Impact Investing: What is it? Who does it? Why?

For many majority-owned institutions, the concepts of "monetary gain" and "social good" have long been regarded as mutually exclusive. We see this most directly in the recent attempt by the Labor Department to shut down Environmental, Social and Governance (ESG) investing: “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” said Secretary of Labor Eugene Scalia. But this ignores the facts: investing has always been used to further social goals.

Claims that it is difficult to determine the worth of "ESG" or "Social Investments" have not prevented majority-owned institutions from using these factors while making decidedly "anti-social" investments. For example, on July 24, 2020, major "investment" bank Goldman Sachs was fined $3.9 billion by the country of Malaysia to settle criminal charges that the bank conducted "a massive scheme to launder billions from one of the country’s investment funds."

What is Impact investing?

"Impact investing" (also cited as social, environmental, social and governance (ESG) investing, or corporate social responsibility (CSR) investing) describes a style of investing combining a desire to maximize financial return with an attempt to maximize social good (social return).

As one report noted, "Impact investing has experienced increased popularity in recent years: A recent Google report found that search volume for impact investing has overtaken that of angel investing in the past decade. Silicon Valley startups and established corporations alike are seeing a surge of impact-driven initiatives, and throwing financial weight behind such projects. There’s also evidence that suggests impact investments frequently outperform those with strictly financial motivations."

In 2006, our statistical and investment analysis found that our thesis about the higher alpha for a portfolio comprised of companies that are top performers within the sector diversity/inclusion were also top performers with respect to investment return.

Who is involved? 

Major institutional investors include:

The United Nations. Via a set of  "Sustainable Development Goals," the UN is seeking to refocus investment attention to non-financial factors. Impact investing looks to factors that aren’t explicitly part of the conventional schools of economic thought. We now know that there are social impacts that cut across all companies, all industries, and that impact a broader community, and you have to account for that within your financial models.

Another major institution in this sector is the Interfaith Center on Corporate Responsibility (ICCR), which "pioneered the use of shareholder advocacy to press companies on environmental, social, and governance issues." The group represents a "coalition of over 300 global institutional investors..with  more than $500 billion in managed assets. Leveraging their equity ownership in some of the world’s largest and most powerful companies, ICCR members regularly engage management to identify and mitigate social and environmental risks resulting from corporate operations and policies."

Impact Investing Tactics: Social and impact investors use four basic tactics to maximize financial return and attempt to maximize social return. These are outlined below.

SCREENING excludes certain securities from investment consideration based on social and/or environmental criteria.

DIVESTING is the act of removing stocks from a portfolio based on mainly ethical, non- financial reasons.

SHAREHOLDER ACTIVISM. Shareholder Activism efforts attempt to positively influence corporate behavior.

POSITIVE IMPACT INVESTING involves making investments in activities and companies believed to have a high and positive social impact.

How to get involved with Impact Investing.

We suggest you visit the following websites:

ICCR: https://www.iccr.org/about-iccr

UN Principles for Responsible Investment: https://www.unpri.org/pri/what-are-the-principles-for-responsible-investment

US Sustainable Development Goals: https://www.un.org/sustainabledevelopment/sustainable-development-goals/: An attempt to address global challenges, including poverty, inequality, climate change, environmental degradation, peace and justice.

Want to learn more about impact investing? Check out our online resources to learn more about putting your money to work in more ways than one.

Impact Investing: https://www.creativeinvest.com/impactinvesting.html
Social Return Anlysis: https://www.creativeinvest.com/socialreturnanalysis.html
Social Return Strategy: https://www.creativeinvest.com/socialreturnstrategy.html
Social Return Tools: https://www.creativeinvest.com/socialreturntools.html

Citi tries new tack to push its social agenda: Venture investing. American Banker Newspaper. By John Reosti February 10, 2020, 4:09 p.m. EST

Citigroup operates a big foundation that focuses on philanthropic priorities such as workforce development, financial inclusion and sustainability.

Now, the banking giant is building on these commitments by launching a venture capital fund that will invest in private-sector firms that are developing solutions to improve worker training, increase consumers' access to the financial system, improve access to transportation, health care and affordable housing, and address issues related to sustainable energy and water use.

Citi is calling the impact fund the largest ever involving a bank using its own capital. Investments could be as large as $10 million in more established companies, said Ed Skyler, Citi's vice president for global public affairs.

