San Francisco, CA
September 3, 2014
I’m thrilled to be back at SOCAP. I last spoke here in 2012, when The Rockefeller Foundation was just preparing to celebrate our Centennial year. Now, we’re still recovering from our Centennial year. At 101 years, we’re not quite old enough to remember the San Francisco earthquake of 1906, but our founder, John D. Rockefeller, gave more than $100,000 to help the city get back on its feet. But it was another businessman who stepped up to save the city more profoundly.
When E. H. Harriman, the President of the Southern Pacific Railroad, heard the news about the earthquake, he led the first train west to assess how the railroad might assist in the recovery. When he arrived in Oakland, he immediately ordered tracks to be laid into the most devastated parts of town to carry out people and debris. He met with local officials to kick-start the rebuilding process, and sent telegrams across the country pleading for both private and public funds. He gave $200,000 of his own fortune directly to the cause. “The rich and poor have to be cared for alike,” he wrote in a telegram home.
I begin with this story not only because it is relevant given last week’s earthquake, which serves as a reminder of the shocks and stresses we continue to face, but also because it reflects the kind of spirit that brings each of us here today – the belief that we share with Harriman, and that his friend John Muir put best when he wrote that Harriman cared for money “as a tool like a locomotive or ship.” Indeed, private capital is a powerful tool for helping to solve humanity’s greatest challenges. Which is critical, because philanthropy and government have only billions between us. Yet, private markets hold an estimated $210 trillion — $80 trillion in pension and institutional funds alone.
Seven years ago, a group of philanthropists and investors convened at the Rockefeller Foundation’s Bellagio Center, where they coined the term “impact investing.” They began to build the field to unlock greater amounts of private capital to do public good.
We have invested nearly $50 million over the last seven years into building the architecture and infrastructure for impact investing, the launching and incubating of global networks including the GIIN the development of reporting and performance standards such as the Impact Reporting and Investment Standards, or IRIS, and the Global Impact Investing Rating System, known as GIIRS. We’ve worked on aligning the enabling policy environment and we’ve been helping to develop an evidence base of what works, and what does not. We have also invested millions of our PRI dollars to pioneer new investment structures and financial models.
Of course, The Rockefeller Foundation hasn’t acted alone. The Bill & Melinda Gates Foundation and the Omidyar Network are creatively using PRIs and other financial structures in exciting new ways. New funds and old-line pension funds such as TIAA-CREF are building greater opportunities for social and environmental impact in their investment funds. Financial institutions such as J.P. Morgan Chase and Morgan Stanley have created impact investing units within their corporate structure, while Bank of America, Merrill Lynch, Goldman Sachs have led on investing in social impact bonds. And the hard work of the G8 Impact Investing Working Group, under the leadership of Sir Ronald Cohen, with the U.S. team led by Matt Bannick, will further systematize and globalize this movement. Thanks to these contributions, impact investing has moved from the margins to the mainstream.
Here are a few pieces of notable empirical evidence:
- J.P Morgan and GIIN’s most recent survey of 125 major impact fund managers showed more than $46 billion worth of impact investments under management, an increase of nearly 20 percent from 2013 to 2014.
- 91% of investors reported financial returns above or in line with their expectations; and 99% reported social and/or environmental impact above or in line with their expectations.
- At this summer’s White House Roundtable on Impact Investing, more than $1.5 billion in new capital for impact investing was committed by a group of investors spanning corporations, banks, foundations and individuals, the Omidyar Network, the McKnight Foundation, the Rockefeller Brothers Fund, and Prudential Financial among them.
That is really a lot of progress in building out this ecosystem. All of you in this room should give yourselves a big round of applause for how far we’ve come.
This is the moment field builders hope will come one day – the time when we can step back and see the field mature and come into its own. But just as innovation propelled the growth of impact investing a decade ago, we’ll need a continuing focus on financial innovation if we are to mobilize capital on the scale needed to stimulate markets for social purpose.
Which brings me to the reason I am here today – not just to applaud the successes we, together, have created, but to challenge us to look to the future. Because if there is anyone who can create the next big innovation in the social capital markets – it’s the people in this room.
Let me tell you what our innovative finance team at Rockefeller has been imagining. While continuing to help develop the field of impact investing, we see two distinct new opportunities for expanding the tools for innovative finance: innovations in the kinds of financial mechanisms that provide new investment opportunities, and innovations in the models that align actors in new ways that leverage each partner’s unique strengths, while also meeting their respective risk/return expectations and needs.
We believe that the goals of the next wave of social financing innovation are three-fold:
- Bring in new sources of capital, often from actors not who are not already mobilizing capital for social or environmental purpose.
- Increase the amount of the capital marked for these purposes from existing sources.
- Or deploy existing capital in more effective and impactful ways.
Take, for example, the social impact bond. The original innovation of the SIB was its straightforward value proposition for each of the actors involved: it offered governments a way to fund proven preventive services without putting tax dollars at risk; it offered nonprofits running a successful, evidence-based intervention a way of accessing new streams of revenue to scale their services; and it provided funds and private investors with more investment opportunities.
Since The Rockefeller Foundation started funding Social Finance UK to develop this seedling of an innovation, it has been adopted in more than a dozen countries and 19 states across the U.S. are in the process of exploring deals. In California, bonds have been launched focusing on recidivism, homelessness, and asthma. In many cases, including New York State’s first SIB to reduce juvenile recidivism, the Rockefeller Foundation has been both an investor and a guarantor.
