The following is a conversation between Judith Rodin, Co-author of Making Money Moral: How a New Wave of Visionaries is Linking Purpose and Profit, and Denver Frederick, the Host of The Business of Giving.
Judith Rodin, Co-author of Making Money Moral
Denver: Impact investing has been around for nearly 15 years now, but how and where did that term get hatched? The answer would be at the Rockefeller Foundation Bellagio Center back in 2007. And the woman at the founding, who has led and transformed two global institutions as the president of the University of Pennsylvania and the aforementioned Rockefeller Foundation is with us now. She is Dr. Judith Rodin, who has co-authored a wonderful new book on impact and sustainable investing and the revolution titled Making Money Moral: How a New Wave of Visionaries is Linking Purpose and Profit.
Welcome back to The Business of Giving, Judith!
Judith: Thank you, Denver. It’s great to be with you again.
Making money moral happens when the bold world of financial markets meets the aspirational world of impact.
Denver: I just love your title, Making Money Moral. So what does it take for that to occur?
Judith: Making money moral happens when the bold world of financial markets meets the aspirational world of impact. It really can be transformative. And that’s what we’ve seen since that term impact investing was coined, because it really enables… people are talking about: we want more than just shareholders to be benefiting from financial markets. And here, when you do impact investing, when you do sustainable investing, you’re benefiting consumers. You’re benefiting the employees. You’re benefiting the communities. And indeed, you’re benefiting the environment, which is another critical stakeholder.
It also is, I think, in answer to this notion that we can no longer outrun the risks of climate change and other existential threats, certainly nothing has shown that more clearly than the pandemic that has us all locked in. Investments that drive long-term growth and value for investors in society really do make money moral because they contribute to a more equitable and sustainable world and also reduce risks. So, we are seeing that it almost produces a triple bottom line, and all of that is making money moral.
Denver: As we move from shareholder to stakeholder capitalism, I wonder if you think we’re in some ways reverting to the way capitalism was after World War II and maybe up until the mid-1980s because it did seem to be working for a lot more people back then. And it seems that in the mid-’80s, that’s when things got so out of balance. Do you see it that way, or somewhat differently?
Judith: I do think that the inflection point there was Milton Friedman’s article. It was just celebrated, I guess, 50 years since that article was written, and that has been, I think, the inflection.
Before that, we really did have a much broader definition of the role of corporations, the role of capital more broadly, and what investment really meant and what it was for. And we were able to do it with, I think, a much longer time horizon. And Friedman’s article interpreted it, I think, in the extreme because I think he, too, would have been horrified to see that it became quarterly earnings, slavish to the analyst reports. And that starts to create behavior not only that eliminates other stakeholders, but also leads to some of the fraud and corruption that we’ve seen that also scars and mars our perception of capitalism.
One of the things that has happened, I think, as a result of the pandemic is that more and more people are asking more and more of the financial market.
Denver: So maybe in some ways, capitalism isn’t bad in itself; it’s what we’ve been asking capitalism to do. And that changed with that article, as you said, back 50 years ago.
Judith: I agree with that. I think that’s right. And I do think this is a phenomenally interesting moment because the openness to really re-examining and re-imagining capitalism is very high right now. And one of the things that has happened, I think, as a result of the pandemic is that more and more people are asking more and more of the financial market.
Corporate CEOs are being asked to step up certainly in ways that they have not before. Social entrepreneurs are really being given their due in terms of leading terrific early-stage growth companies that can affect the environment, and agriculture, and health, and education. So, we’re seeing a real opening of the lens, I think, and the eye of the public to what capitalism, again, could be and actually should be.
Denver: Absolutely. If I could, let me ask you if you could provide some clarity around some terms that are used interchangeably, and I think people kind of assume that they may be all matching in meaning and approach. And those would be ESG, SRI, and impact investing. What’s the distinction between those three?
