Since we published the first edition of this report in 2018, there has been a widespread increase in the general public’s awareness about structural racism and the many ways people of color have been systematically denied access to social and economic opportunity since the earliest days of European arrival to what is now the United States.
The COVID-19 pandemic has exposed alarming weaknesses in the systems we depend on upon in everyday life in the U.S. – healthcare, education, and economic systems, to name just a few. It has cast a harsh light on the disproportionate impacts of these weaknesses on people of color, whose health and wealth have been decimated at far greater rates than those experienced by whites.
Moreover, there has been a dramatic growth in awareness of how the financial system has functionally been closed off to people of color, starting with the largest companies, most of which pay lip-service (at best) to racial equity and many of which do not address the issue at all.
Investors can contribute to the narrowing of economic disparities by investing in communities of color. In this report, we update the findings of our original work in 2018. We also offer fresh insights into how both the #MeToo and Black Lives Matter movements have galvanized shareholder engagement initiatives, with investors increasingly pressing companies to be more transparent and accountable regarding their policies, practices and cultures. We have added a section as well regarding support for diverse asset managers with strong track records who are often overlooked. Lastly, we are pleased to note that over the past two years there has been growth in the number of investment solutions that seek to address racial and ethnic economic disparities.
Download Investing to Advance Racial Equity.
We are pleased to present this replay of our recent panel discussion with leaders in the LGBTQ movement for equality — access the event replay above. Our panel addressed:
- The history of organizing in the LGBTQ movement and what kind of action has led to change, bringing us up to the current moment.
- The recent Supreme Court decision barring employment discrimination on the basis of sexual orientation and gender identity, and how companies will have to implement changes to policies and corporate cultures.
- The role of politics, education and advocacy in creating accountability.
- The role of impact investors in helping to ensure that LGBTQ equality is actualized in a corporate environment, including the role of investors.
Here are some links you may find useful in further exploring the issues raised in our discussion:
Relevant Cornerstone Research in chronological order (we are pleased to announce the imminent publication of an update to Investing to Advance Racial Equity.)
- The creation of small businesses boosts economic growth by introducing new products, services, and technologies into the economy. Most importantly, it provides new job opportunities, challenges existing firms, and boosts competition and productivity.
- Over the past several decades, women have been a fast-growing segment of small business owners, with entrepreneurial women of color representing the fastest growing cohort out of all entrepreneurs. Minority and women-owned businesses were particularly big job creators and stabilizers of the economy following the 2008-2009 recession, adding 1.8 million jobs in 2007-12.
- Meanwhile, companies started or cofounded by women receive on average less than half the amount of investment capital as male-founded companies. According to one study, women founders receive only a small fraction of venture capital deals (4.4.%) and only about 2% of all capital. However, the women-founded and co-founded companies outperformed their peers, generating 10% more cumulative revenue over the study’s five-year period.
- Although businesses owned by women or people of color were more likely to shutter during the Great Recession of 2007-09, they helped stabilize the economy during the subsequent recovery, adding 1.8 million jobs in 2007-12. Meanwhile, firms owned by white males lost 800,000 jobs and firms owned equally by white men and women lost another 1.6 million jobs over this period.
- In this note we consider the role of entrepreneurship in fueling economic growth. In particular, we focus on the need for investors to deploy capital to support women-owned businesses as we emerge from the Covid-19 recession, given that women-owned businesses in a post-recession environment have been shown to create more jobs. The gap between supply and demand for capital available to women entrepreneurs must be closed.
Download a PDF version of Women Entrepreneurs.
Women Entrepreneurs: Foundational to Economic Recovery
By now it’s well understood that entrepreneurship is beneficial to economic growth and development. It has been at the core of every economic recovery in history. The creation of small businesses boosts economic growth by introducing new products, services, and technologies into the economy. Most importantly, it provides new job opportunities, challenges existing firms, and boosts competition and productivity.
In this note we consider the role of entrepreneurship in fueling economic growth. In particular, we focus on the need for investors to deploy capital to support women-owned businesses as we emerge from the Covid-19 recession, given that women-owned businesses in a post-recession environment have been shown to create more jobs. The gap between supply and demand for capital available to women entrepreneurs must be closed.
The backdrop: statistics on women entrepreneurs
Over the past several decades, women have been a fast-growing segment of small business owners, with entrepreneurial women of color representing the fastest-growing cohort of all entrepreneurs. Women-owned businesses were particularly big job creators and stabilizers of the economy following the 2008-09 Great Recession. Nationally, minority- and women-owned business enterprises (MWBEs) added 1.8 million jobs from 2007 to 2012, while firms owned by white males lost 800,000 jobs, and firms equally owned by white men and women lost another 1.6 million jobs. Further, many women-owned businesses focus on sectors such as health care and education, qualifying for consideration as social enterprises, designed for both profit and positive social or environmental impact.