But what has made the SIB such a breakthrough innovation has been its ability to be repositioned and repurposed to fit different applications. For example, development impact bonds are almost identical to the structure of SIBs, except instead of the local or national government repaying investors, it’s the development finance institutions, along with international donors and foundations. These can be used to aid in the prevention of disease or the increase in food security, for example, where greater support for evidence-based interventions could improve outcomes.
SIBs – and their many offshoots – are just one example of innovations in the kinds of financial mechanisms that will provide new investment opportunities. There are also new kinds of mechanisms developing for evolving “land-based” structures to the plight of the world’s oceans. Currently, more than 80% of fish stocks are at, near, or beyond exploitation, threatening the marine ecosystems and the vast numbers of people around the world who depend on it for food and livelihoods.
EKO Asset Management Partners, in a collaboration with Oceana and Rare funded by Bloomberg Philanthropies and Rockefeller, has proposed new financial mechanisms that could accelerate the sustainability of the world’s fisheries. Here’s one: a microfinance or medium enterprise route-to-market vehicle, which would finance improvements to processing and distribution along the value chain, including packaging and interim storage, to increase the sourcing of sustainable seafood in developing countries. The innovative structure gives small fishers themselves an ownership stake – an extra incentive to adopt sustainable practices, and helps to achieve Rockefeller’s goal of protecting ecosystems and building more inclusive economies.
Those are some examples of the kinds of new financial mechanisms – but we know there are others waiting to be developed. A second area we believe is ripe for innovation is in the development and testing of new models for instruments that partner disparate interests and actors to collaborate and share risk, and increase leverage.
One example is a new partnership that we and the Overseas Private Investment Corporation have created to enable impact investments for solving development challenges. Rockefeller will be the flexible capital partner, providing early stage risk capital that will allow OPIC to do certain high impact deals that their suite of investment products don’t allow them to do. In return, OPIC will bring to bear their expansive operational capacity in deal origination and conducting due diligence. The innovation we’re piloting is this approach for structuring viable impact investing deals by deploying capital from a philanthropy and DFIs in a manner that could attract and de-risk investment capital from commercial investors.
This kind of model could be applied to a range of development challenges, while other models are tailored to a specific problem. In India, for example, The Rockefeller Foundation is doing work to reduce rural poverty, which is exacerbated by the reality that large swaths of rural India are not yet connected to the electric grid and will not be for a very long time. It is one of the major causes of such significant rural poverty.
Through our initiative, Smart Power for Rural Development, we are pursuing a model that would use new mini grid technology, powered by alternative clean energy sources. The innovation is bringing together three types of customers:
- an anchor tenant, telecommunications companies that need electricity to run their mobile phone towers and who are currently relying on expensive and environmentally polluting diesel;
- small enterprises, such as carpenters or agri-businesses, that need electricity to operate and grow, and will pay for reliable electricity;
- and villagers who can pay only some tiny amount for electricity, but whose households stand to gain major economic and education benefits.
Our hypothesis is that securing the telecom as a contractually guaranteed customer can finally make it profitable for smaller-scale energy-services companies to bring electricity to rural parts of the developing world, when many efforts have previously failed. While it’s not yet a proven model that can attract private investors, The Rockefeller Foundation is working to de-risk these investments for impact investors and prove that this model can be profitable and scaled in India and across the developing world.
This could be transformative. But to solve challenges as complex as those facing humanity today, we often need the combination of innovations in both models and mechanisms. That’s what we’re learning through our work on resilience, which I am so thrilled SOCAP has featured as a track at this year’s conference.
In today’s world, shocks such as earthquakes, droughts, flooding, and infectious diseases, as well as slower burning stresses such as joblessness and civil unrest, are coming faster and staying longer. Through our resilience work, which over the course of the last decade has funded or committed more than a half-billion dollars, we have learned that investing in resilience not only mitigates the damage caused by disasters and stresses, but also creates benefits for people in good times as well.
We call this the resilience dividend. To help more cities and rural communities achieve the resilience dividend, we are pursuing innovations in both financial mechanisms and models. One is our 100 Resilient Cities challenge, a $100 million Rockefeller commitment, which focuses on building urban resilience in 100 cities worldwide.
The 100 Resilient Cities initiative has created a platform of resilience goods and services for the cities that provide hundreds of millions of dollars more from entities as diverse as Palantir, the World Bank Group, Ushahidi, Sandia National Laboratories, and Swiss Re, and others to be announced. In addition to changing the way entities approach financing resilience, we are also exploring mechanisms that could be developed to make this easier, including infrastructure exchanges and resilience impact bonds.
Let me conclude as follows: We have seen the power and the results of using our risk capital to test or to scale a new mechanism or model. We have also seen that the best ideas have come from many places and many people. And so in our search for the next leapfrog advance in innovative finance, we are asking you, the entrepreneurial community, to think about some of the innovations you’ve come across in your work – or a new idea that you would like to test.
Does it bring more private capital to the social sector? Does it focus on new ways to catalyze social entrepreneurship? Can it promote new and exciting partnerships? Or might it build greater resilience and more inclusive economies?
So if you have one idea, or two, or three, we want to hear it. We are confident that with the collective wisdom of the SOCAP community, we can help turn today’s new idea into tomorrow’s great transformation.