Judith: As we define it in the book, ESG is really being used to evaluate investments in public markets. So, “E” stands for environment, “S” for the social, and “G” for governance. And whether it’s fixed income instruments of all kinds, or investments in companies, or ETF, or any of those aggregation of funds, and there are bond funds as well, there’s a growing number of those that have ESG ratings and that claim to be producing social and sustainable and governance outcomes that are better, and people are investing for that.
Impact investing is a term that really arose to talk initially about the private markets. That it was in venture capital, in private equity, in real estate investment trusts that were in the private markets. So, it’s more which market they represent than a significant difference.
But your question, Denver, raises what for me, and what we discuss in the book, is one of the challenges of these fields right now, which is we have a hodgepodge of acronyms. We have a hodgepodge of metrics. It is confusing both for the general public and even sometimes for the sophisticated investor. And there’s a lot of work going on now to try to coordinate and consolidate these metrics, make them tougher so that we don’t get greenwashing. Right now, they’re too loose as well, and I think that’s another part of the challenge in the field.
But also, if we can have open source, more commonly agreed-upon metrics, I think that would be a benefit. And my guess is that it will ultimately shake out in a sort of two-by-two grid– that there will be metrics that are the best for each asset class, whether it’s venture capital, or mortgage-backed securities, or investment trusts of solar energy or wind farms. And then on the other axis, it will be what the category is. Is it agriculture? Is it energy? Is it housing? Because, again, the metrics may not be uniform for each of these categories. So, a kind of two-by-two that would be asset class and category I think is where we will wind up, but it’s going to take us a while to get there.
Denver: You got so many players in there. You got FASB. You got B Corps. I see the World Economic Forum has their own set of metrics. We got the four accounting firms, and we got IRIS. You start going on and you say, “Yeah, yeah, yeah.” It’s a little bit of the Wild West. So, I think that grid that you’ve just described would really be welcomed.
Judith: It’s also the case that many are proprietary at the moment. So when only some are open source, we don’t get to see what may be actually the investment that a lot of money managers are making in a more differentiated and rigorous set of metrics, but that they’re not sharing with their competitors. It’s estimated that about $1 billion will be spent in the next five years on measurement in this field, and hopefully, that will help us to get closer and get it right.
Denver: And I would imagine that a lot of that’s going to involve technology and artificial intelligence, and all those things as well.
Judith: You’re absolutely right. I think technology is going to be a real boon to this, particularly data mining and AI and machine learning more generally, because these funds, as you say, are only about 15 years old… many of them much younger than that. And so, they haven’t matured sufficiently to give the long-range data that are necessary for the broader sets of rankings that more of us are used to in financial instruments that are single bottom line.
As the field matures and as these investment options mature, we’re going to be able to use this enormous amount of data. There’s now about $30 trillion of assets under management under this label globally, and technology will help. I also think technology will help in another way, and that is to be a metric itself. If we really say that this agricultural company is helping the land do better, or this conservation technique that this company has is helping water flow more freely, we ought to be able to measure that soon with satellites and be able to have very sophisticated metrics rather than just checklists of yes-no.
Denver: Now, that is exciting, I have to say. Let’s return to the impact investing because you have to be one of the few people I know who has been along for the entire ride, and I wonder how you see it compared to the way it was originally envisioned at the Bellagio Conference Center back in 2007.
Judith: At that time, we called this meeting together of a group of significant investors because we saw this nascent field, and it looked very scattered and disorganized. We wanted to both truth-proof whether there was potentially such a thing as the whole bottom-line investing, and then we wanted to know what we as Rockefeller could do to help the field accelerate if indeed it was a field worth accelerating. And as you said, that’s where the term impact investing was invented. And at that time, I think we all concluded that it was going to be a single asset class.
And what has been explosive and so exciting is to see impact and sustainable investing in absolutely every, every asset class, and big actors to come into it, which again, I don’t think we saw at the beginning. We really did think it would be the domain largely of high-net-worth individuals who were philanthropic as well or family offices. But we never thought that we would see the likes of Wellington and State Street, of Black Rock, of TPG and KKR, all coming into this market in such significant ways.