Citi is also setting a portion aside for earlier-stage seed investments. Seed funding will be allocated exclusively to investments in businesses led or owned by women and minorities. The bank plans to manage the fund largely in-house.

William Michael Cunningham, an authority on impact investing and CEO at Creative Investment Research in Washington, D.C., called the prospect of the fund putting capital in the hands of African-American entrepreneurs “exciting," but questioned why Citi is not soliciting outside advice to help find investment targets.

Citi and other big banks “have not been productive in making investments in black companies,” Cunningham said in a recent interview. “Ideally, they’d adopt an open-source approach” and accept input from a variety of sources. “There’s a boatload of black companies that need capital.”

Still, Cunningham is encouraged Citi is offering equity capital, rather than debt that would “hang over the heads” of many minority entrepreneurs.

News of Citi’s impact fund comes as the concept of investing with an eye toward driving social as well as financial returns is gaining increasing currency among investors of all stripes. A June 2019 survey by the Global Impact Investing Network estimated the size of the global impact investing market at $500 billion.

“I don’t think it’s quite mainstream yet, but it’s becoming more mainstream,” Eric Hsueh, director of manager due diligence at Cornerstone Capital Group in New York, said in an interview.

“As with anything the devil is in the details [but] I think it’s certainly a good first step,” Hsueh said of the Impact Fund. “It’s good to see large financial institutions like Citi dipping their toes in this arena.”

While Citi itself is positioning the fund as an extension of its socially conscious philanthropic and lending activities, Robert Johnson, a professor of finance at Creighton University in Omaha, Neb., said it could also help to burnish banks' image.

“Financial firms want to send the message that they embrace the narrative of broader stakeholder considerations, beyond shareholder wealth maximization,” Johnson said.

Johnson, however, expressed concern that the growing popularity of impact investing could lead to a bubble. “Everyone, it seems, has a form of [impact investing] FOMO — fear of missing out,” he said. “Firms really don’t know how to properly position themselves, but that isn’t stopping them.”

Skyler, though, said that the fund fits squarely within Citi's stated mission of promoting "growth and economic progress." He spoke to American Banker recently about the fund and its prospects or helping to solve pressing social problems while generating returns for the bank and its investors. The interview has been edited for length and clarity.

American Banker: Why did Citi choose to create the Impact Fund? What is the bank aiming for?

ED SKYLER: We launched the Citi Impact Fund as another way to make capital available to those who are trying to solve some of the problems our communities are facing.

When you look at some of the tools we’ve used, we’ve used a couple of them. Through the Citi Foundation, our global “Pathway to Progress” initiatives aims to help close the job skills mismatch by helping young people get the skills they need to compete in today’s economy. We have used the foundation to work with cities to fund innovative projects which they wouldn’t be able to spend taxpayer dollars on.

We’ve pursued financial inclusion opportunities in microfinance working with nonprofits like Grameen, and the Ford Foundation, and government organizations like [U.S. International Development Finance Corp.] in lending to entrepreneurs in emerging markets.

To me, what the fund does is complement our existing activities where we’re trying to play a positive role. … This is an opportunity to try to address the same types of challenges through equity investing.

In launching the fund, Citi is the first bank to be using its own balance sheet. We’re not taking investor money to make these types of equity investments in double bottom line companies.

If you look a little more broadly at some of the business we do, it’s all very consistent, as well. For example, Citi has been the leading affordable housing lender in the United States for the last nine years. If you look at sustainability, we’ve eclipsed our $100 billion environmental finance goal. Instead of reaching it in 10 years, we did it in seven.

What makes this project so important that Citi would want to make an investment of this magnitude? This is a lot of money.

It’s absolutely a lot of money.

While we donate roughly the same amount of $150 million a year to different nonprofits globally, this is an opportunity to help solve problems and generate a return for our shareholders. For us it fits squarely in the bull's-eye of our mission to promote growth and economic progress.

If you look at where capital is being made available at this level, for venture investing, we know it hasn’t been distributed evenly. The gender and ethnic gap is very real. Our intention is to not only help women- and minority-owned startups scale and thrive, but to also shine a light on the investment opportunities among this pool of often-overlooked, high-potential entrepreneurs.

How will it work? How long will it take to deploy the capital?

We’re not going to throw money out the door just to get it allocated. We’ve spent the past year doing two things. First was gaining internal support and setting up the internal infrastructure to manage this. We have been working with the investment professionals at Citi Ventures and also in our municipal securities division.

