Impact Investing: It’s Here and Now and It’s Big and Bold

Medium
By Nancy Pfund
June 8, 2016

Impact Invest­ing is now front and cen­ter for many peo­ple and insti­tu­tions, and is no longer a choice of either/​or. That is, a trade-​​off no longer exists between chang­ing the world and mak­ing com­pelling finan­cial returns. Look for Impact Invest­ing to con­tinue stak­ing out its turf on the invest­ment land­scape, with a proven track record of impact and eco­nomic benefits.

2004–2016 and Beyond: Impact Invest­ing, A Decade of Devel­op­ment and Growth — A 12 Year View of DBL and Impact Invest­ing and DBL

As the dia­gram above explains, before 2004, domes­tic impact invest­ing was a nascent indus­try largely com­prised of small VC funds sup­ported by com­mu­nity rein­vest­ment investors along with some foun­da­tion PRI investors. The term “impact invest­ing” didn’t even exist at this point. In 2004, we closed our first fund at $75M, sup­ported by many banks and foun­da­tions like Ford, MacArthur, Annie E. Casey and The F.B. Heron Foun­da­tion. Within four years we had our first sig­nif­i­cant clean­tech exit and had spun out of JP Mor­gan to cre­ate DBL Investors. Shortly after, the GIIN was founded and the world was start­ing to get a taste for the pos­i­tive role that invest­ment could play in address­ing social and envi­ron­men­tal issues.

The next few years were a whirl­wind of highs and lows for DBL and Impact Invest­ing alike. The eco­nomic cri­sis of 2008 took its toll on the indus­try, and many firms strug­gled to keep com­pa­nies afloat. Then, from 2010 to 2012, DBL expe­ri­enced the IPOs of Tesla, Pan­dora and Solar City at the same time that Impact Invest­ing was start­ing to gain trac­tion. After clos­ing our third fund in 2015 and look­ing back at the last decade, it would have been almost impos­si­ble to pre­dict how big and bold impact invest­ing was to become. The fact that our fund was over­sub­scribed at $400M — a very large fund — would never have been some­thing we would have envi­sioned even two to three years ago. Now, Impact Invest­ing is con­tin­u­ing to go main­stream. Large finan­cial firms like Gold­man Sachs, Black­Rock, and Bain Cap­i­tal have joined the field by launch­ing invest­ment prod­ucts incor­po­rat­ing ESG and impact factors.

Impact Invest­ing: Why You May Need A Thick Skin

Around the DBL con­fer­ence table, we are con­stantly tak­ing stock of the field and of our own efforts and ask­ing, how can we do bet­ter? How can we go faster? How can we get big­ger? As an Impact Investor, we ask these ques­tions because we are con­vinced of our col­lec­tive abil­ity to build com­pa­nies and change the world for the bet­ter at the same time. By work­ing with these mission-​​driven com­pa­nies we are able to show what is core to Impact Invest­ing: No Sac­ri­fice.

What does No Sac­ri­fice mean to DBL? It means this: Mar­ket rate, mission-​​related invest­ments are fun­da­men­tally finan­cial invest­ments meet­ing pru­dent investor stan­dards across all asset classes. And yet, they go far beyond this finan­cial met­ric with a plethora of social impacts. These social impacts range from cli­mate change to income inequal­ity to diver­sity and eco­nomic devel­op­ment. At DBL, we are mak­ing an effort to broaden our impact reach. For exam­ple, cur­rently there are over 1.3 bil­lion peo­ple on this planet who do not have access to elec­tric­ity. These peo­ple face sig­nif­i­cant bar­ri­ers to eco­nomic bet­ter­ment and health improve­ment. No Sac­ri­fice means ensur­ing that we launch invest­ment efforts so that all of these peo­ple not only have the elec­tric­ity to bet­ter their world, but that the world cre­ates more elec­tric­ity that does not con­tinue to harm. It means fac­ing the immense envi­ron­men­tal threats from cli­mate change with inno­v­a­tive, scal­able solu­tions that cre­ate qual­ity jobs and strengthen com­mu­ni­ties. And it means that while push­ing for this progress and inno­va­tion we go fur­ther. We also push for equal­ity of oppor­tu­nity, clos­ing gen­der gaps, minor­ity gaps, uncon­scious bias, con­scious bias, and the other social dys­func­tions that hold us back.

To many, these epic chal­lenges seem over­whelm­ing. Yet, for Impact Investors, includ­ing DBL, these social and envi­ron­men­tal threats show the mas­sive and crit­i­cal need for find­ing inno­v­a­tive solu­tions. They should only heighten our sense of action to moti­vate us to take on chal­lenges that skep­tics deem impos­si­ble. As a result, we at DBL are full steam ahead into new and unknown ter­ri­tory, becom­ing more vocal, spend­ing as much time as we can squeeze in on advo­cacy and edu­ca­tion. And in the process, some­times, we have no choice but to develop a thick skin.

