Impact is in the eye of the beholder, but it can still be real.

– Warner Philips

I personally believe that Impact investing is the wave of the future. Society will not survive if we continue to build businesses without consideration for social and environmental impacts. Despite my enthusiasm for this approach, as well as the measurable impacts I’ve had with the portfolios I’ve developed, this approach has its limits. More specifically, the impacts tend toward tactical and regional effects. If the problem you’re trying to solve is a large system, such as climate change or education, regional or tactical impacts don’t move the needle. If you really want impact, you need to incorporate policy, and you need to find ways to change public opinion/values. Impact investments that don’t have strong support from one, if not both, of these other areas are unlikely to contribute to scalable impact.

My journey

Over the last 20 years, I’ve been focused on impact investing, mostly as a way to reconcile my values with what I do for a living. A big part of this is also out of a sense of guilt, as I financed oil and gas activities in the 1990s in NY, London and Moscow. So I’ve slept better knowing that my work is having a positive contribution to the future of society. In an effort to do some self-reflection, I stepped back to take stock of what I’ve achieved over the past 2 decades, and it was, in a word, paradoxical. 

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The financial returns were fine, with many investments returning top quartile performance. As is typical of most impact investments during this period, my portfolio was heavily skewed to venture, but it has a lower washout ratio than usual for venture. So on a risk adjusted basis, I’m quite pleased with the financial performance. It was really the impact that puzzled me. The individual investments almost always delivered good results  from hundreds MW of zero-carbon electricity installed to improved nutrition for hundreds of thousands of low income school kids. However, when I looked at the systemic impact these investments were having, it was as if they didn’t exist.  

Climate Change

Let’s take Climate Change as the first example. I have had the benefit of working with a range of high net worth individuals or institutions that have tasked me with finding quality investments that will contribute to reducing the trend of GHGs that are contributing to climate change. I’ve been able to allocate almost $1 Billion into these types of investments through funds or direct investing. Some of the estimates of the industry have pegged aggregate capital deployment at $3 Trillion over the last 5 years. So my assumption of what I was doing looks like the image below. I mean with wind and solar going from 28% to 90% of new power plants, we’re making progress, right? 

However, when I looked at the systemic data, it was rather depressing to see that despite all this capital and work to find the most efficient way to mitigate GHG emissions, the trends weren’t moving in the right direction. The graph below speaks for itself in what has really been happening over recent years. I’ll also acknowledge that climate change is a global system, so the EU, China and India have as much impact as the US. However that just underscores the need for policy support.

Education

Let’s look at a second example around Education. I’ve been fortunate to work in various different areas of education, from curriculum innovation, charter/alternative school models, ed tech, school nutrition and even innovative low cost school buildings that would improve the learning environment. My first work in this space started around 2008, more focused on emerging markets. However, the last decade has mainly touched US education opportunities. So the systemic impact I’d look to nudge is the achievement gap between high performing and low performing US students. Closing this gap would generate a more equitably educated and powerful workforce, in addition to better economic trajectories for more people. And yet, if you look at the test scores, the top deciles continue to outpace the lowest deciles. The graphs below illustrate this with the top line representing students not getting a government-subsidized lunch (higher socioeconomic status) and the lower line for kids getting a government-subsidized lunch. So the achievement gap hasn’t moved, and if anything the gap in mathematics is slightly widening. 

This education example requires a slight caveat that some regions have seen the achievement gap close. So in some areas, the improvement exceeds what these numbers imply. However, if a sizable chunk of the K-12 population is in a handful of states (California, NY, Texas, etc.), those states’ achievement gaps mirror the national trend, and the handful of states with better data is the exception with a relatively small number of students. 

So What?

Looking through the macro data of the impacts I care about, I can’t draw any conclusion other than I’ve been tilting at windmills. I’m not naive enough to think that my few individual investments would move these macro needles on their own, but the fact that I’m a part of a larger wave of capital that is financing new business models and technologies should show up in the data. But alas no such luck. So why is this? My overarching conclusion is that focusing on systems change is not something that can be achieved solely with capital. 

Policy

In looking at what might be holding back changes that should be showing up, I continually come back to policy or the ‘rules of the road’ for how businesses operate and the economy functions. 

One of my colleagues at New Island Capital (Charles Ewald) made a comment once that has stuck with me. We were working on investments that would affect water supply and quality. As we were considering which types of businesses or investments would move the needle, he said, “If we had $50 billion to invest, we coudln’t have a fraction of the impact that one good clear water act can have.” 

I keep coming back to that, and the more and more I look at what’s limiting the scale impact of the businesses I’m working with, the more important policy seems to become. This is especially true where externalities aren’t priced (e.g. carbon) or the vast majority of resources are directed by governnment and often difficult to change or influence (e.g. public education).

There’s a great example of policy success that is analogous to the focus on Greenhouse Gasses, namely Chloroflorocarbons (CFC). These chemicals were the principal culprit that was depleting the ozone layer, without which most life would get torched by the sun. The Montreal treaty led to the phasing out of the CFCs, staring in 1989 and effectively removing them from the key industrial systems by 2000. A key research paper identified that without the elimination of CFCs, the carbon absorptive capacity of plants would be impaired, which means climate change would accelerate even faster. So not only was this policy a great success at preventing us from getting a sunburn by simply stepping outside, but it’s had further systemic benefits on the whole planet. 