The second is has been developing a pipeline of companies we could invest in, and we already have dozens of companies that we’re looking at.

"We’re really not trying to win any business, but in five or 10 years if one of these companies goes public and we’re on the IPO, that’s great," says Ed Skyler, Citi's head of global public affairs.

Was the seed component always part of the project or was it added as things were fleshed out?

It came as things were fleshed out. … We always knew there would be some seed funding as well as some later-stage funding. We decided toward the end we wanted to make the seed funding exclusive to minority- and women-owned or -led businesses.

Can you talk a little more about the response? Generally, what have you been hearing since you disclosed the full extent of your plans?

There’s been great internal feedback. We’ve also received great feedback from clients, including in the private bank, who’ve wanted to learn more about it and see if there’s an opportunity for them to get involved.

People are even asking if we would take outside money for the fund — which we won’t. It’s a clear signal of the appetite there is from investors for this type of social impact investing.

More broadly in the marketplace, I think our stakeholders see this as a good use of our financial resources. I think that reflects an environment where people see the role of business changing. The concept of shareholder primacy has been challenged. There are people who are looking at their portfolios and making allocations for social impact — perhaps not all, but some amount.

I’m wondering also as you unroll this $150 million program about the types of synergies you might have for traditional banking business. Was that something you thought about, or is it a byproduct that might come from this?

It’s hopefully a byproduct, but it’s not the driving force.

We’re really not trying to win any business, but in five or 10 years if one of these companies goes public and we’re on the IPO, that’s great.

Do you have any geographic regions you’re focusing on, or will you consider investing anywhere in the United States?

It’s the latter.

You mentioned that you spent about a year developing internal support, getting commitments to access the resources you have within the company; that they would be onboard and help with this. Obviously, it seems you were successful with that. I guess that’s another indicator that this is really a Citi project, not just the money but expertise as well. It’s all coming from the bank.

We met with the treasurer, Michael Verdeschi, early on in the process to see if he was comfortable with the concept since he owns the balance sheet.

One of the first calls I made was to our chief innovation officer and head of Citi Ventures, Vanessa Colella, about working with her team. Our risk team is obviously involved, and we reached out to global spread products and municipal securities as well, because they have a lot of experience doing this.

We got to a point where we pitched our CFO, Mark Mason. He saw what we were trying to do and made it better. We originally proposed $100 million and Mark said he was willing to do $150 million — if we put an emphasis on women and minority entrepreneurs. We were embarrassed we hadn’t thought of that ourselves.

CITI LAUNCHES $150 MILLION FUND TO SUPPORT MINORITY BUSINESSES, INCLUDING BLACK FIRMS

Black businesses with socially-driven concepts can now possibly attain some new capital from Citi. See: https://www.blackenterprise.com/citi-launches-150-million-fund-to-support-minority-businesses-including-black-firms/

Citi's Impact Fund. Comments by Nathan Pratt, Impact Investing Intern, University of Maryland.

With the record levels of profits banks have made in 2019, Citigroup is responding by allocating a portion of this money for investments in companies with positive social impact. Citi announced they are starting a $150 million Citi Impact Fund, which will also help fund minority and women owned businesses.

Businesses of this nature represent great potential economic growth for a number of reasons. First, minority and women owned businesses are underrepresented in overall business activity due to structural flaws in the banking system. I believe there is great demand for them.

Given the reality that lack of access to credit is one of the biggest hurdles these entrepreneurs face, the Citi Impact Fund could help address this issue. Furthermore, investing in businesses that promote positive social impacts would likely be beneficial to the average citizen, considering these firms attempt to help provide better infrastructure, access to information, and sustainability.

In conclusion, the Citi Impact fund is a step in the right direction, from an economic perspective. We can only hope that more banks decide to follow in CitiGroup’s footsteps.

Review of "Income Inequality, Record Bank Profits and the Citigroup Impact Investing Fund" by Minwoo Kim, Impact Investing Intern, American University.

These days, it seems that sustainable investing is a global trend. In this context, Citigroup seems to want to join the trend of the times through impact funding.

I think it is important to decide which business to invest in using criteria related to the positive impact on society such an investment may have. The question seems to be whether to place the selection and evaluation standards totally on the potential to succeed financially or on equality related factors such as status of the business owners as minority or women.

