Know What You Own: One Myth of Social Impact Investing

Even with the best will in the world, most individual and institutional investors likely own positions in companies whose business practices undermine their philanthropic or personal values, simply because of the way these funds are put together.
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Since 2013 the FB Heron Foundation has been intent on overhauling our business practices -- from merging investing and grant making operations, to getting our own Bloomberg terminal so we could use widely available data to assess the social performance of our holdings.

Our goal continues to be "full philanthropic engagement" -- that is, to make our poverty fighting mission the central animating factor in all of our work and for all of our resources. This pertains to investing capital, engaging with a range of colleagues and publics, measuring our performance, and more. To get there, our operating model must fully support that goal (and we're still working on it).

After three years of fundamental change here at Heron, I am more convinced than ever that resetting our operating model will sharply increase the good we are able to do.

Not that things are perfect! We have a growing list of "to-dos" and "re-dos" of our own making. We have discovered a number of "needs improvement" tasks as we test emerging theory and practice. Along the way, we have noted some sector-wide orthodoxies -- myths, in our experience -- that create barriers to progress. These myths have the unintended effect of reducing the muscle and reach of the field generally.

We know one that isn't really true, but it seems to persist as an unstated operating assumption -- that the investor and investment (or grantmaker and grant) are the prime movers in creating impact.

But while invested money is an important tool, it doesn't actually do anything except symbolize expected value. We can't tape dollar bills to people's foreheads and expect them to instantly become employed, literate, or healthy. There's something in between the person and the dollar -- and for an investor (or a customer, for that matter), that "thing" is usually an enterprise (e.g., a company, school, or hospital).

One way to describe this is as the "Rumpelstiltskin Effect" of enterprises. Just as Rumpelstiltskin spins straw into gold, a group of enterprises (employing people, skills, market savvy, reliable income, and more) "spins" a variety of ingredients (including gold) into social and financial value. We might call it realized gold. And these enterprises can be nonprofits, for-profits, cooperatives, S-corps, partnerships, C-corps, public companies, governments -- you name it!

Furthermore, the investor is only one in a constellation of important actors (including owners, managers, customers, suppliers, and more) that make successful social impact (and successful investment) happen.

Thus, we invoked another operating principle ("know what you own") as we continued our Portfolio Examination Project in 2014. In my 2013 President's Letter, I cited "the heroism of entering 7,700 separate positions into a database so we can track social and financial gains in real time in our equity portfolio."

Well, in 2014 we took a look at the underlying enterprises where we are directing our impact investments, and here is what we found:

•The two largest employers in our passively managed index funds were FoxConn (also known as Hon Hai Precision Industry) and Walmart. And our mission is to "help people and communities help themselves... ?" (Gulp... needs attention!)
•The largest employer among the public company REITs (Real Estate Investment Trusts) was Corrections Corporation of America (CCA). Guess who the workers are-- both the guards and the prisoners. (Yipes... hardly the pride of the social investor).
•There was a fair amount of overlap between the companies in our U.S. Community Investing Index (USCII) -- which we had vetted with partners for good employment and community practices -- and our conventional portfolio. This indicated to us that while some financially rewarding holdings might undermine the good we hope to do as a philanthropy, good financial performance and good social performance are not mutually exclusive (and may even be synergistic).
•We found that the existence of philanthropic activity (a foundation, community giving, etc.) was often a false positive for a company's social performance (even though it figures prominently in "social" positive screening). We therefore removed it from our USCII positive screen and now emphasize indicators that are core to the businesses themselves, such as employment practices.

A take-away: Even with the best will in the world, most individual and institutional investors likely own positions in companies whose business practices undermine their philanthropic or personal values, simply because of the way these funds are put together. Our work in 2014 helped re-emphasize that we should all, at the very least, know which enterprises we own and avoid unwittingly turning a blind eye.

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