exploited. I have found that the leaders of many NGOs and not-for-profit organizations certainly depend on the generosity of donors but honestly want little more than such direct philanthropy. They appreciate the money but otherwise prefer to be left to their own devices so they pursue change. These men and women are deeply motivated, absolutely driven but often feel convinced that they have the answers, but only lack for the funds to implement the changes that they know will work.

I think both sides of the argument are wrong.

I believe both the business world and the nonprofit world can learn from one another, can trade energy and ideas and respective resources, thereby improving both sectors and society as a whole. It is not a zero-sum game in which one side wins and the other loses. It is a shared endeavor wherein the whole can be far greater than the sum of the parts.

I find it fascinating to consider how the social sphere can benefit by leveraging the assets and strategies of the capital markets. I think this fascination stems from the fact that I have seen all sides of this multiplayer game.

I have been a start-up entrepreneur seeking funds from investors. I have been an angel investor deploying my own funds to start-up entrepreneurs. I have been a foundation director making grants to nonprofits. Now I am a nonprofit executive seeking grants from foundations. And I find that there is tremendous opportunity at the seam between these various roles, setting a more effective table to accelerate these transactions based on what Ronnie would call “profit and purpose.”

Some call the space created by the intentional blurring of the boundaries of business and nonprofit as the landscape of impact investment. I also have heard others refer to it as social innovation. However we might label it, I am deeply hopeful about what it can enable. I have such hope because, in this interconnected moment when markets are ascendant, I see enormous possibility. Let me share some of the signs that reinforce my view that this is happening — and what it means for all of us in this room and for our peers around the world.

First, we see a surge of institutional capital into this space. By this I mean the trend of large scale players entering this emerging market. Now it is not clear that impact-maximizing investments always will drive the same returns as profit-maximizing investments. Many have argued this case, but there have been some very encouraging studies conducted by firms like Morgan Stanley, Deustche Bank and The Global Impact Investing Network also known as GIIN. Nonetheless, we are starting to witness the emergence of patient capital that is willing to take risks with an eye on the long-term horizon rather than the impatient capital that so often seems to drive our volatile equity markets.

I will acknowledge that my view is US-centric. What is required for such capital to flow in other geographies? Policy changes are critical to loosen trapped resources and facilitate the entrance of new investors into this space. I can share some of the work that I did while at White House to make this happen in America. First, we worked with the US Department of Labor to modernize the rules around pension funds, otherwise known as ERISA. This change will make it easier in the years ahead for the $3+ trillion in private retirement assets to shift toward investment products that generate measurable environmental and social benefit.

It took several years, but we also worked with the US Treasury Department to issue a clarification of US tax policy to make it easier for foundations to deploy their corpus in program-related investments. This guidance is important because, while American institutional philanthropy issues $50 billion in grants every year, this clarification relates to the other $700 billion in assets under management that are invested through asset allocations designed to drive results. Imagine what might be possible if these funds were deployed in more creative ways to create more than just absolute financial value.

In light of these changes and response to the new landscape, some actors are stepping up. The $18 billion Ford Foundation has attracted widespread attention for its stated intent to deploy $1 billion over the next several years toward its mission, but to do so via market-based investments rather than charitable grants. Or take Bain Capital, one of the world’s leading private multi-asset alternative investment firms with approximately $75 billion of assets. The firm recently launched its appropriately named Bain Double Impact fund under the leadership of former Massachusetts Governor Deval Patrick. And Morgan Stanley generated headlines in the past few weeks after it announced the creation of a $125 billion fund of funds to invest in these types of products, a new vehicle that clearly signals its belief that institutional capital is coming to this field and likely will do so at scale.

Second, we have started to see the growth of capable intermediaries who can absorb and direct these resources. By this I mean the firms that sit between funds and investees, the athletes on the field who make the capital markets click. These could be venture funds, investment banks and financial agencies that enable the flow of resources at scale. There are encouraging indicators of new players stepping forward to catalyze the evolution of this marketplace.