From a purely economic point of view, it would seem to be much better to put full importance on the potential to succeed financially. But we should also take the global trend toward consideration of equality and sustainable growth into account.

Though Citigroup plans to invest in minority and women-owned businesses, one concern is how can those business keep growing and move forward to the mid-long term. I think a good solution to this concern is to utilize a ‘business incubator’ approach that can systematically educate and support those women and minority-owned businesses.

This way, we can help them get through the well documented difficulties in the start-up stage and move on to the next growth stage, rather than just supplying short-term financing.

(Edited by William Michael Cunningham).

Citi's Impact Fund. Comments by Jalil Boulahssas, Impact Investing Intern, University of Richmond

As Citigroup establishes its $150 million Impact Fund, it takes aim at the issue of funding minority-owned businesses. A fund like this one should look to create a successful equity financing vehicle in a sector with few sources of financial support.

Banks have extended less credit to small firms than they did prior to the Great Recession. According to a Richmond Federal Reserve study, 51% of black-owned small businesses experienced challenges in the availability of credit, compared to 30% of white-owned small businesses. (1)

This trend is also seen in the size of loans received. A smaller share of black, hispanic, and female-owned businesses tend to receive loans over $100,000 and they are also more likely to use owner loans than white and white-male owned businesses. (2)

This points to the larger trend that, while black-owned businesses are the most likely to apply for bank financing, they are the least likely to receive full funding, with only 31% receiving the whole amount requested.

While there is a well recognized shortage of credit to hispanic and black-owned businesses, we note that the main reason these firms seek to borrow is to pursue new opportunities and business expansion. (3)

Similarly, female-owned firms are less likely to receive financing than male-owned firms.

Positive efforts such as the Citi Impact Fund stand to potentially drive an increase of credit to the aforementioned minority groups.

^[1] McKay, Shannon. Key Findings from the Small Business Credit Survey on Minority-Owned Firms. Federal Reserve of Richmond, pp. 1–29.

^[2] Report to the Congress on the Availability of Credit to Small Businesses. Board of Governors of the Federal Reserve System.

^[3] McKay, Key Findings

Hope or Hype? Citigroup's New Impact Fund

Banking giant Citigroup recently announced the launch of the $150 million Citi Impact Fund. (We have long been concerned with Citi, having filed an October 1998 petition in the US Court of Appeals for the DC Circuit (Case Number 98-1459) concerning the merger that created the bank. In our appeal, we noted that our economic models showed evidence that growing financial market malfeasance greatly exacerbated risks in financial markets, and that this would lead to a financial downturn.)

Citi now claims it “will make equity investments in ‘double bottom line’ private sector companies that have a positive impact on society.” These investments in U.S.-based companies (not individuals) will be made using the bank’s own capital. Citi states that it is looking for innovative companies in workforce development, financial capability, physical and social infrastructure and sustainability.

Citi has committed to providing seed funding for businesses that are led or owned by women and minority entrepreneurs. According to the bank, you do not have to be a Citi customer in order to be considered by the fund.

Citi’s announcement has been received positively, especially in the black business community. I think the announcement is a positive one, because of the potential that other banks may follow Citi’s lead and create additional equity funding vehicles targeting minority and women businesses.

We must place this action in the context of recent impact investing developments. Blackrock, the world’s largest investment firm, announced that they would be “making investment decisions with environmental sustainability as a core goal in meeting their fiduciary obligation to clients.” This concern with social issues is new.

Citi’s announcement must, likewise, be viewed in the context of current banking industry activity. JPMorgan Chase, the country’s largest bank, last week reported record profits of $36.4 billion in 2019, the highest annual earnings any U.S. bank has ever reported. Citigroup itself announced its best results since the 2008 financial crisis, reporting $19.4 billion in profits for 2019.  

Given these profit levels, we expected that banks would seek to address income inequality, especially in light of the attention this issue is getting on the presidential campaign trail. Two Democratic frontrunners — Sens. Elizabeth Warren (Mass.) and Bernie Sanders (I-Vt.) — have made income inequality a key issue. In addition, the #MeToo movement helped raise serious concern about the gender pay gap. This fund may be Citi’s way of getting in front of these issues.

According to the bank, the new fund is being run by the Global Public Affairs unit, which includes Citi Foundation, Community Development and Inclusive Finance. It is being managed by the same executive who established Citi’s affordable housing finance business. We note, however, that the Global Public Affairs unit is not a core, bottom-line impacting operational division of the bank.