What Rockefeller did though, I think, that helped make that happen– because we decided as a result of that conference, and our board approved, a $60-million initiative that would help us build the infrastructure that these investors who were working with us said it would take to accelerate the growth of this field. Infrastructure like platforms, because very few wanted to develop the in-house capacity when they weren’t sure how large the field would ultimately be. Develop the metrics like IRIS and GIIRS and B Labs, all of whom were early grantees of ours. Work on the policy issues that as we saw that we would never bring in large pension funds unless we figured out the ERISA requirements and how that would work; and that that would be true in a comparable way for other pension funds in other countries.
And so, all of those efforts were really funded by the Rockefeller Foundation, and it created what I used to call with my team the “plumbing,” essentially, that only philanthropy really would invest in. And the field took off.
Denver: Because you did the field building and that’s sometimes, as you say, pretty unsexy stuff. Everybody likes the investment and the program, but the field-building that makes everything work and everything run, you really grabbed that right at the very outset.
I’ve always been curious, Judith, is there any legal requirement or any kind of threshold that an investment has to meet to be called an impact investment? Or can anybody just throw that slap-a-label on any old investment and call it an impact investment?
Judith: The threshold isn’t a level; it’s actually a demonstration that there is a second bottom line. And that’s why I say that we are concerned about greenwashing when there aren’t sufficient or sufficiently sophisticated impact metrics.
One of the things that actually surprised us was: after all, we all fund grantees, and we think we’re in the business of impact in philanthropy, and yet we didn’t have the kind of sophisticated metrics that the financial folks were looking for to get into this field. So they would come to me and they’d say, “Well, I know how to do the financial due diligence, but how do I do the social due diligence? How can I assess, for example, the amount of impact that this amount of dollar investment would get?”– A question that I used to ask rhetorically as president of Rockefeller but never asked for a metric to show me.
So I think working with all of this has actually made us better philanthropists as well because we’re able to use these tools, ask ourselves the same kinds of questions, and invest with these metrics for the outcomes that we’re looking for to have real and very high-level impact.
Denver: That’s great. Because sometimes I see that from folks I’ve had on the show, even within an individual foundation, when the program people have never spoken to the investment people except at the holiday party, but they’re actually learning from each other and making each of their domains a lot better because of that interaction.
Judith: And we used our endowment folks, not initially because we were investing for impact in the endowment at the beginning, but because they were really our partners and truth-tellers about the financial return side. So there was, in the early days, the view that this had to be patient capital, that people who were doing impact investing had to be willing to both take a low return and also wait 20 years like they did with their philanthropy before they saw any real outcome.
And it was actually both our work with our endowment folks and the fact that we had JP Morgan very early as our partners in thinking through this field that we came to understand that no, we didn’t have to give up the financial return or the financial rigor in order to have social and environmental impact. In fact, the field would never explode if we were willing to do that in the way that it has. And so, I think our interaction with the financial people at the earliest stages helped set the pace and the stage for the financial outcomes that we’re seeing, which are quite sizable.
Denver: They really are. And I think that’s been a hard message to communicate, but you do see investors now saying, “Hey, these actually may be outsized returns when you’re bringing all these other things to the table.” And even though it may have occurred sooner, it takes a while before it spreads, and they begin to recognize that.
Judith: The ESG funds reporting in the first few months last year, after the COVID lockdown, were performing better than their peer in the Morning Star ratings. And so, it may be because you’re ruling out things like fossil fuels or a variety of other things that when there’s a crisis get hit very hard, that you actually have a better investment in these categories, a safer investment because you’re mitigating some of the risks.
Denver: That’s a great point. In a recent Black Pride survey, I think it was one-in-five people indicated that their experience with the pandemic has increased their interest in sustainable investing. But you say, if investors want to double the money flowing into sustainable investing, they’ll have to do more than simply double the amounts that they put in. What else do they need to do?
