The Future of Capital and ESG
What is the future of the full spectrum of capital - from investments made purely for a financial return to those that esteem social returns above profit - as it aligns with environmental, social and corporate governance (ESG) factors? M13, in partnership with First Republic Bank, hosted a conversation on The Future of Capital and ESG, moderated by M13 VP of Investor Relations Sarah Tomolonius, featuring panelists who combined their multiplicity of experiences personally and professionally in the for-profit and nonprofit worlds in a conversation about innovation and collaboration as the private sector and philanthropic world engage to develop solutions to the massive and complex problems facing our natural resources, health and society.
Marcus Bullock is the Founder and CEO of Flikshop, a software company that helps to keep incarcerated people connected to their families and communities. Bullock is an entrepreneur, advocate for justice reform, two-time TED Talk speaker, and an inaugural cohort of Techstars Anywhere and participant in John Legend’s Unlocked Futures business accelerator, the latter enabling the launch of Flikshop Angels, which harnesses public donations toward helping children send photos to their incarcerated parents.
Mark Tercek is a former investment banker and Goldman Sachs partner who, for 12 years through 2019, led the The Nature Conservancy, the world’s largest global conservation organization. Tercek is the author of the bestselling book Nature's Fortune: How Business and Society Thrive by Investing in Nature. He now advises companies, startups, institutions, and NGOs on environmental and organizational strategies as well as on opportunities in impact investing.
Dune Thorne is a Partner, Head of Private Client Growth and Strategy, and Head of Impact Advisory for Brown Advisory. She is also Founder and Chairwoman of the Board at Invest in Girls, which teaches high school-age girls financial concepts, exposes them to professional women role models, and introduces them to financial services. Thorne specializes in working at the intersection of investment and impact, and her career of more than 20 years in this has involved time with family offices, endowments, and foundations.
Right now, we're reckoning with a climate crisis, a global pandemic, excruciating racial and economic injustice, inequality, and social upheaval. It feels as though we’re at a real inflection point for how investors, investment managers and companies act on and incorporate ESG factors. How have you seen the impact investing space evolve over the past five years?
- The evolution of ESG has been over the last 30 years, but very escalated in just the last few years, with the acceptance of the idea that creating impact with investments doesn’t mean compromising returns.
- These last few years have seen a significant increase in interest from investors in terms of aligning investments with their values, and seeing meaningful assets flowing into impactful investments that have this alignment.
- 2,200 investment organizations, representing over $85 trillion, have signed on to the UN’s six principles of responsible investing, pledging to incorporate ESG factors into their investment decision-making process.
- The evolution of ESG has reached integration, or “sustainable alpha,” but the past six months have caused a multiplied crisis mode. The focus is no longer just on what you're investing in and how those companies are creating impact, but also how the management teams of these companies are building the culture, with inclusivity and diversity, that is going to make a meaningful difference for the future.
Are there any qualities of particular asset classes that make them more uniquely well-suited to creating positive solutions that lead to seismic ESG shifts?
- Venture capital has the truest potential to harness ESG, trickling up the precedents to private equity and large companies, as opposed to trickling down. Venture capital is a space of early-stage innovation, with larger risks and equally large visions toward making incredible change.
- Venture capitalists are particularly relentless in wanting to solve big problems, which lead to discovering big business opportunities that can positively impact communities and environments.
- In venture, one considers not only the impact in the solution of the product, but in the impact of the teams being funded and how that’s going to change the investment landscape. When you’re investing in venture, you’re seeding an initial team, built from day one, and that team can be built with diversity, which goes on to inform the company culture and how its teams work together and make decisions. Venture capital is an opportunity to fund and build teams that look very different to the C-suites of public companies today, and there’s significant impact potential in that.
- Companies at a global scale should be more ambitious and realize that they are capable of, and should be going for global challenges. As owners of these companies, investors should be pounding tables and pushing C-suites and management teams to be even more ambitious in addressing challenges.
In 2019, there were around 13,000 VC deals done in the U.S. and over half of the rounds were raised at a million dollars or more, but raising this level of capital is a greater challenge for companies led by underrepresented founding teams. How can change happen when there is still this dichotomy?
