Opportunity Zones: One Positive Takeaway for Impact Investors from the New Tax Act

by Connor Schoen

Among all of the recent debate and discussion of the Tax Cuts and Jobs Act of 2017, a key reform has greatly evaded the spotlight: “Opportunity Zones.” Opportunity Zones are areas that are traditionally left out from key investments and support. These inner cities and underdeveloped areas throughout the United States paradoxically need investment the most while receiving the least of it. According to the Initiative for a Competitive Inner City, a Boston-based economic development non-profit, 42% of working Americans are inner-city residents, and the majority of inner-city businesses see their locations as a competitive advantage.

Nonetheless, these pockets of American society receive some of the lowest levels of investments from VC/PEs and other institutions. In response, John Lettieri and Steve Glickman, co-founders of the DC-based Economic Innovation Group, were able to galvanize support for their proposed solution to this problem in the most recent tax act. According to Impact Alpha, another leading impact investing publication, the Governors of each state had to choose “no more than one-quarter of their low-income neighborhoods for investments that will let investors defer and reduce capital gains taxes.” This was done by the end of March, so the new initiative is now ready to go into full swing.

Will it have a tangible impact on America’s economically stagnant areas? Will it bring more support and leverage to minority-owned businesses and reduce economic inequalities nationwide? These are some extensive goals, and only time can tell us the real, substantive impact of these Opportunity Zones.

Automating Factory Labor: A Positive Social Impact?

by Evelyn Donatelli

Case Study: Bangladesh. The world’s second largest garment exporter, behind the Chinese mainland, is being impacted by the transition from human factory workers to automated robots and machines within the textile, clothing and footwear (TCF) sector, the sector within ASEAN states to be most affected by automation, according to a recent ILO report. Technology lagging after the Industrial Revolution automated sewing and material production includes stitching and final assembly (“cut and sew”), which until recently required large numbers of human workers. New jobs added in garment and textile sector has fallen new jobs added by the garment and textile trades has decreased to +60K a year, just 20% of the 300K new jobs added annually between 2003 and 2010, according to World Bank data. Textile production is already experiencing an outright decline in jobs.

In Bangladesh, workers in the garment industry earn > 82% of the nation's overall export income. The main export “product” is “cut and sew” labor, which is now being automated. Zahid Hussain, the World Bank’s lead Bangladesh economist refers to the nation’s capacity to pivot these 4M workers to a new industry as “a social time bomb.”

However, if companies can’t sustain themselves, where will fair wages come from? Companies must automate to reduce costs and maintain margin profit while offering competitive prices. Somewhat positively, the jobs that are being automated come with little quality of life for employees, such as physical injury endemic to the working environment. However, not having these jobs means not to have a source of income.

Perhaps the “automation apocalypse”, where humans are out of work due to the superiority in cost-effectiveness and accuracy of our own inventions, will create room for growth in Bangladesh. The historied “low labour cost” advantage held by Bangladesh is costing workers quality of life. Embracing automation in order to offer higher value-added products and services which require higher skills and wages would benefit both workers and the economy as a whole. The pivot will depend on the training factory workers receive and seek out following job losses to automation.

Rooted in Impact: Jessica Lee’s Take on the Value of Agricultural Investments

by Connor Schoen

“Pretty much from college onwards, I’ve been in the social impact space. I’ve now found my sweet spot: working alongside social entrepreneurs to make sure they have the resources they need to succeed.”

Jessica Lee works as the Manager of Individual Giving at Root Capital, a nonprofit impact investor that provides loans and training to  agricultural enterprises in Africa, Latin America, and Indonesia to help them grow, and transform their local communities. Specifically, she manages the major gifts strategy and individual giving for Root Capital, working to “foster long-term, high impact relationships” with donors.

In an interview with the Harvard College Impact investing Group, Jessica stressed how tremendously transformative and powerful agriculture is as a tool for social change: “Lending to agricultural businesses may not be the most lucrative, but it can bring about incredible positive change in regards to poverty, gender inequality, food insecurity, etc.” Essentially, by investing in agricultural enterprises, impact investing firms can create jobs in rural communities and raise the incomes of smallholder farmers.

While she acknowledges that “not everyone who is working in agriculture is going to stay in that industry” given climate change and economic realities, bringing technology/knowledge and investment to these businesses to improve their productivity represents an extremely valuable impact investment opportunity.