Small businesses currently suffering
Many small businesses are being challenged or even decimated by the coronavirus crisis. A March 2020 survey by the National Federation of Independent Business (NFIB) indicated that over 90% of small business owners had been negatively impacted by this crisis.[i] About half of small businesses said they could survive two months at best, and about one-third believed they could hang on for three to six months.[ii] In a U.S. Chamber of Commerce Survey conducted April 21-27, 2020, roughly one in three small businesses reported temporarily shutting down in the prior two weeks, up 5% vs. a similar survey in March.[iii]
WEConnect International, a global network that connects women-owned businesses to global market opportunities, conducted a survey in April 2020 of nearly 600 women-owned businesses regarding the impact of Covid-19. More than 85% of those surveyed have been negatively impacted, with 90% experiencing a decrease in sales. Many are adjusting their products or services to changing economic climate and are trying to secure financing so that they can stay in business. On a positive note, women business owners are taking steps to adapt: 54% cut unnecessary expenses; 42% shifted to a digital model; and 37% are growing in response to local or global needs.[iv] [v]
There are reasons for optimism, especially in the medium to long term. According to the Census Bureau, 79% of small businesses that have laid off or furloughed employees anticipate bringing back most of their employees once the U.S. small business climate returns to normal.[vi] Further, more than 500,000 applications for an employer identification number have been submitted since mid-March, an indication of entrepreneurs’ intent to start new businesses soon.[vii]
Crisis fueling innovation
Crises often fuel economic and technological innovation. For example, the 2008-2009 financial crisis led to the development of new business models such as Uber, a ride-sharing platform, and Rent the Runway, an online clothing and accessory rental service. [viii]
Entrepreneurs are already rising to the challenges posed by the coronavirus crisis. For example, liquor distillers are pivoting to make hand sanitizer needed to deter the spread of the virus. Some small companies are seeing soaring demand for innovative products or services. One such example is Farmbox Direct, a subscription service that delivers boxes of fresh produce directly to customers. Ashley Tyrner, Farmbox’s founder, saw a massive increase in orders as the nationwide lockdown took hold. New customers are coming from areas where grocery shelves sit empty, or are setting up deliveries for older relatives who don’t want to risk infection by shopping outside their homes.[ix] Another example is MD Ally, which allows 911 dispatchers and other responders to route nonemergency 911 calls and patients to virtual doctors to help improve the efficiency of emergency response systems. Founded by Shanel Fields in March 2020 just as the US economy was shutting down from the coronavirus crisis, MD Ally is currently hiring while many companies have furloughed or laid off workers. [x]
Innovative new business models will probably lead to sales and employment growth as a route to rebound from the Covid-19 recession. While it may be too early to tell, business models that have gained traction during the era of social distancing, such as telemedicine and remote learning, may flourish longer term as demand for these services grows. The convenience of avoiding a doctor’s waiting room or being able to learn a skill from one’s home on demand may prove to be long-term winning business models.
A compelling analogy: small company performance during the Great Recession
Although businesses owned by women or people of color were more likely to shutter during the Great Recession of 2007-09, they helped stabilize the economy during the subsequent recovery, adding 1.8 million jobs in 2007-12. Meanwhile, firms owned by white males lost 800,000 jobs and firms owned equally by white men and women lost another 1.6 million jobs over this period.[xi]
Some of disparity of experience might be explained by the industries affected. Manufacturing and construction were hit particularly hard during this time — two sectors with a high concentration of white male owners. [xii] Meanwhile, the recovery was largely fueled by growth in industries such as health care and food services, which tend to have more minority and women ownership.[xiii]
The numbers are compelling: Businesses owned by women or people of color were foundational to economic recovery.
Women-owned businesses’ role in recovery
The growth trajectory of women-owned businesses, especially those owned by women of color, suggests that investors who want to 1) support economic recovery overall; 2) support entrepreneurs; 3) support women and people of color; or 4) support social enterprises – or any combination of the above – should consider investment in these businesses as they may offer the potential for both impact and solid investment returns.
Half of women-owned businesses are concentrated in three industries: professional/ scientific/technical services (lawyers, scientific, architects, consultants); health care and social assistance (child day care and home healthcare services), and other services (such as hair/nail salons and pet care)[xiv] Some or all these industries will rebound once the crisis recedes. An opening up of the economy, an aging population and a return to work should revive demand for these types of services and the emerging companies could represent good investment opportunities. Clearly there will be pent up demand for personal services such as hair and nail care. As people go back to work away from home, the need for childcare and other services will rise. Elective surgeries and other non-essential health care services will be in demand again. Finally, as the economy returns to growth, the need for professional services such as legal or consultant expertise will increase.
Across the board, people are increasingly looking at social enterprises, i.e. businesses that are designed to have both a positive purpose and profit, as vehicles for providing solutions to the major social and economic challenges facing communities. By providing social benefits as well as well-paying jobs, social enterprises offer the potential for rebuilding communities that are stronger than they were before the recession. Social enterprises run by women and entrepreneurs of color, who are hardest hit by the economic downturn, understand their target markets especially well and are well positioned to build successful social enterprises while the economy recovers.
The challenge for women entrepreneurs
BCG, a management consulting firm, partnered with MassChallenge, a US-based global network of accelerators, to review five years of investment and revenue data through a gender focused lens. They found that companies started or cofounded by women received on average less than half the amount of investment capital as male founded companies. Typically, women founders receive only a small fraction of venture capital deals (4.4.%) and only about 2% of all capital invested according to pitchbook data in 2016 through early 2018. However, the women-founded and co-founded companies outperformed their peers, generating 10% more cumulative revenue over the five-year period. According to the study, this might be attributable to women operating businesses that they have experience with, such as childcare or personal care (e.g. hair salons). [xv]
Michele Bongiovanni is an entrepreneur and CEO/Founder of HealRWorld LLC, a database platform that measures sustainability and creditworthiness of small and mid-sized enterprises (SMEs) for investors and funders. When asked why she believes women entrepreneurs tend to perform better than men, she opined that women business owners tend to be more collaborative in their management approach and make better financial decisions. This combination, in her opinion, often leads to success for startups. [xvi]
There is some data to back up Ms. Bongiovanni’s statements regarding women as better business owners and managers. FitSmallBusiness.com compiled data from the U.S. Census Bureau, Dow Jones, the Harvard Business Review, and others to compare female entrepreneurs to their male counterparts. The analysis combined 10 private and public studies and determined from the statistics that women business owners outperformed their male counterparts, generating higher revenue, creating more jobs. They also tend to significantly improve startup company performance and have a larger appetite for growth.[xvii] [xviii]
Ms. Bongiovanni notes that funding for SMEs was sorely lacking during the Great Recession. This appears to be the case during the current crisis, as evidenced by the first round of the Paycheck Protection Program (PPP) administered by the Small Business Association (SBA) and facilitated by banks. According to a recent study from ColorofChange, UnidosUS, and Global Strategy Group, close to half of Black and Latinx-owned small businesses expect to close their doors within six months, and may not be able to reopen. A majority (51%) of Black and Latinx small business owners who sought PPP loans asked for under $20,000 in temporary funding from the federal government. Only about 12% received the requested loans. Nearly two-thirds said they either received no funding (41%) or are still waiting to hear whether they will receive any federal help (21%).[xix] [xx] If these businesses can receive funding to get through the recession, they would help the economy pull out of the recession by providing needed jobs and services in local communities, particularly underserved communities.