- Founders who don’t necessarily look like, or send their kids to the same schools as investors certainly struggle to secure the seed funding they need, but in many cases it only takes one to flip the switch. Dune’s assistance, for example, completely de-risked Marcus and Flikshop as an investment. That trust then opened up the opportunity to move on from only focusing on the bottom line and revenue, because it was good, and add a focus on the impact return.
- Change can happen with an investment of time and conversation, all towards developing relationships and fostering trust and understanding.
- Flikshop is intentional about building scalable technologies that allow for not only the successful reentry for people that are coming off of prison, but to be able to have a meaningful, humane life while incarcerated. The company falls into the “S” category of “ESG” and one of the biggest barriers is that VC’s analysts either aren’t considering social, or are viewing the company with preconceived notions. Flikshop combats this by going deeper with potential investors, researching their focus in allocating investments to more clearly understand what the company or the investor is looking for in their portfolio and then demonstrating how Flikshop fits with that focus. For example, Flikshop has metrics on the future earnings of returning citizens that have real employment and safe housing as a result of the connections that were made with Flikshop, or even the reduction of recidivism rates in areas that are highly targeted by our machine learning ads. That’s demonstrated social impact return.
How do we get entrepreneurs who have great ideas, but not necessarily the sort of access or understanding that venture capital is available to them, to understand and embrace that it is?
- For many, the (mis)conception is that the only way to grow a business is via revenue and maybe some debt financing. There’s grit and resilience that can come from operating in this manner, but it also means missed opportunities. And, unfortunately, those missed opportunities are disproportionately in minority communities, where there is the greatest need for products and solutions that create impact.
- “You can’t be what you can’t see.” Having a homogeneous group of very well-intentioned people doing very good things may mean good things are happening, but it also means there are potentially huge opportunities and urgent needs missed.
- Risk is at the heart of venture investing and one way to make a significant impact is to take risk. Risk and reward go hand-in-hand and, when you take meaningful risks and create meaningful frameworks to evaluate them, meaningful impact and growth result.
Who has a voice in the change that's necessary to create a more diverse and inclusive world, as relates to asset management?
- If you're an investor, a provider of capital or, in the nonprofit world, a donor, then realize that you have more clout than you're probably fully utilizing. Utilize it. Raise questions that force teams to have in the important, internal conversations around diversity and inclusivity.
- You are in a position to be asking the questions that are pushing leadership teams to think differently. On the credit side, this is relevant in public equities, around shareholder engagement, and the way you vote proxies. It's also relevant as a private investor or as a philanthropist, the latter when you're making grants and philanthropic gifts.
- As an investor, a donor, a corporate manager, or an NGO manager facing a challenge, ask yourself if there’s a partner who can help, and can broaden your approach, versus facing a challenge by yourself or with your usual method.
Where is there the greatest opportunity for impact?
- There is great opportunity in the coming together of non-profits or philanthropy with typical, return-focused investment capital.
- There is opportunity in grant capital supporting the derisking of an investment and making way for more traditional capital to enter.
- Non-dilutive investments from ESG departments like that at Bank of America provide an example. Their investment in Flikshop was part of John Legend’s Unlocked Futures fund to support entrepreneurs with criminal records and it allowed Flikshop to create the Angels product, for children and families of the incarcerated. It also made it possible for Flikshop to hit revenue thresholds, making the company enough of an attractive investment for Techstars to write a check, and this continued to snowball and add additional investment.
What are your thoughts on timelines for exit opportunities for companies focused on ESG?
- Well-funded companies like Uber will still take a long time to figure out how to be a profitable company. So investors are figuring out that a timeline to profitability shouldn’t necessarily be the top driving factor in a decision.
- What is scarce today is not capital or financial engineering ideas. What’s scarce are strategies and solutions to big, societal issues. Tough problems require tough technology, and companies with time horizons beyond what’s typical face a small stock of venture firms they can look to as potential investors, and that’s limiting for both venture capitalists and entrepreneurs.