Jessica also stresses the value of blended finance as an approach to these types of investments: “it’s the idea of coupling the engine of returnable capital with the precious, limited resource of philanthropy to bridge that last mile and get us to the impact we want.” She describes the major capacity gap that agricultural businesses too often face, and she explains how Root Capital ultimately alleviates this issue through pairing credit access with capacity-building for these smal to medium-sized firms.

Overall, Root Capital is a leading example of the new, powerful wave of impact investors who are flipping traditional finance on its head. For her part, Jessica has “been interested in how to leverage all possible forms of capital towards social change,” and she now does this by aiding Root Capital’s mission. As they assist their clients in getting to 20-25% annual growth rates, Root Capital also significantly transforms the sustainability and standard of living of the communities they work with.

Come see Jessica speak at our Social Enterprise Panel on Thursday, March 29, 2018 from 5-6:30pm in Emerson 210. She’ll be speaking more about her work and answer audience questions at this event!

Tembo Education: Phil Michaels, Founder Spotlight

by Evelyn Donatelli

How did the idea to found an education-technology company for children come to you? Was this in mind before your dual MBA in Entrepreneurship and Master of Science: Marketing at Tampa’s Sykes College of Business?

I was a premedical student in undergraduate college, and subsequently the Yankee team physician’s assistant, before my entrepreneurial ambitions accelerated following working with a fitness start-up. From there, I realized I could have more impact as an entrepreneur than in the traditional medical field, and applied to business school to further pursue.

Why children’s education, and why 0-6 age range specifically?

Social impact initiatives which already existed in our first target demographic, Sub-Saharan Africa, specifically Nigeria, shelter, clothes and food were often provided, but education was not. Ages 0-6 are the most imperative for brain development. By providing education to children during the most pivotal time for their development, we give them the opportunity to succeed not only in education, but in life, by teaching them basic social and critical skills which can be applied and leveraged for the rest of their lives.

Does Tembo Education currently have a presence in the US? Where do you see Tembo going in the next few years?

Tembo has recently launched in the USA, allowing signups nationwide, and already have customers in Boston, Florida, DC, New York, and more.

For every child educated in America, it enables Tembo to educate children who are underserved; similar to TOMS shoes' "1-for-1" model.

Tembo aims to transform early childhood education for the world by making high-quality education more accessible and affordable for millions of children worldwide. Their vision is to become the #1 one-to-one learning platform in the world for 0-6 year old children.

Come see Phil speak at our Social Enterprise Panel on Thursday, March 29, 2018 from 5-6:30pm in Emerson 210. He’ll be speaking more about his work and answer audience questions at the event!

Spotlight: Amazon — Low-Income Sales & Healthcare

by Evelyn Donatelli

Amazon ($AMZN) began 2 initiatives in 2017-2018 which appear to have impact capacity to benefit consumers. First, the ongoing “retail war” for the low-income demographic has taken on a new life in the competition between Amazon and Walmart ($WMT). Second, Amazon’s joint venture with JP Morgan ($JPM) and Berkshire Hathaway ($BRK.A) to reduce healthcare costs for the companies’ employees (and possibly larger population by extension).

Walmart, the traditional dominant player in the low-income space, faces challenges from Amazon, which has began offering lower-priced Prime options for EBT (Electronic Benefits Transfer) or Medicaid card holders. Likewise, Walmart is taking on Amazon’s market share in the higher-income demographic, offering its own private-label clothing line at a higher price-point and initiating a partnership with Lord & Taylor. As companies compete to offer discounts to lower-income individuals, who wins? For now, both Amazon and the customer appear to be benefitting. Amazon’s low-cost Prime membership, $5.99/month (as opposed to regular price $12.99/month), is available to individuals with EBT cards, which are the debit cards funded by SNAP, also known as food stamps. Currently more than 42M Americans, or 12.5% of the population, receive SNAP.