As the coronavirus continues to wreak havoc on communities and the economy sputters back into gear, it is clear that small businesses, particularly those founded and run by women entrepreneurs, can help pull the economy out of a recession by providing needed products, services, and jobs. Such enterprises may also help communities emerge by filling in gaps in social services no longer provided as effectively by underfunded local governments. Investors can step up and provide needed capital and reap positive returns by supporting these women entrepreneurs.
[xvi] Interview with Michele Bongiovanni, CEO of HealRWorld, LLC
We recently held a video panel discussion with experts in the field of education and educational technology, to further explore the topic we first raised in our report Investing in the Future of Work. The Cornerstone team was joined by:
- Susan Cates: Susan is a partner at Leeds Equity Partners. Susan has over 25 years of experience in investment banking, private equity and education leadership. Prior to joining Leeds Equity, Susan was Chief Operating Officer at 2U, Inc., an educational technology company that contracts with universities to offer online degree programs, where she oversaw all product and service delivery operations.
- Sam Caucci: Sam is the CEO and Founder of 1HUDDLE, a workforce training platform using game technology to help organizations better prepare their people for work. 1HUDDLE has impacted people across organizations in a wide array of sectors. Applying an innovative approach to preparing people for the workforce, Sam oversaw the creation of the training game platform, the first game-based platform that transforms the way organizations onboard, train and develop their team members.
- Josh Cohen: Josh is the Founder of City Light, an early-stage investment firm committed to tackling education for underserved communities, the global climate crises, and keeping families safe. Before founding City Light, Josh led direct investments for a family office, worked in venture capital, was a partner in a private debt fund, and was the Director of Business Development for Mobility Electronics. Josh co-founded (and is a Board member of) The ImPact, a member network whose mission is to inspire families to make impact investments more effectively.
The discussion centered on the need for ongoing, lifelong learning, and the different forms that may need to take in order to better enable the workforce of tomorrow (and today, in fact) to better adapt as technology changes and new skills become key to success.
On May 5th, Cornerstone Capital hosted a webinar about Covid-19 and its disproportionate impact on some communities. Race, income, ZIP Code – all are factors that influence one’s chances of making it through the crisis personally and financially. In New York City, black and Hispanic/Latinx residents are twice as likely as white residents to die from the disease caused by the novel coronavirus. This fact is directly related to the lack of economic opportunity in some communities, especially communities of color anywhere in the US, as well as other structural issues including who has access to investment capital.
How can investors address the inequitable impact of COVID-19?
Katherine Pease, Managing Director, Head of Impact Investing at Cornerstone moderated our call with three investors and entrepreneurs with expertise in venture capital and investing for impact for women, communities of color and social justice:
NATHALIE MOLINA NIÑO is an entrepreneur, an investor (at O cubed) and tech globalization veteran focused on high-growth businesses that benefit women and the planet. She is the author of LEAPFROG, The New Revolution for Women Entrepreneurs (Penguin Random House, Tarcher Perigee) and serves as a Venture Partner at Connectivity Capital Partners. Molina Niño launched her first tech startup at the age of twenty and is the co-founder of Entrepreneurs@Athena at the Athena Center for Leadership Studies of Barnard College at Columbia University.
PRIYA PARRISH is the Managing Partner of Private Equity at Impact Engine. Prior to joining Impact Engine, she served as Chief Investment Officer at Schwartz Capital Group, a single-family office investing across global markets. Priya currently serves as Adjunct Assistant Professor of Strategy and Impact Investor in Residence at the University of Chicago Booth School of Business.
MORGAN SIMON is co-founder of Candide Group. She has close to two decades of experience making finance a tool for social justice. Morgan has influenced over $150B in investments and is a regularly sought out expert on impact investing. Her first book, Real Impact: The New Economics of Social Change, has been featured widely. Prior to Candide Group, Morgan was the founding CEO of Toniic, a global impact investment network.
The link between health and the economy
Nathalie began the webinar by noting that the existential danger facing black and brown businesses is directly correlated to their communities’ economy and health. She noted that banks have a long history of rejecting people of color for loans. They are often asked for more qualifying material compared to white borrowers. If loans are received, they are typically issued at higher interest rates that whites obtain. As a result, Nathalie was not surprised that $559 billion in PPP (paycheck protection program) loan money which was deployed through banks went to borrowers with whom the banks already had existing relationships vs. black and brown business owners. As a further barrier, the program excluded people with prison records, which disproportionately impacts entrepreneurs of color.
Morgan noted that $30 billion of the PPP has been designated to be disseminated through Community Development Financial Institutions (CDFIs) and smaller community banks (under $10 billion in asset size). She is angry that this relatively small amount is dwarfed by the $500 billion-plus being targeted at large companies, including $17 billion to Boeing. She believes that this policy failure should be addressed by investors and noted that her organization, Candide, publicly makes political contributions to advocate for broader access to capital for all. Candide has 75 women-owned companies in its portfolio, of which 18 successfully applied and were approved for PPP, in part because they had investors that advocated for them. Candide leveraged its financial connections to help business owners, including some who are not in their portfolio, to gain access to funds.
Priya voiced a somewhat optimistic outlook on the economy. She noted that PPP is not an economic stimulus plan per se but rather a relief package. She sees a long road ahead with actual fiscal stimulus and investor tax incentives. She expects a larger amount of capital to be deployed going forward.
Access to capital a challenge to black and brown communities
But with regards to access to capital, networks or key. Those who have access to a managing director at a venture capital (VC) firm are typically people from privilege, not just a particular race or gender. Priya noted that VC is a high risk/reward asset class and most who invest in venture can afford to take those risks. If you do not come from money, you’re an outsider. The VC firms tend to look for larger, high tech firms that can have big returns. Those firms’ founders/owners tend to be white and male (as are most VC partners).
Priya also noted that venture firms with female and diverse partners may be open to a variety of investments, not just the high-risk, high-reward kind. As an example, the firm invests in a telemedicine company that provides mental health services to 50% of the counties in the U.S. that do not have access to a mental facility. That is impact, in Priya’s estimation.