Whether or not the fund will actually help black businesses depends upon the allocation of funds to each minority group; that is, it depends upon the number of dollars invested in black, white women or Asian or Hispanic businesses. Citi is silent on this.

While $150 million sounds like a lot of money, it is 0.8 percent of Citi’s profits. Equity financing needs in the black business sector are at least $20 billion, based on demand in this sector, which we calculate by looking at total black loan applications, loan rejection rates and the potential number of new black-owned firms.

We also note that, as reported by Black Enterprise Magazine on Jan. 13, “Black business owners are being denied business loans from banks despite having good credit scores and showing consistent annual profits.”  

We have reason to hope that this fund may be fairer. 

ESG Investing - Shifting Towards Sustainable Financial Markets? Tisa Forrest, Johns Hopkins University, Impact Investing Intern

The following is a review of a webinar on Environmental, Social and Governance (ESG) Investing presented by Franita Neuville, CFA. 

To set the stage based on a Greenwich Associates 2018 Future of Investment Research Study, 50% of CEOs, portfolio managers and investment analysts surveyed expect to decrease reliance on traditional investment bank research and to rely more heavily on alternative (ESG and other) data in the future.

In the Private Equity Responsible Investment Survey, 2019, the top issues impacting investment decisions were business ethics, bribery and corruption, with 89 and 97% of surveyed private equity investors saying this is a concern when exploring and implementing investment approaches. The least important issues in the private equity survey were responsible marketing and volunteering, with survey responses of 29 and 13% respectively. Diversity and community investment were also low on the list of issues at 41% and 37%, respectively.

Top Barriers to ESG Integration

As noted in the ESG Global Survey 2019 from BNP Paribas:

• 66% data – Companies need to start with strong ESG data practices.  Analysts need consistent, quality ESG data from trusted service providers. 
• Data from private equity companies and emerging markets that haven’t started implementing a responsible investor reporting framework pose a data risk. Data must be objective and, in some cases, this is hard to come by.
• 32% cost of technology – The cost to obtain alternative data can be a significant challenge.
• 21% the risk of greenwashing – Making misleading claims about the environmental benefits of a product, service, technology or company practice is greenwashing.  It’s important to have a detailed analysis of the company and as much data as possible so there is nothing to hide. 
• 30% advanced analytical skills – ESG is still relatively new, so analyst and fund managers may not be experts in the field. It’s hard for companies to find analysts with ESG skills.

Challenges in Transforming Data into Insight

Other challenges include:

• 32% Inconsistent ESG data across asset classes;
• 27% conflicting ESG ratings – What is important is for companies to ensure the provider they choose to use has a methodology that’s made public. Some companies will formalize their own model and generate their own rating;
• 22% Ineffective data for scenario analysis.

What will improve company sustainability and sustainable investing?

• Continued innovation
• Stronger regulation
• Tougher systematic market risks

Data reporting is improving but it’s still inconsistent. ESG asset managers are looking beyond the headline for information. It’s important to understanding where information comes from and why it is the way it is. Investors cannot just use ESG ratings but need to get access to the underlying data to scrutinize it and even add information that’s important for the specific analysis. Clients also want the underlying data to have choices in their investment decisions.

Build ESG Analysis Systems, Buy or Both? From the ESG Global Survey 2019, BNP Paribas

· 52 % Contract third-party technology partners in support of ESG investing
· 37% Acquire new machine learning AI systems in support of ESG investing
· 24 % Develop in-house proprietary systems
· 9% None of the above

In general, asset owners are placing more importance on social responsibility, but, while 51% of European asset owners agree that ESG is a high priority, only 27% of North America asset owners agree. This plays a role in the perception that more progress is being made in ESG overseas, since the lack of priority from US asset owners limits the willingness of investment consultants and managers to focus on ESG data.

Activists can persuade companies to clean up their act.  While only 38% of shareholders supported a recent South African climate change resolution, environmental and social activists see it as a victory.  The amount of support indicated there’s more support for climate change resolutions that previously believed. 

As millennials become financially stronger and wealth transfers to their generation, fund managers will move towards millennial concerns and desires, and millennials are twice as likely to put money in companies for social or environmental reasons. For them, doing so makes financial sense. Investing in companies with good governance protects investors from placing their money with a company that may pose a greater risk in the future due to potential operational risks, reputational risks or regulatory risks.

