{"id":5752,"date":"2019-09-16T15:43:01","date_gmt":"2019-09-16T19:43:01","guid":{"rendered":"https:\/\/www.bu.edu\/questrom-magazine\/?page_id=5752"},"modified":"2019-11-18T11:37:22","modified_gmt":"2019-11-18T16:37:22","slug":"investing-for-good","status":"publish","type":"page","link":"https:\/\/www.bu.edu\/questrom-magazine\/fall-2019\/investing-for-good\/","title":{"rendered":"Investing for Good"},"content":{"rendered":"

Dirty water. Pollution. Unaffordable healthcare. Governments and philanthropic organizations have traditionally provided the funding for projects targeting these and other global crises. But according to the United Nations, there\u2019s a huge shortfall between the $1.4 trillion in current funding and the $3.9 trillion needed annually to address these challenges by 2030. A growing portion of the business community believes that private investment can bridge that gap.<\/p>\n

\"Nalin Nalin Kulatilaka is helping address the challenges facing the social impact investing sector. Photo by Dan Watkins<\/span><\/div>\n

Nalin Kulatilaka<\/a>, the Wing Tat Lee Family Professor in Management and a professor of finance, is an expert on social impact investing, which can describe anything from a small crowdfunding campaign to specialized funds\u2014like Acumen and the Omidyar Network\u2014that invest in entrepreneurial enterprises where profits come second to doing good. Kulatilaka began thinking about the potential of social impact investing when he cowrote a 2012 paper, \u201cA New Approach to Funding Social Enterprises<\/a>,\u201d for Harvard Business Review<\/em>.It identified a glaring issue: entrepreneurs need capital to grow their businesses but can\u2019t promise the same financial returns as traditional investments, nor can their social impacts be measured easily. Without those guarantees, it\u2019s hard for entrepreneurs to attract investors. The Global Impact Investing Network estimates there was $502 billion in total social impact investing in 2018, well short of the UN\u2019s $2.5 trillion gap.<\/p>\n

Now a codirector of Questrom\u2019s Susilo Institute for Ethics in the Global Economy<\/a>, Kulatilaka is helping to address the challenges faced by this still-maturing investment sector. The institute has joined the Impact Management Projec<\/a>t, a global coalition attempting to standardize the way social impacts are measured, and hosted a business roundtable discussion about creating value for society\u2014not just shareholders. Susilo has also joined the Wharton School\u2019s annual MIINT competition<\/a> where MBA students develop a social impact business model and compete for a $50,000 investment in their idea.<\/p>\n

Kulatilaka discussed the origins and future of social impact investing with Questrom<\/em>.<\/p>\n

Questrom:<\/em> What qualifies as social impact investing?<\/span>
\nKulatilaka:<\/strong> There is a big umbrella called responsible investing, which looks at investing in stocks and bonds that are not doing harm or trying to do good. The money invested there is estimated in the tens of trillions of dollars. More narrowly, impact investing is mission-driven investments, not public companies, where the principal goal is not profit, per se, but impact. Impact investors try to focus on domains of inequality of access. So Root Capital, for example, is looking at helping poor farmers and facilitating fair trade agriculture. There are others that look at women\u2019s empowerment, climate and clean energy, poverty alleviation, financial inclusion, or reducing recidivism. They are trying to solve some problems of access to vital resources.<\/p>\n

If the goal isn\u2019t profit, what\u2019s the motivation for an investor?<\/span>
\nThey are in many ways seeking a mission that they once pursued through philanthropic giving. Now, they\u2019re realizing that entrepreneurs who address these missions can be more efficient: They can scale things up and pursue their mission in the longer run. There\u2019s an implicit understanding that investors are willing to take on unseasoned risks or a concession in financial returns in exchange for the accomplishments of the social mission.<\/p>\n

Who\u2019s vetting these investments?<\/span>
\nIf you think about the supply and demand for these funds, the supply of capital comes from individual and institutional investors. And then the demand for the capital comes from social entrepreneurs who are trying to start and scale up businesses. Impact funds are the intermediaries that direct the capital\u2014and they do the due diligence on the entrepreneurs, the same way as venture capitalists would, except now they\u2019re looking at a double bottom line, with social and financial lines.<\/p>\n

\u201cMany trillions of dollars are going to be managed by millennials, and their objectives are thought to be quite different from their parents\u2019 generation.\u201d\u2013Nalin Kulatilaka, Wing Tat Lee Family Professor in Management<\/span><\/p><\/blockquote>\n

Could the sector continue to grow?<\/span>
\nThere are a number of forces that make me think there is a real potential for this to take off. One is an increasing awareness among the investor communities. Many trillions of dollars are going to be managed by millennials, and their objectives are thought to be quite different from their parents\u2019 generation. They\u2019re much more concerned about social and environmental issues and they don\u2019t believe that you can actually separate your money making from your philanthropy. You see this in our classrooms: students are interested in working for organizations that actually make a difference. So both from where they direct their capital, as well as where they direct their labor, they\u2019re looking for this sector.<\/p>\n

How can someone get involved in social impact investing?<\/span>
\nOpening an IRA or investing in a mutual fund is investing in publicly traded companies. Their actions are often opaque to you and their social mission, if there is one, is secondary. The more comparable thing is the money that you would give to charities and philanthropy. Social impact investing will put your cause-driven, mission-driven allocation toward a longer-term, scalable model that uses entrepreneurship and business acumen to make it work. The problem is that these investment vehicles are not very well established and they\u2019re still not available to the small investor. One accessible impact investment vehicle that is getting a lot of traction is crowdfunding. There are a number of crowdfunding tools that have been used to impact specific missions.<\/p>\n

What work is the Susilo Institute doing that relates to social impact investing?<\/span>
\nThe Susilo Institute deals with ethics very broadly\u2014not just individuals following their moral compass, but individuals and organizations acting in a responsible fashion. So social impact is very much within our scope. One of our big research questions is how you measure impact. If you are telling somebody to maximize profits or stock value, something that is measurable, they have targets. But if you tell people to maximize impact, and impact is not measured well, then the mission tends to drift toward something that can be measured easily. That is a problem that all of these organizations are having as they scale up.<\/p>\n

Another project is looking at how to create incentives and corporate governance structures that would be suited for impact investing. For example, when you invest in a company, you get stocks or bonds and earn dividends or interest. But social entrepreneur enterprises typically don\u2019t have an opportunity to sell stocks or bonds. Instead you might have profit sharing plans or count the social impact toward investors\u2019 goals.<\/p>\n

What do you see as the sector\u2019s future?<\/span>
\nMy wish is to see this become part of mainstream investing, which means investors investing not just on the financial side of their brain but also the life side of the brain. You can think of it as your life portfolio and your financial portfolio become better aligned. We care about society, we care about community, environment, all those things, but when we go to invest, we pretend as if we don\u2019t. Most of our wealth is invested by assuming this separation\u2014and institutions are structured like that. When you look at the large financial service providers, they\u2019re talking about how they can beat the market or give you a good financial return, whereas most of us, in our day-to-day lives, care about lots of other things. So how do we better align these things? And you see early signs of that happening because just about every fund family now has an impact fund. The danger, of course, is that this could become a fad, if it doesn\u2019t produce an impact.<\/p>\n

This interview has been edited and condensed for clarity.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Dirty water. Pollution. Unaffordable healthcare. Governments and philanthropic organizations have traditionally provided the funding for projects targeting these and other global crises. But according to the United Nations, there\u2019s a huge shortfall between the $1.4 trillion in current funding and the $3.9 trillion needed annually to address these challenges by 2030. 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