Nathalie said it’s likely that half of businesses owned by people of color will be gone soon. She believes there must be policy solutions at the municipal and state level. She hopes some policies will be initiated quickly by both the public and private sectors to try to save some of these businesses. Nathalie notes that the needs of both black and brown main street and high-growth companies should be addressed. With people of color a growing US demographic, the needs of main street companies need to be addressed to support near term and future economic health of the US. High growth companies with Black and Brown founders also need access to capital. The challenge is that there are few asset managers of color running funds. Nathalie proposed that governments, corporations and limited partnerships should allocate 30% of money to managers who are people of color to address the growing need for capital by companies run by people of color. Priya agreed but went further by suggesting that managers and investors need to look at who the company is serving and to invest in companies whose products and services support underserved communities.
Finally, during the discussion, both panelists and attendees shared a variety of articles and links to additional resources regarding small business relief, impacts on communities of color, and philanthropic opportunities:
The future is specialized. The rise of artificial intelligence (AI) is affecting the professional job market in much the same way automation and robotics impacted production and service jobs over the past decade. The current turmoil in the global economy may temporarily slow the pace of change, but could trigger accelerated adoption of AI as economies recover and companies seek to reduce reliance on personnel. The question remains: As technology advances and the required workforce skills change, will there be enough skilled workers to fill those future jobs? How can workers acquire the skills needed in the new paradigm?
Rethinking education and training. The U.S. employment market pre-pandemic was characterized by millions of unfilled jobs along with a pool of underemployed or “discouraged unemployed” who had given up seeking work. When economic activity resumes, this dynamic will still exist and may in fact be exacerbated by ongoing social distancing and companies’ ramping up focus on technological solutions to business challenges.
What can investors do to help close the growing skills gap? Reskilling and upskilling may provide the answer to the current and future employment skills gap. We have identified a series of funds that invest in practical solutions to help train, reskill and upskill the workforce of today and the future. Some of the funds focus on improving the skills of young people just entering the workforce, and some provide lifelong learning needed to adapt to the rapidly changing economy.
In this report, we address the widening workforce skills gap and identify the socio-demographic groups that may be most exposed to changing technology such as automation and robotics. We identify specific investments which may help close the widening skills gap. We also share case studies of innovative training and skill-building programs.
Download Investing in the Future of Work
We are pleased to invite you to a webinar to discuss the Future of Work with experts in the field on Tuesday, June 9, at 2 pm ET. The discussion will focus on investment opportunities that promote practical solutions to help train, reskill and upskill the workforce of today and the future. Register here.
On April 22, Earth Day, Cornerstone hosted a webinar titled “Every Day Must Be Earth Day: Climate, Coronavirus and Complexity. CEO Erika Karp was joined by Karl Burkart, Managing Director of One Earth, a project of Rockefeller Philanthropy, and former Director of Science & Technology at the Leonardo DiCaprio Foundation. One Earth is dedicated to advancing cutting-edge science to address the climate crisis. The organization funded a breakthrough climate model (published as Achieving the Paris Climate Agreement Goals by Springer Nature) which shows how the world can achieve the ambitious 1.5°C goal through currently available technologies at a lower cost than our current energy system.
In a wide-ranging discussion, Erika and Karl tackled these questions:
- Is the COVID-19 pandemic related to climate change?
- Will the pandemic-related drop in carbon emissions lead to lasting changes?
- Will the oil market collapse slow the pace of transition to alternative energies?
- What is the impact of the current crisis on social and economic justice?
- What can people do to move the needle on climate justice?
In preparation for our call, Karl provided a written assessment of the questions we used to shape our discussion. Below are his responses.
Is the COVID-19 pandemic related to climate change?
There is a large and growing body of scientific literature linking climate change to the spread of vector-borne disease. Studies have focused mostly on insect carriers such as mosquitos (malaria) and ticks (Lyme). There is a general consensus that increased warming will drive increased vector-borne diseases, but no one knows exactly where and by how much.
It’s also possible that vertebrate animals are being exposed to more vector-borne diseases, making them carriers of novel diseases to humans. These ‘zoonotic’ diseases — pathogens that jump between species — include the COVID-19 outbreak, but it’s very hard to make a direct link to climate change. What we do know is that deforestation and encroachment of human activity on wildlands is creating greater risks for both humans and animals, as edge effects increase. We need to retain our current footprint of wildlands (approximately 50% of the terrestrial surface) in order to save biodiversity, preserve priceless carbon sinks, and reduce the risk of future zoonotic diseases.
Climate change will certainly increase risks to public health, and we’re only just starting to learn about the ways this could happen. An emerging body of science is looking at “zombie pathogens” that have been frozen, sometimes for centuries, but are thawing due to climate change. One anecdotal example of this, an outbreak of anthrax in Siberia in 2016, was caused by increased temperatures thawing permafrost and an anthrax-infected reindeer carcass from 1941. Whether this will happen at larger scale is a very controversial topic and the science is new, but it’s clear there are strong linkages.
Will the pandemic-related drop in carbon emissions lead to lasting changes?
It’s hard to talk about the silver lining to such a horrible pandemic, but it is true that emissions will likely drop 5-10% or more as a result of COVID-19. This is essentially exactly what was needed to get us on track to 1.5°C — a net reduction of 56% of global emissions by 2030 (or roughly 6.5% per year).
I myself had a pretty bad carbon footprint due to my travel and speaking engagements, and I’m seeing many of these venues events now going online, including Climate Week, which is normally held in New York concurrent with the UN General Assembly in September. The irony of Climate Week is that you have the whole world gathered in one place talking about solving the climate crisis while emitting enormous amounts of CO2. We’re now being forced to learn how to do many things virtually, with a much-reduced carbon footprint.
This could be a tipping point when virtual working becomes the standard, rather than the exception. A study in 2018 showed that 70% of people were able to work remotely on occasion. What if that were reversed – with physical officing being the exception rather than the rule? The permanent reduction of carbon emissions implicit in such a transformation of our work lives would be a game-changer. But I think many are rightfully skeptical that this will turn into permanent behavior change. And behavior change is only a piece of the climate change puzzle…
There’s only so much we can do as individuals to help. We need permanent policy shifts. We need to stop subsidizing fossil fuels (at a whopping $4.7 trillion per year according to the IMF) and start subsidizing clean, renewable energy. To make that shift happen, we will need a different kind of behavior change… VOTING. People need to start voting for candidates in much larger numbers at all levels of government of they care about clean air, clean water, and a balanced climate. Perhaps if we get nationwide mail-in voting, this could be the beginning of more civic engagement, which will drive the policy changes needed to solve the climate crisis.
