1. Making Impact Boring:
Harnessing the Power of Investment to Solve Global Problems
We have “a few short decades”i
to re-invent the global economy.
Two decades? Four decades? There’s no way to know. But in those few decades we
need to halt and roll back the impacts of greenhouse gasses, provide food, shelter, and
water for 10 billion people, and reverse habitat destruction and species loss, among
other things.
Global green and grey infrastructure investment will be an important part of this
economic shift. The Global Commission on the Economy and Climate, led by Lord
Nicholas Stern, estimates that some $90 Trillion will be invested in infrastructure over
the next 15 years, or an average of something like $6 trillion per yearii
. To put that in
perspective, the World Bank estimates that the sum of Gross Domestic Product was
about $73 to $74 trillion in 2015iii
. I’m not going to add much to that conversation, except
to note two numbers:
 Global Philanthropy: Approximately $500 - $600 Billion (Giving USA, CIP
estimatesiv
)
 Global Savings (available for investment): Approximately $16 - $18 Trillion
(World Bank, OECDv
)
This means that investment dollars have the potential
to be about 30 times more impactful than
philanthropy alone. As a society, we have to learn
how to harness this power of investment – the most
potent force for change available to us.
This is the power of socially responsible investing
(SRI) and impact investing. I am not going to get into
the nuances of the differences between the two,
except to say that impact investing is actively focused
on building solutions to social and environmental
problems whereas SRI is a much broader category of
investment that is “aware” of sustainability issues as opposed to be driven by them.
Impact investing is not well tracked, but is unlikely to be more than 1-2% of the overall
investment marketv i
.
Two observations: First, if we could focus the majority of the savings available for
investment on social and environmental problems, we could build solutions to those
problems up to 30 times faster. Second, for that to happen, these investments have to
compete with traditional financial instruments in terms of risk-adjusted returns.
In other words, we have to make impact investing boring and profitable. But how?
Philanthropy vs. Investment
Philanthropy vs. Investment
$500 to $600
Billion
Up to $18 Trillion

2. Before we get to that, let’s talk about the relationship between philanthropy and
investment. For decades, economists and others considered philanthropy to be
equivalent financially to an investment with 100% negative return. You give away your
money with no expectation of payback.
At the other end of the spectrum, you maximize your risk-adjusted returns without regard
to societal benefit. In this world, strip-mining coal is financially equivalent to installing
windmills, assuming they have similar risk and return profiles.
And for years, many of us considered this spectrum a roughly linear trade-off. In order
to achieve societal
benefit, you normally
would be willing (or
required) to give up
some level of financial
return.
Many of us now
believe, to the contrary, that this relationship, if it ever existed, has broken down. The
problems that impact investing seeks to fix in energy, water, agriculture, economic
empowerment, global health and elsewhere are now so pressing, and the costs of not
addressing them so abundantly and increasingly clear that many, many of these
businesses have clear, compelling and current revenue streams and profitable business
models.
Look no farther than this room, where there are dozens of organizations that can make
their case based on financial returns, cost avoidance, risk reduction, or all three. Look
no further than the American West where trillions of dollars will be spent solving water
problems in the next decade. Organizations and enterprises with solutions to these
problems will be rewarded.
A New Paradigm
In this new environment, it is now useful to regard Financial Return and Social and
Environmental Benefit as independent variables, which is convenient since that
enables us to deploy one of our favorite tools: The 2x2 matrix:

