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The Impact Investment Revolution

An American and Philadelphia legacy

The term impact investing became fashionable ten years ago as a way to describe the intentional focus on the social outcomes of financial investments. While the term is new, the practices it covers are not. There is a history of social investment and grassroots institution building that is an important part of the nation’s DNA.

The Global Impact Investing Network (GINN) defines impact investing as “any investment into a fund, firm, or organization that seeks a social or environmental impact, as well as a financial return”.

That is a broad definition! You can argue that all economic investments have social impact, which they obviously do. The difference, the impact investor would say, is in the intention of the social goals and the application of intention to the investment decision.

During the past thirty years impact investing has grown – by some accounts – into a $60 billion a year global enterprise, characterized by an increased demand for socially oriented capital and an increasing number and diversity of impact investors.

Every major wealth management firm from Goldman Sachs to Morgan Stanley employs people expert in impact investments. Why? Because their clients – particularly family offices – want it!

The demand side for impact investing is fueled by an expanding number of social entrepreneurs, environmentally friendly businesses, and specialized financial intermediaries focused on integrating financial returns and social outcome. They are looking for capital that is suitable to their growth but may not meet the profit maximizing and liquidity standards of other investments.

Actually, if you take into account the broader landscape of socially responsible investing, which includes screened stock funds that avoid certain practices or favors others; the field may be counted in the trillions, not the billions of dollars. That number would include mutual funds that promote sustainable environmental practices including green infrastructure investments and companies with good ESG (environmental, social, and governance practices) ratings.

This is all, of course, a matter of definition: How active or passive is the investment decision-making and to what extent do social outcomes drive the decisions? But however you count impact assets under management, the integration of social and economic returns is becoming a large part of today’s Weltanschauung.

There are many reasons for this: the corporate social responsibility movement, climate change, concerns around social inequality, the popularity of microfinance in the developing world, and the generic interest in social enterprise as a way to solve problems.

Not to mention the dramatic transfer of intergenerational wealth going on today, which may turn out to be decisive. With more than $40 trillion dollars in the U.S. being transferred from one generation to the next during the first half of this century, the fuel for impact investing may only now be coming into its own.

If I have any beef with the new wave of impact investors it is their tendency to remain disconnected from the substantial history of social reform and finance that is part of our common heritage; it’s as if the idea of using capital toward social goals was invented at an Ivy League seminar or national philanthropy conference.

During the past thirty years impact investing has grown into a $60 billion a year global enterprise, characterized by an increased demand for socially oriented capital and an increasing number and diversity of impact investors.

The fact is, in every important economic transition in American history, expanding access to credit has been part of the social reform conversation, from  savings banks among 19th century workers and artisans to the Freedman’s bank during Reconstruction to the battle of rural sharecroppers to escape debt slavery. Moreover, urban reform movements have long sought to remove high priced money lenders from their communities.

It may come as a surprise to MBA students today (whose curricula lacks a certain sense of history) but many of the earliest banking and credit institutions did not think of themselves as profit maximizing institutions. Savings banks, building and loan associations, and credit unions embody a complex history of social motives, demographic and economic changes, and even philanthropic interests. And several of the earliest U.S. examples have Philly connections.

America’s first savings bank was the Philadelphia Savings Fund Society, in 1816, and its first building and loan association was Oxford Provident in Frankford in 1831. Both were formed with clear social goals: savings for poor and limited income citizens who had no access to elite banking institutions and no access to homeownership lending. They were Philadelphia institutions.

Moreover, they were self-help institutions with mutual ownership structures and social missions. They may have used a different language than impact investment but the early investors had similar motives. Read the minutes of PSFS board meetings in the nineteenth century and it is clear that equity is being raised without expectation of considerable returns or without assumptions of easy liquidity: founders were focused on building a permanent institution to meet savings and credit needs.

Non-elite credit institutions were built continuously throughout the nineteenth and much of the twentieth century by waves of new immigrants and by African American migration from the South.

In the 1920’s there were three-dozen African American banks in Philadelphia. At the end of the 19th century no city in American had more thrifts than Philly. And PSFS was the largest savings bank (by depositors) in the nation. The PSFS program of going into city schools and encouraging students to save, which began in the 1920’s, was still around in the late 1950’s and 60’s when I went to city public schools.

As in other cities in the northeast and Midwest, Philadelphia social reformers railed against high priced moneylenders and pawnshops and used a variety of charitable lending initiatives in an attempt to drive out bad money. We thankfully still have such reformers, who have done what they can to keep Pennsylvania relatively free of the worst excesses of payday lending.

In the midst of their campaign to reform loan sharking, The National Association of Remedial Loan Associations held its annual convention in Philadelphia at the old Adelphi Hotel in 1914. This was a movement that had one foot in building alternative credit institutions (including charitable pawnshops, whose origins go back to late medieval European cities) and one foot in advocating for changes in public policy.

If I have any beef with the new wave of impact investors it is their tendency to remain disconnected from the substantial history of social reform and finance that is part of our common heritage; it’s as if the idea of using capital toward social goals was invented at an Ivy League seminar or national philanthropy conference.

A variety of economic crises in the twentieth century as well as the need to make long term investments in public goods, created a vibrant public-private nexus of government sponsored enterprises, industrial development agencies, and housing finance institutions. They exist today and play a huge role in bond markets and asset securitization.

A history of civil rights legislation helped give rise to waves of urban and rural development organizations including nonprofit finance lenders, known as  community development financial institutions, like Reinvestment Fund in Philadelphia. In fact the Opportunity Finance Network, a national association of more than 200 community based financial institutions, is located in Philadelphia.

And today, a little more than a century after the first U.S. credit unions opened their door there are about 100 million credit union depositors in these cooperative credit systems. Employee associations in Philadelphia sponsor many of the largest of the local credit unions.

I recount this history to note that impact investing has emerged over time through different kinds of institutions, with investors and savers, wealthy and poor playing different roles. Most Americans would relate to the idea of impact investing not through the decisions of the investor class but through the institutions that helped build their communities and their social mobility over generations.

Today’s interest in impact investing is also a search for a more sustainable and just form of capitalism at a time when old orthodoxies are being rendered ineffective.

On the one hand, we have the collapse of orthodox socialism, with its full public ownership and control of the economy, due to its inability to provide sustained models of growth and innovation. Even America’s democratic socialist, Bernie Sanders, could only point to examples in northern Europe to emulate, where there are strong social welfare states but equally strong market economies, often less regulated than the United States.

At the same time we also have the collapse of the free market consensus during a period when crony capitalism seems ascendant, significant social problems appear immune from easy market solutions, and the nation is still recovering from the exploitative uses of consumer debt that characterized the twenty year run-up to the Great Recession.

Our current populist anger is equally trained on government—the political class—and big business as colluding enterprises that stack the deck against the poor and middle classes. Most people are wary of forms of capitalism that are exploitative just as they do not assume that answers lie in public control or a massive regulatory state.

Americans favor an entrepreneurial economy and civil society, cushioned by public sector goods and safeguards (healthcare, civil rights, retirement, education, infrastructure, defense, safety standards) that are reliable, fair, and efficient.

But neither political party has been able to articulate these ideas without resorting to the politics of grievance, both right and left. Or without being trapped in old ideologies and models.

If impact investing has a vibrant future it’s because it claims the grey area between private enterprise and public purpose, without appearing too captive to either a statist or market ideology. Moreover it is defined by practices focused on solutions that are measurable and tangible.

In a future column I will look at the local impact investing eco-system and ask questions about its possibilities as an important regional catalyst.

Photo header: Pixabay

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