Will the oil market collapse slow the pace of transition to alternative energies?
This is an excellent question and a very complicated subject. In my opinion, COVID-19 is “sinking all boats” — fossil fuel energy and renewable energy. I was in Riyadh for G20 meetings in late February, and prior to COVID-19 breaking out there was already a brewing conflict with OPEC+ nations balancing whether or not to cut production to stimulate falling prices. The fact of the matter is, the oil industry was already heading for a rough year. We supported research by Carbon Tracker, a think tank in the UK that has been analyzing data from many of the Oil & Gas majors, and they predicted a major decline in the sector in the early 2020s, as more and more people switch to electric and hydrogen modes of transport.
Then COVID-19 hit. The oil markets are now in a freefall, with negative trades for the first time in history. This will put a lot of oil and gas companies out of business, including the oil services industry (companies that manage, build, and maintain the production pipeline). Massive layoffs are happening right now, and when the economy comes back to life, hopefully in a year or two, it will be a huge and difficult ramp-up for the fossil fuel industry. There will be many, many losers and only a few winners. And some of the losers need to lose, like the tar sands in Alberta, which produce 25% more supply chain emissions per barrel of oil than the global average. Then there is increased demand for electric vehicles. Just last month, Tesla had record sales in China.
I’m almost brave enough to predict that COVID-19 will be the beginning of the end of the fossil fuel era as we’ve come to know it. We will have to rebuild our economy, and I think clean economy will win out, with solar and wind power now heading to 4 cents per kilowatt hour (c/kWh) on average and one solar hybrid project last summer bidding below 2c/kWh. Renewables also make the most sense as a stimulus for economic recovery, creating jobs at a ratio of 3 to 1 per dollar invested versus fossil fuels. This is not to say the renewable energy industry isn’t also being pummeled. This was set to be the biggest year in history for solar deployment, and now there are massive layoffs. We’ll just have to see how bad it will be on both sides and hope for a realignment of subsidies to promote a clean future.
What is the impact of the current crisis on social and economic justice?
First let’s consider health. Before COVID-19 hit, there were an estimated 4.2 million deaths per year due to ambient air pollution, according to the World Health Organization. Low-income communities constitute by far the majority of those deaths. And this isn’t the case just in the developing world. A recent study in California shows that black and brown people are exposed to 40% more emissions than white people. This is often due to the location of low-income communities in proximity to fossil fuel plants — land that wealthier (and historically whiter) people didn’t want to build on.
So we need to acknowledge that low-income communities were already struggling with lung disease and other diseases at a higher rate. Now, according to a new study, those same communities are experiencing many more COVID-related deaths than the national average. In Michigan and Illinois, for example, black people make up 41% of Covid-19 deaths, despite being less than 15% of the population. And in Louisiana, nearly 60% of the people who died of coronavirus in the state are black, while the demographic is just a third of the state’s population. Top all that off with the lack of socialized healthcare in the US, and you have a recipe for disaster.
There’s blame to share in many directions, but first let’s point a finger at the fossil fuel industry, and the lack of regulations to protect communities from pollution. Second, let’s look at our healthcare system in the US. Many European countries last month called citizens home who were on visas in the US because they deemed our country as lacking sufficient medical infrastructure. Post-COVID, these two problems have to be addressed to even begin a conversation about social justice. In the global context, I shudder to think about the impacts of so many people losing their jobs and livelihoods. But one thing that does appear to be emerging is a growing movement to tackle climate injustice head-on. I think COVID-19 is going to add fuel to that fire as these great inequalities in our economic system are revealed.
What can people do to move the needle on climate justice?
It shouldn’t take a global pandemic for us to see clear blue skies and breathe in clean fresh air. We deserve better. If anything good can be said of COVID-19, it is this momentary glimpse of what the sky should look like and some space to think about the future we want to create.
So what is the future we want to live in post-COVID? I think that’s the question we all need to be asking. Are we going to let the fossil fuel industry come roaring back to life? Or are we going to finally start to build the clean energy future we all need? We could have an opportunity to start righting the wrongs, provide low-income communities with access to clean energy while providing job training and income opportunities for a clean energy future. This is what a Green New Deal should focus on – pivoting subsidies away from the ailing fossil fuel sector and towards investments in renewable energy, along with a major jobs program to transition coal, oil and gas workers to good, long-term jobs in solar, wind, and energy efficiency.
Internationally, we know developing countries are going to be hard hit by the pandemic and one initiative, Sunfunder, is working to bring energy access to rural areas of Africa where it’s needed most. There is a risk of default for many community solar projects across Africa due to the pandemic, which would be a horrible loss to the people there, derailing more than a decade of progress to bring clean, affordable energy in the region. So these are the types of efforts that need to be supported now more than ever.
One thing we do at One Earth is to identify key initiatives that are strategically important in creating a green future and achieving the 1.5°C goal of the Paris Climate Agreement. If you’re interested, please feel free to visit our website OneEarth.org and sign up for a monthly briefing of projects around the globe that are working towards a green, and sustainable future.
Editor’s Note: From an investment perspective, there are numerous ways to deploy capital in support of climate justice. Cornerstone Capital Group works with to clients to identify their financial goals and impact interests, and recommends appropriate investment solutions. Our recommendations reflect rigorous research into investment opportunities to understand their risk and return profile, their environmental, social and governance characteristics, and the degree to which an investment facilitates access to the products, services and systems needed to achieve the United Nations Sustainable Development Goals. If you would like to explore how Cornerstone may be able to serve you, click here.
We recently hosted a second discussion on the near-term impact and longer-term implications of the current coronavirus pandemic. Cornerstone Managing Director Alison Smith moderated a Q&A session with CEO Erika Karp and CIO Craig Metrick, based on questions submitted by attendees. The dialogue focused on asset allocation, implications for various sectors and asset classes, and the role of environmental, social and governance analysis in crafting resilient portfolios. We hope you find this replay helpful, and welcome your feedback at email@example.com or via our website Contact Form.