This low-cost Prime membership is also available to customers on Medicaid, which is relevant as Amazon continues its foray into healthcare. Throughout 2017, Amazon applied for and received wholesale pharmacy licenses from at least 12 US states, including New Jersey, Michigan, Connecticut, Nevada, Arizona, New Hampshire, Oregon, Tennessee, Idaho, Louisiana, and Alabama. Amazon’s licenses specifically allow it to ship durable medical equipment from its Indiana offices and more broadly position the company to become an intermediary between pharmacies and health care providers, a position known as PBM (pharmacy benefits manager). This position is the role that the joint venture “independent company” from Amazon, Berkshire Hathaway, and JP Morgan, seeks to leverage in order to secure “reasonable medical costs” for their employees.

Though lower-income consumers are shifting to online shopping, they constitute a smaller base than their higher-income counterparts, which is the cause of Amazon’s competition with Walmart and traditional brick and mortar alternatives. Only one in five low-income Americans say they do “a lot” or a “fair amount” of shopping online, which is less than ⅓ as many as those making $100K or more annually, and this number is smaller than it was 2 years ago  Amazon’s 45% discount for EBT and Medicaid card holders stands to save lower-income individuals money on everyday household goods, clothing & shoes, as well as rendering other individual prescriptions from other providers unnecessary, such as video and music services. Though, these benefits may be mediated by the so-called “Prime Trap”, referring to the fact that Prime members spend more than “casual” Amazon users. It will be important to monitor the success of this $5.99/month initiative and, if possible, its effect on household debt of lower-income families.

Spotlight: Arctaris and Growth Debt Financing

By Connor Schoen

A conventional challenge for any start-up is not only gaining access to capital but also accomplishing this mission on terms that are favorable to their growth. While impact investing is commonly known for its efficacy in expanding access to capital, firms in this sector of finance have also turned to tackle the second problem. Namely, Arctaris, a 100-million-dollar impact investment fund manager headquartered in Boston has taken an active stance on providing growth capital on terms that are favorable to the companies they invest in.

On a call with HCIIG, Managing Partner of Arctaris, Jonathan Tower, emphasized the success of their “Growth Debt” strategy. This style of growth financing is “a blend between traditional bank debt and venture… [that] offers a flexible structure with variable payments that let companies grow without having to dilute ownership.” Essentially, the Growth Debt strategy allows shareholders to retain equity by utilizing royalties instead of the traditional financing methods employed by conventional venture capitalists and private equity firms.

According to Tower, this form of financing also alleviates the company’s pressure to sell while still closely aligning the interests of Arctaris and their investees. Unlike pure debt models, this blended system of royalties and debt ensures that both Arctaris and their investees strive towards the growth of the company. Moreover, another advantage of the royalty-based loan system of financing beyond equity retention for shareholders is that it involves “payments that hew to the company’s actual sales growth” instead of a fixed amount of debt to pay back.

Founded in 2009, Arctaris has been using this model over the past decade to start a variety of funds in Massachusetts, Michigan, and elsewhere. They are partnered with the U.S. Treasury Department along with a variety of state government agencies “to form fund programs with primary emphasis on economic development and jobs creation.” Some of their current investments include Planet Fitness, Berkshire Hathaway Home Services, AFCO Manufacturing, and events.com, and–according to Tower–they are currently working to expand their portfolio with some larger investments this year.

Public Relations More Important than Bottom Line?

by Evelyn Donatelli

2017 marked the deadliest year in US mass shootings, a fact with which the public is acutely aware. Social media has magnified the outraged voices of groups across the country through campaigns like #BoycottNRA and #DemandAPlan, which aim to put pressure on businesses and lawmakers to effect meaningful gun control. 

Impact investing has entered the conversation after the most recent shooting, February 14th in Parkland, CA, when companies both private (e.g. First National Bank of Omaha) and public (e.g. $DAL, $UAL, $SIR) began publicly disavowing and severing business ties with the National Rifle Association (NRA). Through these public disavowments, it became transparent that companies had been offering NRA members discounts in exchange for favorable tax treatment. 

The decision to end business relationships with the NRA has been credited, by many companies involved, to consumer complaints. The cost on paper of the severing of this relationship is, in Delta’s case, the loss of a $40M tax break. Clearly, corporate leadership feels that the impact of this investment in consumer opinion will outweigh that of a tax break which has grown too controversial to maintain.