Impact Invest­ing is wholly based on peo­ple. Peo­ple who have the belief that they can change the world, with the imag­i­na­tion to dream up inno­v­a­tive solu­tions, and the tenac­ity to work on the world’s most chal­leng­ing prob­lems. At DBL, we do so with pride, and we often find our­selves actu­al­iz­ing this com­mit­ment by work­ing hard on pol­icy. Our efforts with SolarCity on the rooftop solar story is a well-​​known pol­icy exam­ple cur­rently bub­bling in impact invest­ing cir­cles, but it is by no means the only one. Nutri­tion stan­dards, bans on sugar, trans­porta­tion taxes on imports to reflect car­bon impacts, increas­ing diver­sity tar­gets in Sil­i­con Val­ley and Sand Hill Road, devel­op­ing appro­pri­ate employee pro­tec­tions for the gige­con­omy: these are a sam­pling of what is in store for impact investors on the pol­icy front. An impact investor has to engage. You most assuredly will not win every pol­icy bat­tle, but you have to engage. That’s where the thick skin comes in handy. Change at this level just doesn’t hap­pen on its own. And investors have an impor­tant voice to add to these pol­icy narratives.

Inno­va­tion, Impact and Risk

Another dri­ver of our invest­ment phi­los­o­phy at DBL is to rec­og­nize the impor­tance of inno­va­tion cycles. Being based in Sil­i­con Val­ley, we hear the word inno­va­tion on an hourly basis. We have seen many inno­va­tion cycles over the past sev­eral decades, includ­ing in com­put­ers and tele­com. As his­tory repeats itself, we know that there are going to be skep­tics every step of the way, and that inno­va­tion cou­pled with impact may attract even more naysay­ers than tra­di­tional early stage invest­ing. Still, we have learned that the great­est ven­ture invest­ment oppor­tu­ni­ties lie at the onset of inno­va­tion cycles, and that cap­tur­ing social change cycles at the same time can be almost mag­i­cal. After almost 100 years of being rel­a­tively steady state indus­tries, the energy and auto­mo­tive sec­tors are enter­ing an era of trans­for­ma­tion and inno­va­tion. Changes in pop­u­lar sen­ti­ment and approaches are pro­pelling new gen­er­a­tions of star­tups that are built on the backs of the first gen­er­a­tion com­pa­nies and push­ing us even fur­ther into the future. There will be incum­bent ten­sions and even legal actions, but the path toward 21st cen­tury busi­nesses that address envi­ron­men­tal and social needs of the 21st cen­tury in favour of 20th cen­tury approaches is an inex­orable one. New star­tups are becom­ing stronger and build­ing prod­ucts bet­ter than we ever thought was imag­in­able. After fight­ing all of these bat­tles for the past decade, we have seen the incum­bents start to move from denial to fight­ing back to even­tu­ally forg­ing some kind of coex­is­tence. It’s a well-​​worn path that, as impact investors, we need to keep in perspective.

And now, back to tak­ing more risks. DBL invested in Tesla in 2006. Back then, that was an incred­i­bly risky deci­sion: By con­trast, invest­ing in an elec­tric vehi­cle in 2016 is risky in another way: Been there, Done that. So today, we are look­ing at new areas in trans­porta­tion that we call the trans­porta­tion tri­fecta: elec­tri­fi­ca­tion, auton­omy, and rideshar­ing. We’re also look­ing at the con­nec­tion between elec­tric vehi­cles and green­ing the grid. We are eval­u­at­ing many deals in these areas, and it helps to have the learn­ings from Tesla as well as SolarCity to help sort out these invest­ment opportunities.

Tesla Model S

We are also tak­ing our learn­ings from the U.S. solar mar­ket to address the off-​​grid solar mar­ket in Africa. One of our new invest­ments: Off-​​Grid Elec­tric (OGE) pro­vides small solar/​battery sys­tems and energy effi­cient appli­ances to homes in Tan­za­nia and Rwanda. The sys­tems take advan­tage of the high pen­e­tra­tion of mobile telecom­mu­ni­ca­tions tech­nolo­gies by allow­ing cus­tomers to pay for power with their cell phones. This is our first inter­na­tional invest­ment and rep­re­sents a big stretch for us. We had to con­sider polit­i­cal risk, cur­rency risk and eco­nomic devel­op­ment risk in a man­ner very dif­fer­ent from our U.S. invest­ment process. At the same time, we strongly believe in the busi­ness model of OGE and its poten­tial to com­bine extra­or­di­nary social impact and finan­cial returns.

Impact Invest­ing: Join­ing the Head and the Heart

At DBL we hold our­selves account­able. We push to cre­ate a body of work that sat­is­fies both the head and the heart. As Impact Investors, we are account­able not only for the deci­sions and invest­ments we make today, but also for their broader impact across gen­er­a­tions. It is a demand­ing path to choose, full of fail­ures and suc­cesses, set­backs and break­throughs. And yet, when all is said and done, we wouldn’t have it any other way.

*The author would like to thank Jake Young, Ana­lyst at DBL Part­ners, for his assis­tance work­ing on this paper.