On March 19, 2020, Cornerstone Capital Group held a conference call addressing concerns about the current coronavirus pandemic and its impact on the markets, the economy, and importantly, the changes in how we think about the infrastructure of our society over the longer term. Cornerstone’s Erika Karp, Craig Metrick and Michael Geraghty were joined by two equity managers on the Cornerstone platform: Cathie Wood of Ark Investment Management, and Garvin Jabusch of Green Alpha Advisors. The full call replay can be accessed here.
Managing Portfolio Risk Through Integrated Analysis
The participants on the call focused on the benefits of integrating environmental, social and governance (ESG) factors into the investment process in an effort to de-risk long term portfolios and identify critical growth opportunities. Both Ark and Green Alpha look at multiple risk factors at a systemic level to minimize exposure to threats such as climate change. This extends to investing in methods to address risk — such as pandemic crisis. In their view, by focusing on innovation and the future while considering all stakeholders instead of only shareholders, investors may experience better long-term returns with lower volatility.
Kicking off the discussion, Erika highlighted that “sustainable investing is a proxy for quality. It’s a proxy for innovation and a proxy for resilience. And that is precisely what we need right now.” She asked whether, when we emerge from this current crisis, we would be forever changed:
“We have to think about issues like distance learning, telecommuting, distributed health systems. We have to think about supply chain logistics. We have to think about surge capacity. We have to think about virtual entertainment, emergency service centralization, obviously food safety, water quality, hygiene standards. We have to think about mental health provision. We have to think more proactively and in an innovative way about investing. Going forward to attack these challenges, we remind everyone that impact and sustainable investing is just investing. But a more conscious, predictive way to invest. Impact investing is the new cornerstone of capitalism.”
Michael Geraghty, Cornerstone’s market strategist, discussed the volatility of the markets under the current coronavirus situation. He doesn’t believe the markets will stabilize until the virus is either contained or a vaccination is developed and made available to the public. Michael notes, however, that this is a short-term shock to the system and not a structural one. That’s not to say that this pandemic won’t have a profound effect on the economy or the markets near term. The consumer accounts for 70% of U.S. Gross Domestic Product (GDP). If consumers are staying home and hunkering down, a cut in rates by the Federal Reserve and a payroll tax cut by the Federal government won’t have a strong impact on consumer behavior.
Craig Metrick noted that Cornerstone focuses on long term investment objectives while creating an investment plan which is designed to achieve social and environmental impact. He then interviewed Cathie and Garvin as to their views on the longer-term implications of the current crisis.
Investing in Disruptive Innovation and Strong Governance
Ark Investment Management focuses on investing in disruptive innovation over a five-year time frame. Its five core themes are: DNA sequencing, robotics, artificial intelligence, energy storage and blockchain technologies. Cathie Wood noted that the companies her firm invest in are not typically in any indices. Other managers are selling these names while buying names in the indices, such as the S&P 500, giving firms like hers an opportunity to buy these innovative company stocks at lower valuations. Over the long haul, she believes these investments should outperform older economy names that still dominate the indices.
Garvin Jabusch noted that a recession is already priced into the markets and his firm is looking for companies that will perform well out of the downturn. Bottom-up analysis is key, in his view. He looks for companies that are good stewards of capital, are innovative and create solutions that will make the economy more productive. Green Alpha is a long term buy and hold manager. The firm focuses on innovative companies that can help de-risk the economy such as those engaged in decarbonization, biotech and electrification.
Summing up the discussion, which included a very lively Q&A, Erika noted: “When it comes to ESG analysis, the “G,” governance, is first among equals. Because if we’re talking about a well-governed company, then by definition it is looking at environmental and social issues. And if a company is not looking at environmental and social issues, it is by definition not well-governed. It’s tautological.”
Ark Investment Management and Green Alpha are two of the strategies included in the Cornerstone Capital Access Impact Fund. Click the link to view standardized performance and the Fund’s top ten holdings: https://cornerstonecapitalfunds.com/quarterly-commentary
You should carefully consider the investment objectives, risks, and charges and expenses of the Fund before investing. The prospectus contains this and other information about the Fund, and it should be read carefully before investing. You may obtain a copy of the prospectus by calling 800.986.6187. The Fund is distributed by Ultimus Fund Distributors, LLC. Cornerstone Capital Group is the adviser to the Fund. Investing involves risk, including loss of principal. Applying ESG and sustainability criteria to the investment process may exclude securities of certain issuers for both investment and non-investment reasons and therefore the Fund may forgo some market opportunities available to funds that do not use ESG or sustainability criteria. Securities of companies with certain focused ESG practices may shift into and out of favor depending on market and economic conditions, and the Fund’s performance may at times be better or worse than the performance of funds that do not use ESG or sustainability criteria.
Cornerstone Capital Group Founder and CEO Erika Karp addresses the state of impact investing, offering a clear distinction between impact investing, ESG analysis, and sustainability. No matter what labels are used, someday this will all simply be called “investing.” Note: This video originally appeared on cornerstonecapitalfunds.com.
The economic model of our current era is linear. We take resources from nature, make them into a product and then throw the item away when we’re done with it. The result? Overflowing landfills, trash-filled waterways and, too often, toxic waste. This rampant waste of resources poses an existential threat to the world as we know it.
What is the way forward? The circular economy. A circular economy uses as few resources as possible in product creation; keeps resources in circulation for as long as possible, extracting the maximum value from them while in use; then recovers and regenerates products and their components at the end of their service life. Embracing circular economy principles is perhaps the most essential initiative we can undertake as a global society.
In our report Intentional Design: Embracing the Circular Economy, we look across a range of sectors to identify critical resource issues and identify examples of companies that are adopting circular economy practices into their supply chain management. In many cases, companies are increasing their efficiency, reducing waste, and saving money through their investments in the relevant processes and technologies. The transition to a circular economy is also spurring new business models and collaboration across supply chains.
For investors, forward-thinking asset managers are increasingly incorporating circular economy considerations into their investment processes; “pure play” circular economy investment vehicles, though rare, do exist. The report highlights several existing investments that we consider under the circular economy umbrella. In our view, investing in the circular economy is poised to become a central theme in sustainable and impact investing.
Download Intentional Design.
