This post is part of a series of conversations with leaders and innovators who are working to reinvent the global economy and energy system.
Jed Emerson is one of world’s leading authorities on strategic philanthropy and impact investing. The originator of the term “blended value,” he is currently the Chief Impact Strategist for ImpactAssets, senior advisor to two family offices and a leading foundation, as well as a Senior Fellow with the Center for Social Investment in Heidelberg, Germany. In the past, Emerson has been a Managing Director for Integrated Performance for Uhuru Capital Management, a Senior Fellow with Generation Investment Management Foundation, and a Project Manager for the Edna McConnell Clark Foundation. He has also held faculty appointments at the business schools of Harvard, Stanford, and Oxford, and co-authored or co-edited several books, including, most recently, Impact Investing: Transforming How We Make Money While Making a Difference.
Recently I had the change to talk with Emerson about blended value and what he sees as an emerging impact investment ecosystem.
You’ve dedicated your life to the impact investment space and to blended value businesses. What do those terms mean to you and why do you see them as so important?
The concept of blended value came out of a personal journey of trying to make sense of various conversations I found myself involved in during the 1990s. I was founding director of REDF, which works with social enterprise organizations supporting employment opportunities for formerly homeless people. And as I published work on SROI and capital innovation, I had begun having conservations with people in social investing, in CSR, in social enterprise. All of these folks thought they were having very unique conversations about different things. But there was a common element and that came down to how we think about the nature of value; they were all thinking about how they could create not just financial, but social and environmental value, through investing and organizational development. I realized all these conversations made sense to me since I’d become agnostic about form (nonprofit vs for-profit or philanthropy versus investing) and had come to think of it all as aspects of value creation. That’s how I came to focus on what I call blended value. That was the fundamental underpinning for a lot of these discussions.
Around that same time, I was also talking to a lot of entrepreneurs who were starting organizations, be they for-profit, non-profit, or some kind of hybrid. Time and again the trouble they faced was not one of strategy, but of capital. There was a sense that the way capital was moving in to support blended value enterprises was really dysfunctional. I was also coming across more and more asset owners who were struggling with the difficulties of putting capital to work supporting social entrepreneurs.
So I began focusing my work on what you might call the capital question. That is, how do we make the practice of impact investing functional both for entrepreneurs and investors?
Beautiful. In ten words or less, what is impact investing?
Impact investing is the practice of structuring all of your capital to realize the full potential value you can create on social, environmental, and economic levels.
You wrote a book with Antony Bugg-Levine on impact investing. In it, you open with a memorable metaphor that describes the impact investment field as a dark wood where all sorts of interesting creatures are living. Why did you choose that metaphor?
The metaphor was coined by Antony and came out of our mutual sense that we’re moving into areas where we have not really seen how to move forward in the past. We are seeing different paths and different kind of impact investing animals, if you will, kind of scurrying around ahead of us. Now we’re getting to the stage where we can see the whole ecosystem, where we can finally see the forest for the trees. Impact investing can be edgy stuff, but there’s a lot of richness and diversity out there. What we’re trying to show people is how, over time, we will be able to bring all this together to create a rich ecosystem of impact investing strategies and actors that will benefit all of us.
What does the ecosystem most need to grow that diversity and resilience and scale?
It’s interesting you ask because I’m currently working on an issue brief with a colleague on where we are and where we as a field need to go. One fundamental challenge relates to how we connect the right capital to the right entrepreneurial opportunities. A lot of the activities that are going on, the meetings and convenings, are circling around this challenge: how can I as an asset owner find the right types of enterprises that fit the profile for the type of investing I am interested in and able to do.
Are you saying we need efficient impact investment marketplaces? Is that what you’re talking about?
At the broadest level, yes. I’m not saying all of this boils down to the need for various social stock exchanges or angel networks. But yes, broadly speaking we need more and better enabling structures that will allow various types of impact investors, seeking a variety of different types of returns, to be able to identify and connect with, and ultimately invest in, entrepreneurial endeavors.
What did you make of the garden brain piece in the NY Times? It strikes me as a similar metaphor for thinking about the broader economy, in the sense of ceasing to think about the economy as a machine, and starting to think about it as a garden, where there’s a proper role for pruning, as well as watering and fertilizing.