William Michael Cunningham on Impact Investing, Blockchain, and Crowdfunding

September 2018 - 10 Questions

William Michael Cunningham on Impact Investing, Blockchain, and Crowdfunding
Interview by Carly Schulaka
WHO: William Michael Cunningham
WHAT: Economist, impact investing specialist, founder of Creative Investment Research

WHAT'S ON HIS MIND: “Any finance professional in the U.S. should learn how to code in
blockchain.”

1. You are an economist, an inventor, and an impact investing specialist. I’ve heard you say: “True innovation happens in a way that is independent of monetary returns.” How does this statement influence your work?

It’s really about finding an interesting problem and applying financial technology to solving that problem or to dealing with that problem.

You know, the people who invented the alphabet didn’t do so to make money. They had an interesting problem—communication on both a local and a grand scale—and if you were to calculate the social return for the invention of that technology or technique, it’s almost infinite.

So, that really influences what we decide to work on. We’re not looking at the money side first and foremost. There’s nothing wrong with making money, but it’s not the driving force in true innovation. The thing about true innovation is there’s always money down the road.
We are working on an investment vehicle that deals with homelessness and another that deals with HIV/AIDS, mainly because we think these are interesting problems with interesting applications of financial technology; not for the money side.

There’s a cultural phenomenon in Western society, I’d say in American society—the dominance of the free market school of thought, which reduces everything to monetary values. I think we’re at the beginning of a cycle where that dominance is going to be challenged. This is what we’re seeing with impact investing. It’s looking at factors that aren’t explicitly part of the conventional schools of economic thought. We now know that there are social impacts that cut across all companies, all industries, and that impact a broader community, and you have to account for that within your financial models. That’s what we’re doing.

2. I’ve also heard you say that the firm you founded, Creative Investment Research, creates investment vehicles that are “honest.” What do you mean by that?

I mean “honest” with respect to the financial returns and the social impacts. Certain investments—coal in the 1950s, for example—were solid from a financial perspective, but they failed to account for the long-term social impacts of their product.

It’s the same thing with cigarettes. In the 1920s, Philip Morris was a great investment, but it didn’t fully account for the social costs, and there was a reckoning. We think it’s important to think about those social factors and make them part of your financial and investment model.

To not do so is dishonest.

3. Tell us about the Diversity Fund.

We think diversity and inclusion are leading indicators of management competence and therefore should lead to a portfolio with higher alpha.

Common sense will tell you that in an environment, a culture, and an economy that is getting more diverse all the time, that the diverse company is going to have more customers, and this should lead to higher revenue and higher profits, assuming their costs are under control. They should do better over the long term than the non-diverse company. We researched that [premise] and found that that is the case, but there is a but; it really depends upon the industry you’re in. If you’re in a consumer-products type of industry, of course, more customers is better than fewer customers, and that’s all it boils down to.

We did some of this initial work for DiversityInc Magazine. (See photo.)

DiversityInc Magazine, 2006

We did the statistical and investment analysis and found that our thesis about the higher alpha for a portfolio comprised of companies that are top performers within the sector diversity/inclusion was correct. So we put together a portfolio and posted it on Folio Investing, Steve Wallman’s online platform that allows you to create and monitor portfolios of stocks and bonds. It’s been a paper portfolio; we don’t have any real investments in it, but we continue to monitor its performance.

When we started out in 2005 to 2007, returns for diversity were huge. Those returns have shrunken a little bit. What we think is happening is that American corporations have gotten the diversity message. In 2006, it was easy to stand out. We were just at the beginning of understanding how diversity and inclusion led to higher returns. Now, in 2018, more and more companies get it. So, the differential in returns has gone down—which is a good thing from a social perspective—but a bad thing from the perspective of a portfolio manager.

4. How do you calculate social return?

We started out in 1989, looking at banks owned by women and minorities. We wanted to be the Moody’s, the Standard & Poor’s for these banks, because there was a class of institutional investors who wanted to deal with women and minorities in banks, but they couldn’t find any credible, real-time information, so, we created it. We created something called the Fully Adjusted Return Methodology, which is a way of calculating and capturing both financial and social return data. Our methodology is trade secret protected, so I won’t go into detail, but let me share what I can.