SDG 8 seeks to strengthen inclusive economic growth and promote decent, productive work for all. Even with current levels of growth, it is estimated that the number of unemployed globally will rise due to expanding labor forces. Progress towards SDG 8 requires both the creation of new jobs and steps to make work conditions fair and decent. To accomplish these goals and encourage growth, the provision of basic energy, tech, transportation, and education services is crucial. SDG 8 is further refined by targets that can be more readily translated into actions. These targets highlight the interconnected nature of the goals. For example, strategies to support Decent Work and Economic Growth also promote SDG 1 (No Poverty), and SDG 9 (Industry, Innovation, and Infrastructure). Below are a series of synergies that can come from providing access to products, services and systems that address Decent Work and Economic Growth.
Invest in Access to Fair Treatment and Equal Opportunity
Fair treatment and equal opportunity are dependent on decent work and economic growth. Social protection systems provide safeguards to extreme poverty and unfair treatment, but 55% of the global population lacks at least one of these protections.1 Currently, there are approximately 152 million children globally aged 5-11 participating in the labor force, a situation detrimental to their futures and well-being.2 Unfair workplace treatment is also reflected in the gender pay gap. Currently, the difference in earnings between men and women sits at 23% and may take decades to close without renewed action. In addition, there are significant gender differences in access to job opportunities as 94% of men ages 25 to 54 are in the labor force compared to 63% for women of the same age.3 Efforts toward decent work and inclusive economic growth must address these issues of differential work treatment and opportunities.4
Invest in Access to Financial Services
Currently, there are two billion people who lack access to financial services, leaving them unbanked.5 Financial services allow individuals to take ownership of incomes, savings, assets, and investments. Services to be provided include automated teller machines, point of sale terminals, branches of payment services, and agents of payment services.6 Participation in the use of financial services allows individuals and firms to gain financial stability, insure against risks, and invest in education.7 In these ways and more, access to financial services underpins job creation and overall increases in economic productivity.8
Invest in Access to Telecommunication Services
Telecommunications are closely connected to the provision of access to decent work and economic productivity. Individuals typically benefit from the establishment of the internet through e-mail, social networks, and search engines.9 When businesses are able to harness digital technology, they gain access to more markets, experience increased efficiency, and can develop innovative links with customers.10 For example, the internet is being used by entrepreneurs for online payment platforms which significantly streamline transactions.11
Invest in Access to Education
Investing in education and job training enables individuals to develop the skills and knowledge crucial to succeed in the workforce and increase earnings.12 Additional education leads to easier entry into the job market, and to more stable employment opportunities that require skills such as basic literacy or computer use. The relationship between education and decent work is even stronger if the skills that are taught are relevant to the types of employment available in the local context.13 Beyond these individual benefits, a workforce with knowledge and skills gained through education and training is more productive and is capable of introducing innovative processes or ideas into a business.14
Invest in Access to Affordable, Sustainable and Modern Energy
Reliable and modern energy goes hand in hand with economic stability and growth.15 Energy enables businesses and industry to increase productivity and can bring access to fundamental internet and telecommunications connections.16 Accordingly, the presence of modern energy is essential in generating additional employment opportunities as economic activity accelerates. To complement the environmental goals embodied by the SDGs, however, the energy sources used to enable economic growth and opportunity must also be sustainable and climate-conscious.
Invest in Access to Clean Air
Fostering opportunities for decent work is difficult if workplace conditions are unhealthy. Many types of work environments can have poor and unhealthy air quality, including construction sites and office buildings with poor ventilation.17 If workers are exposed to pollutants such as radon, dust, or mold, they can develop respiratory issues like asthma, chronic lung diseases, and cancer.18 Clean air has also been linked to broader economic benefits due to more productive workforces and healthier populations, resulting in avoided medical expenses.19 Improving access to clean air within the workplace and without can thus establish the conditions necessary for decent work and economic growth.
Invest in Access to Safe, Affordable and Sustainable Transportation
Economic growth depends on efficient, reliable and interconnected transportation networks. Seaports, rivers, railways, roads and airways and informational technologies all serve to establish trade routes and link businesses with their consumers. The resulting efficiencies in conducting transactions and accessing materials enables the growth of existing businesses and facilitates the establishment of new enterprises. Transportation is also important for individuals to obtain decent work: With greater mobility options, workers are better able to reach job centers that are not always close by.20
SDG 8: References
On May 20, we hosted a video webinar with Cornerstone’s Katherine Pease and Craig Metrick, who provided an overview of our new impact measurement framework, the Access Impact Framework. Katherine and Craig provided background on why Cornerstone created the framework, our rationale for basing our framework on the UN Sustainable Development Goals, and described our methodology.
Rising income and wealth inequality is a widely recognized social concern in the United States. This is a multi-faceted issue, with root causes that vary according to demographics, and one that impact investors have shown strong interest in addressing.
Since the 1990s, there has been a growing disparity in economic opportunity for rural Americans. This demographic issue has gained public awareness in mainstream social discourse in the recent past. In this report, we lay out the key challenges faced by rural America, highlight approaches to revitalization that have proven effective, and describe existing investment strategies.
The decline of manufacturing and shift to a knowledge- and service-based economy left many rural communities unable to recover adequately from the Great Recession of the late ’00s. The resulting challenges can be summarized as:
- Lack of jobs, or a mismatch in skills with available jobs.
- Poor infrastructure: Rural communities often lack high speed internet, access to quality healthcare, and local banking services.
- Drug addiction, specifically opioids, which compounds the effect of limited health care access.
Effective strategies for revitalization
Asset-based community development (ABCD) is a “self-help” strategy that sets the stage to attract private loans and investments by taking advantage of a community’s existing strengths. Initially a community might use government or foundation funding to develop community assets, e.g. supporting existing local entrepreneurs or developing local natural resources to offer an attractive quality of life. Once an initiative proves viable it may be possible to attract private investment.
Community Development Finance Institutions (CDFIs) and other local intermediaries can help aggregate capital to support local investment. Aggregators attract capital to an investment theme and allocate sums to projects that need funding.
Real estate development is another possible path to revitalization, with Opportunity Zones potentially attracting investment that might not otherwise be economically feasible.
We highlight several initiatives that are under way related to broadband projects in small communities that may finally begin to deploy this critical infrastructure.