Judith: We’ve discussed a bit of it. They have to convince people like me, and I think others, that ESG is going to get tougher, and it should get tougher. So as we look at “E,” I think one result of the pandemic is that we’ve seen that it isn’t only… Look, the next existential crisis is climate change, but climate change will not be resolved merely by reducing carbon emissions. And so, a lot of the “E” metric right now is about carbon and fossil fuels. And we think that “E” has to expand to natural resources. It has to expand to biodiversity– all of the things that are significantly threatened and could be improved with double bottom-line investing that was serious.
We think the pandemic is making a greater demand on what the “S” has to be. Workers’ health, family leave policies. How will we work from home? All of those things never got incorporated into the “S” before, and I think that that will expand our view. And then I think the “G” will change, too, and we’ve already seen a bit of that where we’ve seen the leaders in the financial markets step up and speak out about their obligations.
But I also think that we need an “R.” We need a measure of resilience as well. And that won’t surprise you; you know that that was the topic of my last book. But here, I think it’s especially relevant because what we’ve seen is that it’s not enough for a company to have a business operation plan if their employees can’t get to work because the transportation system around them is flooded. It’s not enough if they don’t have multiple redundancy backups in their supply chain, their global supply chain.
So I think “R,” and we have great metrics for the R, will come into the ESG. It will be ESGR, and that will assure that the inflows of capital that we are seeing are more protected and more productive.
Denver: And you also make the point in the book that the investors need to get in the same room as the problem solvers. What is a unique contribution those problem solvers can make to the field?
Judith: It’s such a great idea that I think others in the financial markets simply are experiencing but haven’t articulated, so we tried to label it. Because often, what an NGO has, or a government agency has, is really deep, on-the-ground knowledge about the domain in which the investor is considering an investment. So the investor is looking kind of at the meta-analytics and the macroeconomics; and the NGO, the philanthropy, the government agency, that category of problem solver has boots on the ground. And it really does make a significant difference.
So take one example. We talk in the book about the Nature Conservancy and all the terrific work over many years that they were doing in Central Appalachia, in Tennessee and Arkansas, and Virginia. And they worked with communities all along the Clinch River, which is notable because it has the largest number of endangered freshwater species in Northern America. And obviously, the runoff from the coalfields was the problem.
They developed all kinds of typical activities that you would see in NGO conservation activities and the like, but then they worked with a group of very sophisticated investors — Wellington and State Street, Brown Advisory, and others — and they raised $150 million or $130 million for a fund to buy almost a quarter-million acres of land in that area and put it to work for conservation, and put people to work out of the coalfields into these productive jobs of the future.
And investors were paid back both by carbon offsets, by revenue from selling sustainable timber, and ultimately, from the sale of the land whose value has quadrupled. So it’s a very high-level investment producing all kinds of wonderful outcomes, and it was created by the investors and by the NGO in the same room, thinking through how together they could solve the problem.
Denver: Your book is filled with wonderful examples. Let me ask you about another, if I can, and that would be NBIM and UNICEF.
Judith: This is such a wonderful example. Again, bringing these two communities together. So NBIM is the parent really of so many of the companies in Europe that manufacture a lot of brands that we know very well– luxury brands of all sorts like LVMH and others. And they invest in them in a very large fund.
They worked with UNICEF for a couple of years to really think through how they could best impact the lives of women and girls, not only the women and children who worked in the factory, but the children in the communities that surrounded it, many of whose parents worked in the factories, although the young children didn’t. And they developed a phenomenal set of guidelines. And initially, they were guidelines. Now, they are requirements for the companies that NBIM invests in.
And this is a great example, Denver, not only of bringing UNICEF’s needs to the fore by a large, significant investor, but the fact that these asset owners and the investors are making many, many, many more demands of the entities in which they invest. And so, they are saying we may not put our money in you, or we’ll take our money out if you don’t behave in certain ways.
