How Impact Capitalism Re-Discovers Place

Bruce Katz & Jeremy Nowak · May 15, 2018

Newsletter

Our book tour has included several events hosted by impact investors. A question that comes up in these forums: how does New Localism connect to the activity of intermediaries and investment strategies that have a social mission while also generating returns for private investors?

There is a very direct connection. And we want the connection to grow in depth and capital commitment. But for that to happen, there has to be more of a focus on place within the impact field – urban, metropolitan, and rural – than has presently been the case. It is possible that the newly legislated opportunity tax incentive may enable more of a place-oriented connection for impact investors.

Here is how we frame the issue.

A central thesis of New Localism involves the imperative to finance the future through investments that support innovation, infrastructure, and inclusion. An important component of that financing requires organizing civic and private wealth toward future leaning initiatives and projects.

The elevated role of private and civic capital is, in part, structural. On the one hand, public balance sheets struggle to keep up with legacy liabilities and therefore are constrained in terms of fiscal capacity. And on the other hand, private capital is largely place agnostic, flowing toward predictable, risk-adjusted returns.

Of course, city governments must pursue a variety of paths in search of capital: improving management so as to get better returns for their citizens; raising taxes or fees when there are no other choices; and utilizing the bond markets. All of these are critical for different projects and circumstances.

As a way of countering the aversion to tax increases, some mayors have effectively put forward infrastructure and education-focused referenda directly to their voters, knowing that citizens often react best if they know exactly what an increase in taxes pays for, rather than the general budget.

We suggest that cities reconsider the way they manage their public assets – land, airports, ports, parking authorities – to drive better returns for their budgets. As we note in the book, most cities can tell you what they owe but not what they own, let alone analyze the return on those assets and alternatives for getting better results.

But beyond taxes and better public management, the need to target greater amounts of private and civic capital into city building remains critical, particularly in support of employment opportunities that will increase per capita income. Conventional capital is plentiful but not suited for all uses; particularly projects that must incur higher costs and greater risks but are vital to generating important development outcomes. Transformative early stage capital can make all the difference by demonstrating tangible success, changing attitudes that underlie demand, and being an entry ramp for other forms of capital.

One important source of civic capital has been philanthropy. Our observations of success stories in Indianapolis and Pittsburgh point out the role of local philanthropic investors who at times functioned as first movers in support of economic development and neighborhood change. The role of philanthropy was noted in a recent review of our book in the Chronicle of Philanthropyhttps://www.philanthropy.com/article/Philanthropy-Fills-Void-as/243345 

Philanthropy is increasingly not only as a grant maker but an investor, using its balance sheet to de-risk private capital around mission-based goals. The Kresge Foundation’s role in Detroit’s Strategic Neighborhood Fund is a great example of the relationship between philanthropy and private capital.

Many community foundations are now exploring how they can leverage their donor advised funds to generate a new source of capital. One example of this was the work of the MacArthur Foundation and Chicago Community Trust through the Benefit Chicago initiative. The Philadelphia Foundation and Reinvestment Fund just launched a new fund designed to tap the resources and skills of the two organizations https://www.reinvestment.com/news/2018/04/27/reinvestment-fund-philadelphia-foundation-launch-philaimpact-fund/.

During the past half-century, a variety of institutions have played important roles in mediating markets and public benefits including community development financial institutions, quasi-public development organizations, and research universities. Those institutions were largely motivated by a connection to their home towns: a region, specific neighborhoods; the area surrounding a university.

Impact investing is a sub-field of social investment with historical ties to corporate social responsibility, including the use of social screens to select stock portfolios. It has been far less tied to strategies around place. The term impact investing became fashionable ten years ago as a way to describe an intentional focus on the social and environmental outcomes of financial investments: less about what you avoid and more about what you directly engage. During the past thirty years impact investing has grown, by some accounts, into a $60 billion a year global enterprise, characterized by an increased demand for socially oriented capital and an increasing number of impact investors.

Much of the recent demand for an impact investing focus has come from family offices and private wealth management firms. Today all major banking and investment companies have a business line that deals with social and environmental impact in some way: their customers demand it. You can find experts at Goldman Sachs, Cambridge Associates, J.P. Morgan and many others whose job is to map the thematic interests of their client (e.g. climate change, global inequality) against a range of asset classes that promise to deliver certain social and financial returns. The more boutique the interests, the more the focus moves from publicly traded stocks and bonds to private funds and bespoke projects that promise an alignment between impact and financial returns.

Many of the largest impact funds have been oriented around critical environmental issues from watershed management to sustainable agriculture.  And many of those funds are structured as traditional venture capital funds, with ten-year investment horizons, management incentives based on performance, and qualified institutional investors. While other impact funds are focused on non-environmental themes, such as educational technology or income inequality, environmental issues remain the leading focus within the impact field.

The global impact investing focus on environmental issues is admirable and needed. Yet we would like to see more of a connection between environmental sustainability and the restoration of places.  The logic is clear: creating energy efficient cities that use sustainable transportation and resource management practices is a clear win for environmentalism. There are environmental impact projects with an urban consequence within most environmental portfolios, from vertical farming to watershed restoration to the energy efficient retrofitting of urban commercial and residential spaces.

One question we pose to the impact investment community: what it will take to generate a more place-based focus for impact investors?  Part of the answer is related to customer demand. What do the investors want to accomplish? But part of it is also about education. How can we help financial advisors understand that impact investing is part of a longer tradition of responsible capitalism that include efforts to restore urban and rural communities?  And of course, the most important issue is the creation and marketing of impact funds that have a place orientation.

It is possible that the new opportunity tax incentive will turbo charge the integration of impact capitalism and place-based development. The opportunity tax incentive provides capital gains deferments and reductions for long term investments into low-moderate income opportunity zones, which states recently selected. As we have written in other essays, the selection principles that were applied will turn out to be critical https://www.thenewlocalism.com/research/guiding-principles-for-opportunity-zones/.

There is great potential for regional and national funds to be created that focus on multiple zones with an investment thesis that fits the opportunities of those places. If the right funds are created and if the opportunities are marketed through impact advisors to family offices and investment firms, billions of dollars can be organized around the effort. Funds could be customized around a variety of common investment issues: advanced manufacturing in the Midwest, the commercialization of research by urban anchor institutions, land assembly for neighborhood housing development in the inner city, and so on.

We have built forty years of expertise around the best way to stretch the canvas between market viability and social outcomes. We now have significant interest by holders of capital around social returns. And we have a new incentive that may help us organize at the intersection of impact and place.

This could be New Localism on steroids. Bring it on!


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