3. Of course, like all 2x2
matrices, the place to be
is in the upper right –
High Benefit / High
Return. Pretty obvious.
But where this construct
starts to become
valuable is when you
think about what kinds of
investments and
investors reside in each
quadrant and, more
important, how to move
investments up and to
the right as far as
possible.
Let’s take each in turn:
High Benefit / High Return: The easy one. These projects should be fundable through
mainstream investment vehicles in accordance with their risk profiles. Private investors,
return-seeking corporations, and bond investors can often
evaluate these projects as financial-only investments and
treat the societal benefits as a positive add-on. The
challenge is twofold: first, investors on the whole are averse
to projects that try to do two things at once – a straight up
financial objective simplifies decision-making. And second,
the financial return may often be driven by regulatory or
other mechanisms that are not purely market driven which
might attenuate over time. In either case, a specific kind of
investor is often required who has confidence that the
revenue model is durable and will allow the company pursue
it’s mission over the long term.
Everyone’s favorite example here is Tesla, where the elements of a (potentially) highly
valuable business were generally available and waiting to be assembled in new ways:
Consumer excitement and demand for zero emissions and advanced design, highly
capable battery and power-train technology, and even the network of
charging stations. But, in the event, it required the investment of a
visionary individual, not a traditional investor, to put the pieces together.
There is a reason that Tesla was created by Elon Musk and not a
traditional venture capital investor or an existing auto company. The
reliance on monetizing multiple bottom lines to deliver a return (in this
case the price premium and excess demand Tesla realizes as result of its
clean technology) is in many cases too challenging for traditional investors
to tackle.

4. High Benefit / Low Return: Historically the province of philanthropy, these projects will
continue to be funded through grants and government programs with extremely patient
capital or traditional philanthropic objectives. Projects in this zone can become attractive
impact investments, however, through various mechanisms that monetize and
internalize their significant benefits.
This internalization tends to happen in three ways:
1) Discoveryof a revenue model: The trend in
philanthropy today is to focus strongly on measuring the
results of charitable efforts and to be rigorous about
tracking and reporting on their value. A natural
corollary to that trend is for these organizations to
review their landscape for beneficiaries that may be
able and willing to pay for the services offered.
Frequently this may not be possible because
beneficiaries have no money or the benefits are too diffuse across a broad range
of beneficiaries. But in some cases, a direct line can be created from a project's
benefits to a source of payment. A good example is the social bonds created in
Utah to fund early childhood education. The state government was able to
measure the future impact on tax revenues, reduced crime, and other benefits
from high quality early education and has committed to pay bondholders out of
this future benefit for financing education today.
In conservation, we are beginning to see this kind of monetization through flood
insurance rebates to enterprises willing to invest the rebates in natural flood
control landscapes or paying landowners for clean water easements to avoid the
cost of future water treatment plants. When the choice may be between very
expensive water treatment facilities or flood control projects versus the
“ecosystem services” provided by conservation land, preserving and restoring
natural sources of required benefit can look like a very good investment.
2) Internalization of costs or benefits: The discovery of a revenue model is a
specific case of a more general effect, the internalization of benefits. Frequently
this may be the result of government action – a tax or regulation that exposes the
benefits of sustainable projects by highlighting the avoided costs of alternatives.
The best known example of internalization may be the
imposition of a carbon tax or a price on carbon emissions.
Charging emitters for their use of the atmosphere can make
alternative low carbon solutions more attractive financially.
Conservation offsets, land banking and other mechanisms can
be a powerful complement to carbon pricing and other
regulations aimed at internalizing costs.
A Boston based impact investment is taking advantage of the high costs of
managing rainwater runoff in many cities by enabling customers to avoid
wastewater charges by controlling runoff from their flat roofs.

