This pioneer impact investor explains how to activate total value.
Jed Emerson is a leader in the impact investment space and heavily invested in the creation of nonprofits. In addition to his role as Senior Fellow at the Center for Social Investment at Heidelberg University, he has held positions at Harvard, Stanford, and Oxford business schools. He is co-author of the preeminent books on the subject Impact Investing: Transforming How We Make Money While Making a Difference and The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism. Jed currently acts as the Chief Impact Strategist at Impact Assets and serves as senior strategic advisor to ultra-high net worth families around the world.
Jed’s impact investment journey started in the early ‘90s when he met George Roberts, the founding partner of KKR, a $129.6 billion global investment firm. Their conversations surrounding a community-minded investment approach inspired Jed’s thinking for the next decade. That inspiration led him to create the term “blended value” in an effort to express the conceptual framework of creating holistic, integrated worth. The idea is simple: Rethink the nature of value. Take it from being either financial or social to being financial and social.
For Jed, the idea of “blended value” moves beyond capital and organizational structure, but instead includes the envisioning of personal and professional development. With iterations over time, the ultimate goal is to be the optimized expression of our total value.
How did you get started in creating Blended Value? What was the inspiration?
It was an evolution. I knew that capitalism can be exploitative and public funding/philanthropy wasn’t satisfactory. I knew that I wanted to do something positive and sustainable — the question became one of how to approach a social return using an investment methodology. How can one monetize the economic value of social impact while also describing the qualitative aspects of value.
In the early ‘90s, I became agnostic in terms of the investment vehicle and the methodology. The only thing that matters is how you understand the nature of the value you’re trying to create. Bifurcated value (profit or purpose) doesn’t address the issue. We need to first focus on how you understand the value you aim to create. Concepts such as the Triple Bottom Line are important to our understanding the components of value, but we must understand that ultimately value is fundamentally whole, non-divisible and a blend of these elements.
What excites you about impact investing?
I’m most excited about the fact that there are now more people thinking about the intentionality of their investments and the impact their capital can have. I think it will continue to become mainstream practice. We will see more and more traditional financial institutions either create their own impact investment services or at least realise all capital has impact and may be managed on an impact basis.
In some ways, the bad news is we will continue to see a mainstreaming of impact investing. The more it becomes normal, there is greater risk we have of it not being transformative. And the greater risk we have of it being one more accommodation to business as usual, instead of challenging how we think about and execute investing practice.
Impact investing has already proven you can do well by doing good; the challenge may be how to do that at scale, throughout ever larger capital markets.
This is a multi-trillion dollar market today and it is not about philanthropy. It is about financial returns as viewed through a lens of integrating social and environmental factors. Thinking about more fundamentally the purpose of capital, which goes to our understanding of the philosophy, intent and mission of life. These are questions and ideas that mainstream capital has not explored. Impact investing is about achieving diverse levels of financial return and it’s about transforming economies to take into account the social and environmental factors that affect our future.
What is your investment approach?
The first question we ask is, what is the nature of the value we’re trying to create? As asset owners, how do we understand the fundamental purpose of capital? For each of us, the fundamental purpose of capital will differ depending on who we are, our intent and individual experiences. It needs to be about a vision of performance and purpose that is beyond financial performance alone. It is about how we understand value.
Most of my clients are moving toward understanding value as being more holistic.
To start with, the value I seek to create, and the people I work with, are moving toward is this understanding of value as being whole and non-divisible. It’s not about doing well and doing good, but about optimizing total performance. Once you know the value you want to create, you start to look at the types of capital structure that will allow you to achieve your objective and achieve the maximum value. Then the question isn’t about should you make a grant, a below market loan, or an at market investment. The question becomes which of those capital structures best advance you toward the goal you seek. And, then you can explore the types of organizations that you work with to achieve these objectives. You can grow companies that seek to capture the blended value embedded in their business model, like Swell.
Additionally, you can engage in charitable giving to create additional and complementary opportunities to explore potential impact.
Impact can feel immediate or really far away. With that in mind, how do you think about impact?
We need to match the right impact intent with the best investment vehicles and intention.
For instance, when looking at Swell, I’m looking for sourcing, community employment, good ESG integration, etc. versus how I might look at impact in a higher risk, community-based social enterprise.
But when I am looking at the Dow Jones, I’m not thinking about social enterprise level risk either. Bringing this perspective into your total portfolio can leverage a whole suite of options for the kinds of impact that you want to have.
How do you think about impact measurement? What numbers and metrics really appeal to you?
The type of metric that’s appropriate depends on the intention and the vehicle through which that impact is realised.
For the public markets, ESG integration and understanding the materiality of those factors is important. That’s different from a social enterprise that is employing 400 homeless people. Perhaps the social enterprises have a revenue shortfall of 20%, but that is because they use additional resources to provide training for their employees and other programs to help people get off the streets, so I would seek to measure the outcomes of that impact. It’s a long term investment strategy.
Bearing that in mind, how do you think about time horizon? Especially for seeing an ‘outcome’.
The current capital system favors short-termism, which is a challenge. Therefore, as asset owners we need to be clear about our value goals and associated time horizon. The short-term focus of public markets is also why you see many companies choosing to stay private because they understand that as a private firm they can embrace a longer term perspective on how they measure their success -- both financially and on any number of other terms.
We’re already seeing more interest in the creation of holding company type structures, with folks looking to create an “impact Berkshire Hathaway” where the outlook is over a 30-40 year time horizon.
The question today isn’t about whether one can get financial returns while investing in impact. This has been proven.
The question today is can you create sustained impact and what does that mean and how do we comprehensively understand the full performance potential of our portfolios.
Tell us about your new book.
In October, we aim to release Impact Asset Guide for Investors. It is the nuts and guts, 101-201 level content for impact investors. It is an early stage impact investor guide, covering topics like: How do you go about due diligence? How to think about impact metrics? What are the communication issues related to impact investing? We also explore such issues has executing a Total Portfolio Management strategy and finding good advisors to help you develop and execute your strategy.