Black Enterprise Magazine, 1996

The financial return data was straightforward; it’s standard CAMEL: capital, assets, management, earnings, and liquidity out of FDIC reports. For social return data, we turned to the CRA, or Community Reinvestment Act database, and  HMDA, or Home Mortgage Disclosure Act database. Using those two data sets, we came up with an estimate of social return.

We discovered we could apply this methodology to non-minority banks, to other industries, and to entire economies.

For example, we know that the social return for hospitals is higher than the social return for guns. It just is. That’s easy, but that’s what you need to start.

This approach of looking at both social and financial factors and looking where you can generate abnormally high returns comes through in all our work. And yes, we make point estimates of social return.

5. Research shows that Black female entrepreneurs are only able to raise a fraction of the venture funding that white males do. How do we remedy this?

That’s absolutely true. What that means is that global investment returns are lower than they should be, because you are excluding from investment consideration an entire segment of the population—that is very talented and has good ideas—based on racial and gender discrimination, and that is lowering your overall returns—both social returns and financial returns.

You have to acknowledge what’s going on. And then you have to develop efforts to address those gaps with respect to capital access.

We’ve seen a number of [new] funds that are focused on African-American women entrepreneurs. What they’re finding is exactly what we predicted: that there’s a large group of very talented entrepreneurs with good companies that are well-positioned to make abnormally high financial returns that have been locked out of the market because of the irrelevant factors. Now that they are beginning to get capital, they are going to do well. We just rebroadcast our webinar, “How to Finance an African-American Woman-Owned Business in 2018,” and on the initial broadcast, we had about 40 African-American women entrepreneurs on the call, all doing very interesting stuff. So, we’ve helped uncover the demand for capital there, and we will continue to develop new tools that will flow capital resources into that space, because we think the returns are going to be higher than
average.

6. What impact has the financial crisis had on communities of color?

Census data has shown that Black median net worth decreased 61 percent from 2005 to 2009, and a white family lost 21 percent of their wealth. Both are devastating declines in wealth, but whenever you have a 61 percent decline impacting a specific community over a very narrow window of time, it leads to greater social cost.

Long-term, we know that this decreases the economic activities for the economy overall, because if you lose 61 percent of your wealth, that means that you don’t have the money to invest in houses, invest in new businesses, invest in sending your children to school, all of which generate additional economic activity. It has been, and continues to be, devastating economically on the communities involved.

And it’s not just that one time period. From 1983 to 2013, the median wealth of Black and Latino households declined by 75 percent and 50 percent, respectively, and median white household wealth rose by 14 percent.

You may think: well, that’s on them, that’s their fault, that doesn’t affect me. Eventually, it will affect you. That’s the reason why you should care. No matter where you fall along the wealth distribution, our contention is that everybody is better off with a fairer, broader wealth distribution. The reason is purely economic; if everybody has more money, then everybody spends more.

7. You’ll be speaking at the FPA Annual Conference on the future of blockchain. Can you give an example of how blockchain technology is being used for social impact?

One of the most interesting ways we’ve seen blockchain being used for social impact is to enhance food safety—basically, tracking the path of food from its origin to its consumption point in a much more efficient way than has been done in the past.

IBM, Walmart, and a number of other companies came together on Capitol Hill earlier this year to talk about how they are using blockchain technology to enhance food traceability and transparency. When you have something like an E. coli outbreak, the current response of the food industry is to throw everything out, because you don’t know where it came from. Blockchain allows you to narrow that down. It allows you to say, we’re throwing out this pallet because it came from that farm, but we’re not going to throw out this other pallet. Blockchain technology can tell you where to look so you can run the analysis and determine faster and with much greater efficiency, which food products are contaminated.

If you’re really interested, I encourage you to look up Hyperledger and Solidity. Get involved and learn the software. Any finance professional in the U.S. should learn how to code in blockchain. If you really want to protect your job 20 years down the road, you will learn this.

8. You’ve been tracking Bitcoin since 2011. Is there anything wrong with Bitcoin as an investment?

No. I think it’s a fine investment, as long as it’s done in moderation and as long as you understand the risks that are embedded in the system. You should have some—a minimum $100 position—in Bitcoin, just so you can see how it works.

We like a number of tools, including Coinbase, which is a platform where you can buy small amounts of Bitcoin and other cryptocurrencies. It’s very elementary, but it’s a good way to get introduced.

9. You also serve as managing partner for National Crowdfunding Services. What role does crowdfunding play in society’s economic success?