The Language of Impact

by Connor Schoen

In trying to quantify impact, coauthors of “Unpacking the Impact in Impact Investing”, Paul Brest and Kelly Born (Stanford Social Innovation Review), divide their metrics into three separate categories: enterprise impact, investment impact, and non-monetary impact. First of all, with enterprise impact, Brest and Born discuss how to most effectively measure the investee’s social impact (“social” being used here and throughout this piece to incorporate all aspects of traditional ESG considerations). They highlight product impact (result of their actual good or service), operational impact (effects on employees and local community through operations), collective impact (aggregate impact through partnerships with other NGOs, the government, etc.), and sector impact (wider expanse of their effects on the sector as a whole) as four key considerations when evaluating the investee’s overall social impact. Brest and Born also lay out a simple, mathematical tool for assessing social value: social value = (social benefit/production cost). 

Regarding investment impact, the authors first lay out the basic types of investors in order to separate classifications of how they should consider impact in their investments. Primarily, investors can either be socially neutral or socially motivated, and they can be concessionary (willing to sacrifice financial gains) or non-concessionary (unwilling to sacrifice financial gains). Ultimately, the basic classification of investors affects the major considerations driving investment decision-making and, thus, what metrics are preferred in making these decisions. For non-concessionary, socially motivated investors, for example, their program-related investments should be focused on allowing below-market-price investments/resources, providing loan guarantees, allowing for more favorable conditions and flexibility, etc.

Finally, nonmonetary impact encompasses everything from improving social enterprises’ operational environment to bringing more capital to their sector/mission from socially neutral investors to securing and protecting the enterprise’s social mission. These nonmonetary factors are critical in considering how an investor should measure his/her impact.

Can activist investing be impact investing? A look at Apple.

by Evelyn Donatelli

Over the past few decades, activist investors (ex: Peltz, Icahn, Ackman) have occasionally become stereotyped as power-hungry bullies who leverage their investments (typically 0.5-5% of a public company) to force their agenda on company executives at the expense of the company’s autonomy. But could this be used for good?

Apple’s ($AAPL) recent confrontation with 2 activist investors, suggests so. An unlikely pair on first look, NY-based hedge-fund JANA Partners LLC, and the California State Teachers’ Retirement System (CalSTRS) pension fund together own a combined $2B position of AAPL shares. In an open letter, the two activists urge Apple to deal with the “growing health crisis” Apple is currently enabling, and that the company has a responsibility to help parents limit phone use through developing new software tools, and to actively investigate the impact of excessive phone usage on mental health.

Though Jana and Calstrs own a small 0.2% of AAPL’s $900B market capitalization, an activist using his/her position to enforce social impact initiatives is noteworthy, and speaks to the improved support impact investing is receiving, at least publically, from investors and banks.  However, JANA and CalSTRS’ virtuous approach to investing is offset by investors like Ross Gerber, chief executive of Gerber Kawasaki Wealth and Investment Management. Gerber says simply “We invest in things that are addictive…Addictive things are very profitable.” Gerber also owns shares of Starbucks, MGM Resorts International, and alcohol-maker Constellation Brands Inc.

What is impact?

by Connor Schoen

While the investing world at large has spent centuries refining their methods and defining their key approaches to analysis, impact investing specifically is still at its early stages of growth; thus, metrics for defining this term have remained elusive and hard to quantify.

“Unpacking the Impact in Impact Investing” provides a useful framework for considering what factors should guide the decisions of prosocial investors; namely, coauthors Paul Brest and Kelly Born of the Stanford Social Innovation Review explore the complexity of the term “impact” and how it translates into investment decisions. Ultimately, Brest and Born udefine impact on the basis of additionality—the idea that the value of your investment is predicated on its ability to add social benefit that wouldn’t be there otherwise.

In “What Are We Talking About When We Talk about Impact,” C. Wallman-Stokes, K. Hovde, C. McLaughlin, and K. Rosqueta bring in a new idea that complicates this additionality idea. The authors argue that “what we talk about when we talk about impact” depends on who is talking—and who is listening!” Thus, depending on whether you talk to foundations, nonprofits, individuals, or another group, you will get a different answer as to what exactly “adding social benefit” means.

Overall, however, both papers agree that impact is measurable and definable. Just like there are debates between what financial metrics indicate and which are most important, a continued discourse as to what is the core foundation of “impact” is a necessary step in the development of this field.