For years we have seen a handful of firms pioneer this new market. In this nonprofit space, think of New Profit and the groundbreaking work that its done out of its office in Boston over nearly 20 years to stimulate the field of venture philanthropy, launching a series of funds that have invested in some of the most successful social entrepreneurs of the past 20 years, individuals who have built sustainable models of social impact in the US such as Teach for America and YouthBuild.

Teach for America HQ, New York City

But there also are exciting new players that have emerged in more recent years such as Blue Meridian Partners. For those of you not familiar, Blue Meridian is a new capital aggregation platform that plans to invest at least $1 billion in nonprofits poised to make a national impact on economically disadvantaged children and youth. Comprising 12 philanthropic institutions and individuals and incubated at the Edna McConnell Clark Foundation, Blue Meridian plans to focus on “big bets”: flexible, unrestricted, long-term investments made over a 5 to 10 year horizon, each tied to performance and totaling up to $200 million for each grantee.

And there are similar examples in the for-profit world. First, I will mention DBL Partners, a venture capital firm formed in the Bay Area 13 years ago that validated the field of mission-driven businesses with early stage investments in large-scale successes like Tesla Motors and Revolution Foods. DBL just closed a new $400 million fund in 2015.

And, just as in the nonprofit sector, there are new actors in this realm, too. Two years ago, Twitter co-founder Ev Williams launched Obvious Ventures, a firm focused on what he defined as “World Positive” investments that seek to create economic and social value. One such example is Diamond Foundry, a startup growing cultured diamonds in plasma reactors rather than extracting them from the earth. Another is Beyond Meat, an L.A.-based company that has developed several lines of plant-based products designed to taste like, and eventually replace, animal-based food. Obvious just closed its second fund, raising $191 million.*

Beyond Meat faux-meat products (source:

Or the much hyped RISE Fund, a new multi-billion investment vehicle developed by the Texas Pacific Group with the support of global mega-personalities including Bono and Richard Branson. RISE recently announced its first investment, a whopping $190 million to scale the fast growing ed-tech startup EverFi.

Along with institutional capital and new intermediaries, new financial instruments are appearing, products with the promise to appeal to a wide range of investors. In this regard, I could talk about microfinance and what it has done to empower the poor. I also could point to innovative new approaches like water credit, a new impact investing instrument that offers small, easily repayable loans to those in the developing world who need affordable financing to make household access to clean water and sanitation a reality. The nonprofit already has disbursed more than $400 million through more than 1.4 million water credit loans benefiting an estimated six million people in 10 countries with loan repayment rates reported to exceed 99 percent.

Customer signing for a new watercredit loan (source:

But I would prefer to highlight Social Finance and their pioneering work in the UK, the US, here in Israel and around the world to define and develop the social impact bond.

As a former White House official, I can attest to the fact that SIBs are not a silver bullet that will save stretched public treasuries but the notion of leveraging private sector resources to fund better public outcomes could be an enormous asset to policy makers starved for resources and to social entrepreneurs with proven interventions.

It should be noted that there are some critics who seem obsessed with the flaws of the first social impact bonds. They have written extensively and almost gleefully about these missteps. But we should not be discouraged by their cynicism. In fact, we should expect fits and starts in any new field and we should embrace the learnings that come with such missteps. It’s simply part of the highly imperfect process of innovation.

If we look to the for-profit world, there also are a range of exciting developments. I spoke earlier about some of the early stage venture funds. But there also is a constellation of new innovations and some long-standing, under-reported ones that demonstrate the feasibility of investors building diversified impact portfolios. Take for example the community investment notes developed by the Calvert Foundation, fixed-income investments offered to mission-driven businesses. Since their launch in 1995, these notes have raised more than $1.5 billion from over 15,000 investors. And the ImpactBase, a database developed by the GIIN, claims a subscriber base of more than 2600 accredited investors who use the service to research more than 400 impact-related investment products with significant diversity across asset classes and global regions.

And finally this market has been facilitated by better information. Our conventional capital markets work relatively well and do so across borders because they benefit from common standards and generally accepted accounting practices developed over decades. These enable a broad-based understanding of basic financial accounting. The good news is that we already have seen a rapid evolution of new measurement tools to facilitate basic impact accounting.