And so the activist investor kind of, in the beginning, had a bad label. It was somebody who was forcing the company to focus on quarterly earnings and the bottom line, but we are seeing a whole new category, a really exciting group of activist investors who are activists for social and environmental outcomes. And that is creating part of this transformation.
Denver: Just a splendid collaboration. And let me get back to the pandemic again because we are all so concerned about the health and the stress on those frontline workers, those essential workers. But an innovative way to address it was created by Bobby Turner and none other than Magic Johnson. Tell us about that.
Judith: This was a terrific collaboration. Of course, it began before the pandemic, but I think focusing now on these people who often do feel forgotten by us — the frontline workers, the policemen, the nurses, the service workers in our stores… all of the people who we’re cheering for now from our balconies. But these are people who often pay about half their income on rent, and they struggle to make ends meet for their families. Turner and Magic collaborated on a fund that built, or mostly initially rehabbed housing, and made affordable, sustainable, environmentally good housing for this category.
But then they went further, and that’s what we’re seeing now in terms of the impact of this during the pandemic. They actually created companies that built new housing for these categories of people. And often, with the housing were childcare facilities and health facilities, sometimes schools, and then the funds. And they brought traditional investors into those funds. The funds got the benefit of the housing, but they also manage the companies that ran the housing. And so, it was a completely integrated virtual cycle.
And the social impact, the environmental impact, and truly during COVID, the psychological impact of this kind of investment was profoundly important, and I think kudos to Bobby Turner and Magic Johnson. It’s a social REIT we’re seeing. Social Real Estate Investment Trusts are part of this new set of categories.
We are starting to see a different set of mechanisms and a different way of thinking about how to use capital for racial justice… I think that we benefit as a society so much when we bring in all the talent — people of color, women, all of those people who haven’t typically been as front and center in the capital markets or in corporate America.
This is the moment. And if we use our capital effectively, and if we use our government arrows in our quiver effectively, this could be a really important transformational moment.
Denver: So many innovative things going out there.
It’s been, I guess, about a year now since the outbreak of the pandemic, and we’re coming up on the first anniversary of the tragic death of George Floyd. As we seek a more just and inclusive and equitable recovery, and certainly more so than we had back in 2008 after the fiscal crisis, I always think it’s helpful to look at the capital flows. Are they changing? Are they going to… we have about 1% of these new companies’ venture capital going to people of color, a couple of percent to women’s, low single digits. I think 80% go to the three big States of Massachusetts and California and New York. Are you seeing a change in the flow of those investments to address this equitable recovery we’re seeking?
Judith: Boy, do I wish I had a crystal ball and knew what the answer to that would be 10 years from now. Because the answer now is: yes. Obviously, these profoundly unsettling events have really captured so much more attention than maybe others that were just like them in years before. And so, we are seeing the capital markets respond, as we’re seeing governments and other entities respond. Bank of America issued $2 billion worth of racial justice bonds. Alphabet issued an almost $6 billion racial justice bond where they will invest in companies led by people of color, entrepreneurs of color.
And so, we are starting to see a different set of mechanisms and a different way of thinking about how to use capital for racial justice. There has been an ETF that focused on NAACP goals for a long time, but it was small relative to what we’re seeing now happening. And I think it’s all to the good. I think that we benefit as a society so much when we bring in all the talent — people of color, women, all of those people who haven’t typically been as front and center in the capital markets or in corporate America.
And this is the moment. And if we use our capital effectively, and if we use our government arrows in our quiver effectively, this could be a really important transformational moment, but there are a lot of ifs.
Denver: A lot of ifs. And as you say, sustainability is the biggest of all. Because sometimes when the world gets back to the way it was, and people return, do these commitments that they’re making now stick, or do they get too busy? Or whatever the case may be.