Firm Spotlight: BlackRock, Inc.

by Sofia-Marie Mascia

If there is one man on Wall Street who can demand socially responsible investment, it is Laurence D. Fink, CEO of BlackRock – the world’s largest asset management firm. In an annual letter to his CEO’s, Fink stated,“Society is demanding that companies, both public and private, serve a social purpose.” He boldly asserted that as a fiduciary, BlackRock does have a responsibility to drive long term growth that meets the demand of their client’s growth. His belief is that, “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

This statement comes at a time where faith in governments are low, and influence of stock exchanges are high. BlackRock has set the stage for influencers of Wall Street to account for “governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining.” BlackRock is not alone in its participation in this seismic shift: in January alone,Wall Street has also seen Berkshire Hathaway, JP Morgan and Amazon team up to address America’s healthcare epidemic independent health care company for their employees in the United States. Neither initiative is without economic clout – Fink promises asset holders that if a company does not display a sense of purpose or commitment to social responsibility,“it will ultimately lose the license to operate from key stakeholders.” Fifty years ago Milton Friedman posed the question – “What does it mean to say that ‘business’ has responsibilities? Only people can have responsibilities.” To him I say, welcome to 2018.

Impact Investing Gathers Renewed Strength in First Days of Fall

by Mariana Garza

It’s not every day that Impact Investing makes financial headlines. So when it does, you know that the impact, will be of considerable monetary value. Some argue that for it to continue this upward trend, it has to go mainstream.

Although it’s working its way through the millennial ranks, it has yet to become a household name. Though these new renewed efforts do seem to be working towards that goal.

Salesforce, an American cloud computing company, is leveraging its own financial services to invest in companies that use its software to enact innovation in the fields of workplace development, equality, sustainability, and the social sector. How are they doing this? By using their own corporate capital to launch a $50 million Impact Investing Fund. The company has been inching its way to this big step by first starting Pledge 1%, an advisory program that over a thousand companies have adopted to donate 1% of their resources to charity. Then, the company decided that driving social good should be synonymous with driving good returns, the principle on which impact investing rests. The company went carbon neutral, 33 years before schedule, and started Salesforce Ventures, which has backed over 200 enterprise companies including Dropbox. This new impact investment fund is Salesforce Ventures baby, and the genius of it is that as each company they invest in succeeds, Salesforce succeeds along with a targeted part of society or an industry. A company they’ve already invested in, Angaza Design, is a pay-as-you-go platform for renewable energy products like solar lanterns; they largely operate in Africa and South Asia for off-grid costumers by means of mobile micro-payments.

In other news, Bono-backed Rise Fund raised $2billion, one of the largest impact investing funds ever. Similar to Salesforce Ventures, it targets deals that are ESG oriented in a variety of industries such as education, agriculture, energy, and healthcare. Of course, as product of collaboration between TPG Growth, Elevar Equity, and The Bridgespan Group, profits are important, so it’ll be interesting to closely watch their investments (and Salesforce’s) in the year to come.

Recent Natural Disasters: An Impact Investing Wake-up Call

by Mariana Garza

It’s strange to think that something positive can come out of the devastating weather events and natural disasters that have occurred as of late, or that the events themselves are what pushed investors over the edge to move capital somewhere where, yes, profits can still be made, and where positive impact can make a big difference.

Yet, this is exactly what has happened.

Hurricane Harvey and Irma not only left behind environmental destruction, but also massive economic destruction, wiping out nearly $200 billion of economic value. Unfortunately, this highlighted the lack of investment in sustainable infrastructure in the United States. This infrastructure not only needs to be sustainable in terms of longevity, but also in terms of how environmentally friendly these structures will be: will they be worked into the natural environment or will they inhibit habitats, will they add or subtract to the current CO2 levels in the atmosphere, amongst many other questions and concerns.

In response, the Environmental Defense Fund released the “Investment Design Framework”, a framework that will help local and state governments mobilize private investment. This is the first-ever organized written system that outlines how the private sector will fill in critical funding gaps. The report draws methods from already existing financial practices such as how DC Water uses Environmental Impact Bonds and how the New York Green Bank redistributes risk between private investors and public agencies to accelerate clean energy. This is where impact investing steps in, and I, along with the rest of HCIIG, am excited to see where this framework will take the field this coming year.

Stay tuned for updates!