This idea of social finance is a powerful one. The Statue of Liberty was crowdfunded. People sent in a dollar here and a dollar there. The civil rights movement was crowdfunded. Martin Luther King Jr. would go around to churches and they’d pass the hat to pay bail for people arrested during the civil rights movement. All of the digital currencies are crowdfunded. Some of the new financial technologies based on digital currencies—I’m thinking about ICOs—they all are crowdfunded.

This idea of pooling money together is a very positive and very powerful approach. We’ve seen what’s happened with sharing cars and sharing apartments and sharing scooters. We think we’re just at the beginning stage of applying this way of thinking in terms of crowdfunding and shared resources. We think it’s the future. Social financing is going to be a key part of the new economy.

10. In June 2016 you predicted Trump would win the presidency. How did you get it right when so many others got it wrong?

Our independence allows us to be objective. A lot of people were forecasting based on their preferences or based on their institutional ties. MSNBC was forecasting Hillary Clinton to win, because they really, really wanted her to win and their ties to that kind of social network didn’t allow them to look around the corner for other evidence that might run counter to what everybody was  predicting.

Independence and objectivity are our specialty. And having this level of objectivity is not costless. There are people, clients, institutions, and others who won’t deal with you because they think, this guy doesn’t toe the party line, he’s not saying what we want everybody to say.

In June 2016, looking at social returns, social data, as well as financial data, our models were saying, there’s something going on here; everybody’s undervaluing this candidate and this approach, and our model is quite clear in saying that he’s going to win.

Carly Schulaka is editor of the Journal. Contact her HERE.

LEARN MORE

The Future of Blockchain Join William Michael Cunningham at the FPA Annual Conference in Chicago, Oct. 3–5, 2018, where he will participate in a panel discussion on the future of blockchain. Learn how this emerging technology will influence the financial planning profession. Visit FPAAnnual.org for event, schedule, and registration details. Learn More 7535 E.

Impact Investing, Blockchain, and Crowdfunding

Journal of Financial Planning. September 2018 - 10 Questions
​William Michael Cunningham on Impact Investing, Blockchain, and Crowdfunding
Interview by Carly Schulaka

WHO: William Michael Cunningham
WHAT: Economist, impact investing specialist, founder of Creative Investment Research
WHAT'S ON HIS MIND: “Any finance professional in the U.S. should learn how to code in blockchain.”

See: https://www.onefpa.org/journal/Pages/September-2018%20-%2010-Questions.aspx

William Michael Cunningham at Blockchain for Social Impact Conference 2018

WASHINGTON - May 18, 2018 - PRLog -- William Michael Cunningham will moderate a panel on the Future of Impact Investing at the Blockchain for Social Impact Conference 2018, to be held on Friday, June 1, 2018. The United States Institute of Peace in Washington, DC will host the conference.

The Conference is being organized by the ConsenSys Social Impact team, and will focus on "areas where blockchain technology could be instrumental in revolutionizing existing systems and making a significant impact." The Conference will focus on four major global challenge areas: Agriculture, Infrastructure, Democracy, and Refugees.

Conference organizers noted,

"As blockchain becomes the shared infrastructure for more and more people to collaborate with one another, participate in global marketplaces, access essential services, and protect their personal data and assets, it is the responsibility of the larger tech community and governments around the world to make sure this technology reaches the vulnerable populations who need it and stand to benefit from it the most."

Specific breakout sessions will be held on the following areas: Identity management, refugee resettlement, supply chain, energy, financial inclusion, human rights, democracy, and voting.

Mr. Cunningham will moderate a panel discussion titled: The Future of Impact Investing. He will be joined by Decker Rolph from Calvert, Kevin Gordon Barrow, Founder & CEO, Mark Labs, and David Nage, Managing Director at Apeiron Ventures, NYC.

For more information and to RSVP, please see: https://conference.blockchainforsocialimpact.com/

Impact Investing Forum - Hilton West Palm Beach, West Palm Beach, FL- April 22-24, 2018

Impact Investing Forum- Hilton West Palm Beach, West Palm Beach, FL- April 22-24, 2018

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The Impact Investing Forum will look at many of the asset classes that encompass this space. We invite you to join us and meet top influencers, experienced investors, money managers, and service providers that are leading the charge in this ever growing space. Themes of defining impact investing, portfolio construction, asset class opportunities, and the role of the investor are just a few of the stimulating topics to be covered at this event.

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