Judith: I’m trying to get people now, two weeks later, in some of the resilience work I’m doing to remember what happened in Texas two weeks ago. It’s actually shocking how short term our attention span is. I’m a psychologist. Maybe it is that we’re so eager to get back to normal. We don’t want to focus on the bad things, the tragedies and whatever, and so we sort of try to put them out of our mind. But as everyone takes credit for saying: “A crisis is a terrible thing to waste.” And we have to use these crises and double down on what we’re trying to do.
Denver: If I can add to that, too. I think our sense of what’s important is measured by how recent it was and things that happened. You know, a tweet is: that’s so 30 minutes ago. That’s the old news. And it’s almost like a currency that we have to try to be the one with the latest news to share with our friends. And that’s what becomes the most important, where these really important issues, as you say, if they’re two weeks ago, you can barely remember them.
Judith: It’s true. It’s true. And I don’t know how we overcome it. I’m talking on the one hand about overcoming the short-term-ism in the capital markets and the quarterly earnings focus. But of course, it’s part of this broader issue that we’re talking about that we live so much in the moment, and all of the technology that not only enables it, but forces us to do it, is a countervailing trend that may prevent some of these long-term investments from yielding impact.
But I’m an optimist. And as I said, I’m seeing all the money that is coming into it. I’m seeing all the attention at the moment that is coming into it. It’s not everyone, but it’s an awful lot more people, an awful lot more money than it was even five years ago.
Denver: For sure. Finally, Judith, let me ask you about that crystal ball you don’t have. How do you believe COVID-19 has permanently changed philanthropy and investing…the landscapes of those two things?
Judith: I think for philanthropy, it will be even clearer that we need to focus on the intersection of issues that we treated separately. So the pandemic hit people of color way harder. And so you and I were just talking about racial equity and investments in racial equity. You can’t really solve racial equity if you don’t solve the health disparities that we see, and therefore access to health.
I think COVID will really open even the minds of those investors who didn’t think that they had to worry about a social or environmental purpose to rethink it. Crisis is the new normal, and it will affect all of us.
Denver: Or climate change for that matter.
Judith: So that was my next point. Climate change absolutely affects people of color more. It affects people in certain areas more. Wildfires are worse than any kind of other emissions in terms of asthma and the lungs. So again, I do think, and here I’m extremely influenced by John D. Rockefeller Sr. and what he said at the outset, which is the difference between philanthropy and charity, in his term, was: Charity solves, looks to solve it after the problem has occurred. And philanthropy, at its best, is really looking for the root causes and trying to solve the root causes.
And again, I think this is a critical moment for philanthropy to really ask itself how much of that it is doing, how it is deploying its resources, and how effectively it is measuring its impact. So, I do think it’s time for philanthropy to self-examine. We’ve rushed in immediately to help, and that was very necessary, and I’m grateful to all of our colleagues in philanthropy for doing that. But now let’s step back and reflect and see what that means for our missions going forward, and how we can really get to these root causes.
I think for investors, it’s really what we’ve already discussed. More will be asked of them, and they will have more tools to really make an impact and to create the kind of financial outcomes that many are required to do, particularly pension funds and others who have other obligations to the lives of the people they’re serving. But these are not competing things. These are things that, as we’ve seen, what makes impact and sustainable investing so exciting is that these ambitions and these tracks of opportunity and obligation really coalesce. And I think COVID will really open even the minds of those investors who didn’t think that they had to worry about a social or environmental purpose to rethink it. Crisis is the new normal, and it will affect all of us. Regrettably, it affects the poor more than the rich, but that’s only some crises that do that. And so, I think it is a wake-up call.
Denver: Judith, it must be gratifying to look back and see the key role that you played in what this has turned out to be and what you started. The title of the book is Making Money Moral: How a New Wave of Visionaries is Linking Purpose and Profit. It is available wherever books are sold and in the Wharton School Press Bookstore. Do yourself a favor and pick it up, or download it today. I want to thank you, Judith, for being here today. It is always such a great pleasure to speak with you.
Judith: Thank you so much. I enjoyed it, Denver.
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