Looking at that chart it’s clear that one of the most impactful things one could do is to influence policy. I have no illusions that this is actually harder than it sounds, especially at the national level in the current polarizing environment. However, state and local solutions are still taking place, and if large markets like California or New York start to move in one direction, they can often pull other states along and therefore influence national policy de facto. Even so, changing policy is really really hard, especially in this polarized political environment.

Culture

So if changing policy is hard, changing society’s values is even harder. However, I would argue that it’s the single biggest impact one can have. If enough people start to shift their behavior and preferences (a reflection of their values), the products they want, the businesses they support, the policies they want to see from their politicians will all change accordingly. If politicians don’t reflect these changes, they will be voted out of office.

But is it even possible to change values in society? The answer it turns out is….kind of. My view on this is based on a belief that humans are tribal and social animals that need to belong to a group. So this underlying driver creates the opportunity for media and influencers with the right groups to shape people’s values and behavior. 

TV as an example

In today’s world of social media and TikTok, it seems a bit antiquated to focus on TV, especially network TV as an example of influence. However, some of the most extensive research has been done on this medium, and it also represents a passive influence, vs. the active influence that social media sites have with dynamic algorithms. The idea that one-way delivery of content can influence is in some ways more surprising than interactive content where the algorithms can ‘feed’ you information that is more likely to affect your world view.

In the case of TV, there have been numerous studies on the impact of the theme of a television show on the perception of a topic. Three examples illustrate this:

One of the interesting benchmarks these studies use is a factual lecture as a comparison. In the case of the attitudes-to-death study, the impact was seen to be comparable to a lecture in the impact it had. While the attitude-to-autism study found that there was greater learning and positive connotation through the TV show relative to a factual lecture. What I take away from this is that many people are more easily influenced if they don’t know a particular point of view is being presented in what is otherwise an entertainment setting.  

Online cultural influence

If the TV examples show how individual perception can be nudged through the indirect messages in the material, how then does social media work, where there is less of a passive intake of media, and a greater engagement in selecting what to focus on?

Not surprisingly, there is no shortage of research on the impact of technology companies affecting public perception. A look at Google and the impact of their search algorithms on political perceptions was extremely enlightening (and more than mildly alarming). 

The results of these experiments demonstrate that (i) biased search rankings can shift the voting preferences of undecided voters by 20% or more, (ii) the shift can be much higher in some demographic groups, and (iii) search ranking bias can be masked so that people show no awareness of the manipulation.

There are a range of other studies with similar examples that relate to almost any social media platform, from Facebook, to LinkedIn to Tik Tok. 

Who’s using all three levers well?

 So if my premise resonates at all, the question then becomes, who is doing this well? Or more bluntly, who is having the most impact for the resources they are putting in? My sense is that most groups that have acknowledged the impact of these three levers are in the early days of trying to use them. 

 The only group I’ve found that seems to have been consistently applying these levers over a long period of time is the Koch Brothers. Their multi-decade of consistent funding of politicians that advance their policy objectives, as well as funding numerous think tanks and organizations that can help shape the policy and cultural discussions is unrivaled at that scale. Arguably some groups like Open Society Foundation and Humanity United have used these levers effectively, but at a much smaller scale. 

The interesting trend I’ve been watching is how a number of wealthy individuals are now looking to use these three levers to advance their values. Most billionaires are active politically in funding politicians through political donations. The culture side is what’s novel, and that’s where most of the latest action is. The list includes Laurene Powell Jobs acquiring the Atlantic, Jeff Bezos acquiring the Washington Post, Marc Beinoff acquiring Time Magazine, Pierre Omidyar creating First Look Media, Jeff Skoll with Participant Productions, etc. I doubt that most of these individuals have purchased media properties as fantastic financial investments. So my hypothesis is that the laundry list of media acquisitions is to enable them to have a megaphone to start to nudge the cultural dialogue. It reminds me of the adage that ‘Freedom of the press is guaranteed only to those that own one’. Not the most democratic development, but media has traditionally been concentrated in a relatively small number of organizations.

Conclusion

I want to be clear, that impact investing and factoring in ESG in all investing is key to having a sustainable society on social as well as environmental grounds. However, the complexity of most human systems means that individual investments are rarely going to have a sizable effect beyond the tactical impact they achieve. If you want to turbo charge the impact you are seeking, it’s imperative to consider policy and cultural nudges as the optimal compliments to capital for systemic change.

1 Schiappa E, Gregg PB, Hewes DE. Can one TV show make a difference? Will & Grace and the Parasocial Contact Hypothesis. J Homosex. 2006;51(4):15-37. doi: 10.1300/J082v51n04_02. PMID: 17135126.

2 Schiappa E, Gregg PB, Hewes DE. Can a television series change attitudes about death? A study of college students and Six Feet Under. Death Stud. 2004 Jun;28(5):459-74. doi: 10.1080/07481180490437581. PMID: 15152651.

3  Stern SC, Barnes JL. Brief Report: Does Watching The Good Doctor Affect Knowledge of and Attitudes Toward Autism? J Autism Dev Disord. 2019 Jun;49(6):2581-2588. doi: 10.1007/s10803-019-03911-7. PMID: 30734174.