One thing I thought about while reading that piece is that there’s a similarity between the worlds of agriculture and impact investing. If we’re going to truly meet the needs of the modern world, the farming practices of industrialized farming will have to evolve and we’ll also have to enhance and expand local practices. It’s not one or another. In the same way that those are the challenges on the table for agriculture, those are the same challenges on the table for impact investing. We need to build on the advances that brought about modern SRI. We also need to be able to create and refine local, direct impact investing and angel/venture networks. We need it all.
Another thought is that, even as we’re committed to the garden metaphor, we also need to be aware that there are various mechanical things that can be applied in the maintenance and growth of our garden. We’re not talking about sitting in the dirt with our bare hands. We’re talking about a very thoughtful and refined strategy, and we’re talking about the right tools and implements to grow our impact garden in the right and thoughtful way.
I think that’s where these various metaphors come together in a very powerful way. You can see, visually, how this aspiration of a shared ecosystem comes together with the interest and focus of an individual gardener. The key is connecting the right capital with the right investment opportunities.
I’m thinking about Mosaic and the different solar businesses that our business is designed to support. We’re looking at opportunities with some of the biggest developers that are growing very fast as well as local community folks that haven’t even set up their projects yet. It’s incredibly diverse.
The thing that I find intriguing about what Mosaic is doing is that on the one hand you have your toes in the grassroots–and on the other hand you’ve got your head in the canopy of the forest. And in between you’re fully aware of the breadth and strength of the potential of the plants or organisms in that broader ecosystem. You and the other folks who are playing with that broad vision, grounded in practice and connectivity, are really key parts of solving for this challenge, of finding the right fit and framing of capital for entrepreneurship.
How can we measure impacts that aren’t financial? Which impacts do people most care about when they’re investing, other than financial returns?
I’ve been involved in this metrics conversation for over twenty-five years, going back to my time as a social worker directing a nonprofit serving street kids. And, frankly, I’m really frustrated by the lack of forward thinking with regard to this topic. My feeling is people are getting overly obsessed with letting the perfect be the enemy of the good. The issue for me is not “Gosh, is it possible to integrate off balance sheet elements into an economic analysis or is it possible to assess the economic value of extra financial returns?”—but rather, how we do think about the nature of performance? What is the total performance we’re looking to be able to generate here? And within that broad framework, what are the variety of different types of metrics we want to bring forward to be able to understand this total performance which, in turn, does consist of financial, social and environmental returns?
If we focus more on that broad vision, and how we can bring all these tools to play in support of that it’s a more effective place to focus than on the lower order questions that seem to get people tied up in knots.
You answered half of my question. The other half is which impacts do people most care about? If we want impact investment to go into the mainstream, we need to tell people about the impacts they care about most. What do people most want to see their investments doing?
Well, here’s the trick. In my humble opinion, what people think they want is not necessarily what they may ultimately need. In the same way that Steve Jobs used to say something along the lines of “I will tell the customer what they want,” I don’t think a lot of the actors in this space really fully understand where they’re headed and where they could go. If you start where they are, you’re never going to help them appreciate the fuller potential and broader horizons or possibilities of this discussion and since they are so focused on what is versus what can be, they simply may not see the future potential of what “metrics” can bring for each of us. I think there’s a need to, on the one hand, create metrics that respond to the stated need and interests of various stakeholders and investors, while at the same time challenging them to embrace a broader perspective on what the full potential is and what the full spectrum of value assessment could be.
How do you invest?
My wife and I are personally fully invested in sustainable, responsible, and impact investment vehicles. We also have our checking account at a community bank in Colorado. We’re trying to practice what we preach fully in terms of how we manage our own assets. The work I’m doing with two family offices and a foundation are exploring more at the institutional level the complexities of doing that as well and over coming years I believe all three will be outstanding leaders in this work. So that’s basically “how I invest.”
Some of my thinking comes down to some very commonsense ideas, in terms of the test of whether an investment, really, in the light of day, can be felt to create value and impact. The reality is that there are a host of ways we can create value and impact. So I don’t think there’s a single best practice approach to impact investing. I think there are many approaches that will work to varying degrees of success for varying types of impact investors. Quite frankly, part of what keeps me in this conversation is the fascinating diversity of interests and strategies at play and figuring out what works best for different asset owners and stakeholders.