Models such as PULSE, GIIRS, and IRIS are all related elements of this emerging field and tools that have been invented and iterated by this industry to assess and evaluate social benefit. And make no mistake, the new class of what The Economist’s Matthew Bishop has termed the philanthro-capitalists will demand an enormous amount of information.

We should not be surprised by the expectations of the class of tech billionaires who need to be identified by little more than their first names — think Sergey and Larry, Mark and Jeff. They used algorithms to build empires based on dynamically-generated insights about the information consumption of their users. Now they are demanding a similar degree of rich, real-time detail about the social progress of their investees. They will expect rapid prototyping and AB testing, instant feedback and iterating programs. Those are the new norms in our data-driven economy.

But information is not just about measuring dollars and outcomes. It is also about analysis and insight. To that end, newsletters like Impact Alpha, journals like the Stanford Social Innovation Review, advocacy groups like the US Social Investment Forum and conferences like SOCAP further underscore the case that information is flowing at an accelerating pace and this market is maturing.

Social Capital Markets Conference, 2013 (source: SOCAP)

So these four data points — institutional capital, capable intermediaries, serious instruments, and better information might seem unrelated but, when you look more closely, it is clear that these points can be connected on a curve that trends upward, representing a growing global market.

In light of this trend, I think there is an immediate opportunity for my organization, the ADL, and for many of the nonprofits in this room and around the world. In this moment, NGOs need to reimagine themselves, their boards need to re-envision their value chains, and their executives need to rethink their business models. I can assure you that ADL is in the midst of exactly this type of transformation.

I am driving this change because, as I have tried to lay out here today, I believe that in the near future, it will not be enough for ADL or almost any organization to rely simply on the largesse of donors, whether these are individual philanthropists or government agencies.

In an environment of dwindling treasuries and demanding donors, we must develop new strategies to attract and earn those dollars or shekels, ideally through the innovative and effective provision of products or services and a commitment to measure and report on the results of such activities. This can drive new kinds of investors and new earned income strategies.

To be clear, I am not trying to suggest this is a one-size-fits-all moment. I do not believe that the poor are simply purchasers, a new class of consumers at the bottom of the pyramid. I do not think that basic research only should happen when there is a clear financial opportunity. I am not trying to assert that every ailment is a market in disguise. Not at all.

But I am suggesting that we are facing a historic moment. Those nonprofits that adjust their sails and harness the wind will have extraordinary prospects. With the advent of new intermediaries and institutional capital, there are enormous possibilities for the nonprofits that adopt scalable business models to solve widespread challenges like reducing infant mortality, improving early-childhood education, and enhancing workforce development. And with the emergence of new instruments and better information, there will be historic opportunities for those organizations that craft measureable models to address the most insoluble issues that, even if they lack a viable profit model, they still inspire the human spirit.

And so, as we consider this new horizon and as I look around this room, I am again heartened.

As I stated at the start of these remarks, the challenges ahead of us indeed seem vast, almost insurmountable. And yet I can think of no pool of talent better prepared for this moment than the Jewish people and no country better poised to capitalize on this trend than the state of Israel.

Early Zionist farmers building a kibbutz (source: Maoz Israel)

This is a country that was borne out of a miraculous combination of the Zionist imagination, human ingenuity and relentless dedication. This is a nation of entrepreneurs and pioneers who have done the impossible again and again, surviving and thriving despite the intentions of its enemies and the opinions of the experts. If there ever was a country that could reshape its social sector and realign its organizations, it is this one. If there ever was a community positioned to seize the day, it is this one.

Now it won’t be easy. And it won’t be even. Innovation rarely is. There will be highs and lows, stops and stumbles along the way. There will be cynics and detractors who denigrate this work and who focus on the failures. But all of us will need to steel ourselves for the short-run and stay focused on the long-term.

But I know it can happen. With the leadership that I see right here in the first rows of this room and with the opportunities taking shape just outside this hall, I might predict that the Jewish state one day will be envied in capitals around the world and described by analysts and observers, not only as the start-up nation, but also as the social impact nation.

Thank you .

* In terms of full disclosure, the speaker is an investor in Obvious Fund 2