What/How Series (6 of 6): This Is Personal
In 2008, a friend who I have known from when I arrived in the US in 1996 asked me: “Why are you building a firm, Next Street, to provide access to capital and advisory services for small businesses in underserved communities, particularly those of color? Why not build a money management firm – something you have had a lot of experience with?”
I responded that the time was not yet right to establish a firm focused on investing capital for both financial and non-financial returns as mainstream capital was not prepared to consider investing for both. Furthermore, I told him, building an outstanding money management firm, is really difficult.
I wrote about mission/impact investing at the time and challenged philanthropy to think differently about how they invest their endowments. While there has been some progress toward aligning endowment assets with mission and purpose, less than $600 billion has been invested for mission (i.e., to generate both financial and non-financial returns). This is a tiny percentage of total assets invested globally: currently in excess of $100 trillion. ESG (Environmental, Social, and Governance – “sustainable”) investment strategies are estimated to underlie $30 trillion of investment processes worldwide[1]. When the world’s largest money management firm declares that sustainability and climate integrated portfolios can provide better risk adjusted returns, people are missing the forest for the trees. We need change at an order of magnitude that meets the magnitude of the challenge. While the sustainability dialogue among, and with, asset owners is a positive development– ‘maximizing risk adjusted financial returns with ESG factors’ won’t meet the challenges of our time.
Inequity in our society, the Covid-19 pandemic and the mounting impacts of climate change are converging to define the crises of our time. These challenges will not be solved without capital from private investors. For this to happen, we will need to evolve how we invest capital; in particular, to reimagine how we think about returns. Some asset owners are asking about the way their capital is invested and whether it is possible to generate both financial and non-financial returns. These questions weren’t part of the conversation twelve years ago. Today, with the emergent risks to our way of life, they are growing more familiar.
Academics and social scientists have studied regenerative wealth systems, multi stakeholder economies and multi capital investment frameworks for more than 25 years. While this body of work has produced some important outcomes within a social development context, these theories have not been applied to an investment process. TILT Investments is applying these ideas to both forecast and measure whether and how an enterprise generates financial, environmental, human and civic returns. If we can develop and refine this practice, we could ‘unlock’ the billions of dollars of private capital that are needed to invest in solutions that regenerate the environmental, human and civic capitals that are in deficit in our society.
I often hear from investors that it is impossible to attain both financial and non-financial returns, and that there are too few investments that are of a size that allow them to deploy capital at scale (i.e., in amounts that make economic sense for them.) It is true that community development finance institutions have struggled to deploy large amounts of capital, with the exception of housing and facilities. Banks too have imprisoned community development finance institutions and used them as conduits to achieve their own CRA (Community Reinvestment Act) objectives.
There continues to be much talk amidst the mission-aligned investing ecosystem about how to address the lack of effective intermediation and enabling infrastructure. In recent years, we have seen some institutions and organizations re-align with the values and goals of society and business. Perhaps most salient, the Covid-19 crisis has catalyzed corporate and financial institutions to begin addressing - head on - the racial inequities and wealth divisions in the US. Management teams have begun to change their understanding of what this means for their businesses. Increasingly leaders realize that without a diminution in the wealth gap, civil unrest will continue to escalate. In turn, these leaders can see growing risks for the health of their enterprises: including both their financial stability and the well-being of their workforces. Asset owners too have an opportunity, even an obligation, to see these trends and to take appropriate action to align their capital with the risks and opportunities that present today. The scale of the investment opportunity reflects the scale of the challenges that we need to take on.
As we look ahead, we can see that the increased self-interest of the large corporates and institutions is beginning to influence how capital is deployed. Capitalizing the enterprises of tomorrow, not those of yesterday, has always been a profitable exercise. Forward thinking asset owners have a real chance to lead. Their leadership will be grounded in an understanding about communities’ needs, where investments are required to regenerate wealth in our society. New ways of thinking about how capital will be deployed - to include returns that are not just financial but also non-financial, are emerging. We believe this transition will accelerate in the same way that traditional investors have embraced ESG screens over the last five years. It is inherently more complicated to involve multiple capitals in a forward-looking investment process than simply carrying on with ESG conventions. The academic research shows that it is possible; the pressing challenges call us to test those possibilities.
TILT Investments is a mission aligned investment platform that has an investment philosophy and process that considers financial, environmental, human and civic returns. We are on a journey to build out decades of theoretical work into investment practice. We expect that this learning will be ‘messy,’ and we invite asset owners that want to attain financial and non-financial returns that align with their purpose to join us with at least part of their portfolios.
I caught up with my friend that I introduced at the start of this note, who had watched me found and build Next Street. I told him that I was excited to be launching an investment management firm, that TILT had been registered as an investment adviser with the Securities and Exchange Commission (SEC)[2], and that we had landed our first client. He asked me: “Why now?” My response was twofold and personal: “First, TILT brings together my forty years of financial services experience - the first 25 in traditional financial services and the last 15 with Next Street providing advice and access to capital to small businesses, particularly those owned by people of color in America’s underserved communities. Second, twelve years later – it’s time; if we do not alter the way we think about how capital is invested and how we think about returns we will fail to build an equitable society for all.”
I am not sure that he understood, and he probably thought: “there he goes again, at the front of the curve.”
It’s a new dawn
It’s a new day
It’s a new life for me
And I’m feeling good
Nina Simone
[1] Source: Global Sustainable Investment Review 2018. Global Sustainable Investment Alliance.
[2] Registration with the SEC does not constitute an endorsement by the Commission, nor does it imply a certain level of skill.