5. 3) Pressure from stakeholders: The government is not the only entity that can
expose the costs and benefits of negative impacts. Customers, employees,
communities, and investors themselves can demand that projects take into
account and mitigate their negative impacts. While we tend to think of these as
relatively weak and hard to marshal forces, the impact on corporate reputation
and brand is becoming a powerful influence on investment decision-making.
Examples like Google’s commitment to not “be evil” for Patagonia’s strong
affiliation with the preservation of wild places, for all their challenges, good
examples. When combined with economic benefits, these effects can become
even more powerful.
Low Benefit / High Return: This is the realm of traditional
investing, where the primary, or perhaps only consideration is
whether the project can generate a financial return. And
calling them “low” social and environmental benefit is not
nearly strong enough – we are all too familiar with projects
such as mountaintop removal mining or development of lands
whose “ecosystem services” are not recognized or valued.
Such activity is highly costly in an environmental and social
sense and the focus in this zone is often to mitigate or
eliminate those negative impacts.
Here it is worth remembering that every investment has impact, positive or
negative, and that the big game, particularly in this zone – to internalize the costs
imposed so that they are paid by the project itself. In this way, a full and accurate
accounting of costs and benefits erodes the apparently high returns from such projects
and makes many of them financially less attractive than sustainable projects that
achieve the same goals.
The mechanisms tend to be the inverse of the zone above:
 Measurement and reporting of negative impacts, to create awareness of the risks
that these projects impose.
 Regulatory or market mechanisms that start to monetize the now hidden costs of
the project and impose them on the project itself
 Pressure from consumers, investors, employees, or the community
In conservation, efforts to measure and publicize the costs of deforestation, loss of
habitat, and other impacts can help marshal popular and governmental resources to the
cause. The availability of a pool of capital – impact investors like Peter Stein and
conservators like the International Land Conservation Network – that are willing to take
into account these costs and include them in their investment decisions helps catalyze
conservation efforts even in the absence of specific government action.

6. Low Benefit / Low Return: Not much to say here, but on the
face of it, it appears that projects like this should not be done.
That would be the end of the story, except for projects that
appear to be in this quadrant but actually generate benefits that
are so diffuse or so miss-understood or so far in the future that
they require extremely visionary individuals or groups to take
them on.
Many conservation efforts may fall into this category. At the time
of their founding, America’s national parks were certainly among
them. Roosevelt, Pinchot and others had no econometric studies
or environmental data demonstrating the value of preserving these
places, only the instinct that is was the right thing to do and would yield benefits far into
the future. How right they were and how thankful are we for their instinct.
Similarly, the benefits of today’s large scale conservation efforts, the “ecosystem
services” provided by conservation land such as bio-diversity, groundwater
replenishment, recreation, or flood control can be hard to measure, extremely diffuse, or
unrecognized. Modern communications make it possible to communicate with and
organize large populations of beneficiaries whose monetary benefits (and contributions)
may be small, but critical to taking action on projects in this quadrant.
Conclusion
. None of what I have presented here is ground-breaking or even necessarily
particularly surprising. But these are the dynamics that drive impact investing, and
understanding how they operate is critical to harnessing the power of investors and the
private sector. The principles are pretty simple:
 Exposure, measurement, and publication of external impacts to enable
consumers, employees, investors, and the community to understand and
agitate for more thoughtful investments
 Internalization of those external costs and benefits through regulation,
consumer action, and full consideration of natural alternatives to put more
sustainable investments on a level playing field with traditional projects
 Where possible, identification and monetization of untapped revenue
streams, including crowd funding of conservation efforts, to move
sustainable projects up and to the right in the investment universe
If we are to harness a growing share of the $20 trillion dollars available to save the
planet and preserve our home, we will have to learn to use every one of these levers to
make social and environmental benefits clear, measured, and valued in public policy and
investment decision-making.
We will have to make impact investing boring.

7. i Paul Gilding, The Great Disruption, 2011, among others. For a summary, see Thomas Friedman’s
oped, “The Earth is Full”, New York Times, June 7, 2011.
http://www.nytimes.com/2011/06/08/opinion/08friedman.html
ii From Jim
iii From Jim
iv Giving USA 2016: The Annual Report on Philanthropy for the Year 2015 puts US charitable
contributions at $373 Billion. CIP estimates a global number at $500-600B based on global giving
patterns.
v The World Bank and OECD measure global savings rate at 24.3% indicating $16.8 Billion
(http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS) available for investment or more is
purchasing power parity metrics are used.
vi Global Impact Investing Network, 2016 Impact Investing Survey, published by JP Morgan Chase,
https://thegiin.org/knowledge/publication/annualsurvey2016