Plumbing with purpose: Scaling impact markets

This post is adapted from a presentation I recently gave at the Sorenson Impact Center’s 2019 Winter Innovation Summit on “Impact Investing: Quick Chats on Emerging Issues.”

I want to talk to you all today about something that is not exactly “on brand” for impact investing.

It is not particularly sexy or inspiring. It is not a new technology or an uplifting client story. It’s not an innovative new financing structure or big-name investor entering the space.

But, in my mind, it is something more important, vital to delivering on impact investing’s promise to solve global challenges.

I want to talk to you about plumbing.

To do so, I’m going to take you on a journey of a dollar. Let’s call him Bill. Bill is a millennial dollar and believes that he and all of his friends should be invested for good. They read the news. Climate change is affecting everyone, everywhere, right now. Access to opportunity is unequal. Women and people of color are categorically undervalued in the global economy. Bill wants to do something about this.

The challenge is that Bill’s current home is the retirement account of a woman named Sheila. Sheila’s account sits at a global wealth management firm, we’ll call them GWM, and is advised by a woman named Kate. Right now, Kate has Bill sitting in a boring ETF that tracks the S&P 500. Bill knows that this is not where he belongs. He wants his life to have more meaning.

He keeps reading about exciting new impact products — funds that are helping to build affordable homes so families aren’t displaced, companies that are building community solar to provide greater access to renewable sources of energy — and he’s dying to be put to better use.

The problem is to get Bill moving into one of these products, there are two big hurdles.

First, the products have to get past the compliance team at GWM. Understandably, GWM wants to make sure that the products sold to their clients are suitable — so they have very strict rules. Fund managers have to have a long track record of success. The fund has to be big enough to make it worth their time to review. The manager has to have the systems and processes in place to pass “operational due diligence.” And often there are other required features like liquidity and easy, electronic distribution.

Second, the products have to get the attention of Kate. Kate has been reading a lot about sustainable and impact investing but isn’t quite sure what it is or how it could benefit her clients. There isn’t a ton of data or benchmarks, there aren’t analyst reports, research, or trusted third parties that are verifying that these are, indeed, good products to sell. And — to be frank — Kate has no financial incentive to do anything differently than she does today.

She’s had a conversation with Sheila and knows that Sheila wants to invest responsibly — but doesn’t know where to go from here. So, Bill sits, riding the wave of the S&P, his dreams unfulfilled.

I use this simple example to illustrate some of the challenges we are facing as we attempt to scale the impact markets. We love to talk about scale, but we don’t talk about the realities of tackling it. We all know that Bill is not alone, and that trillions more like him are sitting behind the operational, legal, and regulatory complexities of their current home.

Because of this, the impact investing industry is stuck. Yes, it is growing. Yes, there is increased awareness. But people and organizations are not moving money at the scale required to solve our very real, very urgent global problems. In fact, we are nowhere close.

Just a few alarming statistics:

In 2017, the Global Impact Investing Network (GIIN) survey found that there were $228.1 billion private impact assets under management (AUM), with a median AUM of $92 million. In contrast, in 2018, the global AUM of the top 450 asset managers was $78 trillion. The median manager had $32 billion under management. To be fair, that includes the public markets. If we look only at private equity and private debt AUM as a proxy for private market activity, Preqin reported more than $3.7 trillion invested, 16 times the total amount invested in impact in the same year.

The gap between interest and action is shockingly large. Our 2018 survey of investors found that 90% of them want more impact products but they, on average, had less than 5% of their household investment portfolio invested in cause-based or impact products — and that includes ESG funds.

So, needless to say, we have a long way to go.

At Calvert Impact Capital we are slightly obsessed with how to build the market infrastructure — the appropriate products and services — the plumbing — to get Bill and all his friends moving into markets that we see as credit worthy, but that traditional markets don’t (yet). Markets that need private investors to step in to build the bridge that allows these assets to fit the size and shape of the capital markets.

Our Community Investment Note — the most widely distributed private impact product in the market — has played this role for decades. But we can’t stop there. Not all problems are going to be solved with one product.

That is why we recently launched our syndication services; to create easier on-ramps for institutional and accredited investors to access high impact private credit deals, originated and structured by our team, to build affordable housing, increase access to capital for entrepreneurs of color, support the growth of the off-grid energy revolution in Africa, and accelerate the shift to a renewable economy.

And that’s why we’re currently working to build new products that meet the ever-evolving needs of the markets we love to serve that, most importantly, can get past GWM, grab the attention of Kate, and have a chance of finding Bill a better home.

Over two billion Bills have joined us so far, but we have a long way to go. We need individuals, advisors, and institutions to recognize the power of their dollars to build a better future. And we need them to enter this market with an open mind.

Interested investors often ask similar questions — does this fund pique my interests? Does it meet the needs in my community? Does it solve the problem I care about? These are all important questions to ask, but they focus on the desires of the supply of capital, not the needs of the market that is demanding it. The industry often applauds innovation over standardization; it places more value on customization than efficiency.

We are not making a dent and we need to start thinking differently.

Most importantly, we need to have an appreciation of the urgency required. We know that to move money at scale, we have to meet the markets where they are. This means accepting the warts of the current system and learning how to work within it.

Yes, we would all prefer to change the system — to drastically alter how capital is allocated in our economy to create more inclusive capital markets that work for all people, all the time. But that process is slow and honestly, we don’t have the time.

The problems we face are so big they can feel abstract. But anytime I need to make that urgency feel more tangible, I think of the world we are leaving my one-year old son. He will witness the drowning of large urban areas, the destruction of our ocean ecosystem, cities that run out of water, regions that run out of food, and the continued global backlash of a radically unequal society. If we don’t act, a lot of us will witness this too.

So, it is time to go off-brand. Let’s do the resoundingly unsexy thing. Let’s focus on building the plumbing and get more money moving.