Lastly, we highlight how some communities are making a concerted effort to attract a younger population and stem the “brain drain” of rural youth to urban areas.
For investors interested in promoting capital investment in infrastructure and businesses that create jobs in rural America, there are various strategies one can consider across asset classes. We describe these strategies in this report; some are general categories of investment, and in other cases we refer to specific strategies available to our clients.
The U.S. Impact Investing Alliance and the Beeck Center at Georgetown University have authored a paper outlining a framework for Opportunity Fund managers entitled Prioritizing and Achieving Impact in Opportunity Zones. The framework provides guiding principles for investors to combat economic inequality and barriers facing low-income and underinvested communities while avoiding unintended outcomes (such as gentrification vs. generating community benefits). The paper outlines a reporting framework that helps fund managers provide effective information to encourage market formation and enable community engagement before and during investments. The authors and contributors also highlight a method for impact measurement and reporting to track transaction level data along with community impacts and metrics. Responsible exits and outcomes reporting are discussed as well.
“The best investments in Opportunity Zones will be firmly rooted in local context and will engender local champions by being responsive to community priorities or input,” says Fran Seegull, Executive Director of the Alliance. “The framework is meant to guide all of us working in this new market – investors, local leaders, fund managers and others – through that conversation so we can lift up and amplify best practices around the country.”
For more details regarding Opportunity Zones, and the questions regarding these investments, please refer to our recent report, “Opportunity Zones: Positive Intentions, Many Questions.”
While there are still many questions regarding Opportunity Zones which will not be answered until the final rules for Opportunity Zones are announced by the U.S. Treasury and the IRS, investors might lay the groundwork for their investments by utilizing this framework so they can prepare to invest effectively when those rules are issued.
This article originally appeared in Investment News on December 13, 2018.
Sustainable and impact investors are set to intensify their decades-long support for action on climate change on the heels of a recent report from the Intergovernmental Panel on Climate Change and the Fourth National Climate Assessment, issued by the U.S. government.
The U.S. government notes that unless urgent action is taken, climate change could shrink the U.S. economy by hundreds of billions of dollars every year in direct costs. Consistent with these findings, the IPCC’s alarming (and unsurprising) conclusions are that urgent global economic transformation is needed to head off catastrophic damage to ecosystems, communities and economies beginning within a quarter century.
Many investors now understand that climate change is not merely an environmental issue but a material economic risk for long-term portfolios. However, investors should avoid a single-minded focus on climate change that ignores the relationship between ecosystems and human development.
The IPCC report stresses that an effective fight against climate change must include efforts to achieve sustainable development goals such as gender equality, the eradication of poverty, and food security.
In other words, how we fight climate change matters. Even the most optimistic scenarios will require substantial human adaptation to changed ecosystems, which will be especially challenging for poor or marginalized communities. Achieving sustainable development goals will strengthen the ability of poor communities to adapt to inevitable change and complement more direct efforts to mitigate climate change. However, these climate mitigation efforts by themselves may either help or hinder progress towards the sustainable development goals.
For example, mitigation strategies such as reforestation or biofuel development may reduce the land available for agriculture at a time when crop yields are already declining because of rising temperatures and water stress. The resulting increases in food prices have the effect of reducing buying power and possibly destabilizing civic and political cultures in developing countries.
Conversely, sustainable agricultural strategies, conducted with attention to social equity, can increase food security and counteract some of the negative effects of climate change on drinking water, biodiversity and income inequality, while reducing greenhouse gases associated with intensive farming practices.
The empowerment of women can also support and reinforce both climate change mitigation and adaptation. Improving the quality of cookstoves available to poor women has the direct effect of reducing fuel use and deforestation. It also reduces asthma rates, which improves educational outcomes, and empowers women by freeing them from the labor-intensive “drudgery” of traditional cooking methods.
Numerous studies have also shown that as women gain education and empowerment, they earn more income and often choose to have fewer children, which is associated with reduced poverty and lower greenhouse gas emissions.
The introduction of modern technologies such as cookstoves into poor households would have an undeniably positive effect on quality of life for the poor and the resilience of their communities. However, the resulting increase in the demand for energy could undermine the intended climate benefits unless these strategies are accompanied by investments in renewable energy and energy efficiency — both of which come with additional benefits for income and energy access.
These and many other examples demonstrate the need for a holistic understanding of the connection between issues of climate and human development. Yet much of the financial capital flowing into climate mitigation today is motivated solely by opportunities for financial return arising from new public policies and the dramatic improvement in renewable energy technology.
These flows are important for achieving global scale for environmental solutions. However, a lack of attention to the social dimension of investment decisions may create a blind spot for unintended consequences that counteract environmental benefits.
The insights of sustainable and impact investment offer an essential complement to mainstream financial analysis. Integrating environmental, social and economic concerns into investment analyses can yield a more nuanced understanding of the complex interactions between climate and society. As part of this analysis, a commitment to stakeholder engagement will help investors incorporate the perspectives of local communities who will be impacted by investment decisions — because, as the IPCC report notes, climate change will impact people differently depending on geography, income and culture.
So what can investors who are concerned about climate change do? First, their investment policy statements should explicitly incorporate both climate change and key related social issues, such as gender equity, poverty, food security, and health. Second, the evaluation of investments or investment strategies intended to address climate change should integrate an analysis of their impact on broader sustainable development goals. Third, investors should use their voice to ask companies, governments and financial markets how climate change and sustainable development is incorporated into policy, planning and performance measurement.
An effective response to climate change will require the mobilization of every resource available to society, including governments, business, and civil society. Given the unique power of financial markets, investors can contribute to a long-term solution or exacerbate existing problems. Sustainable and impact investors have an opportunity to influence the outcome, if they choose to take it.
We recently hosted a live video webinar to discuss ways in which investors can contribute to the narrowing of economic disparities through a dedicated emphasis on investing in underserved minority communities. Our panel, moderated by Randall Strickland, Cornerstone’s Director of Client Relationship Management, featured Pat Miguel Tomaino, Director of Socially Responsible Investing for Zevin Asset Management, and Julianne Zimmerman, Managing Director of Reinventure Capital.
When we at Cornerstone Capital Group first discussed the idea of exploring arts and creativity as an impact investing theme, our greatest challenge was narrowing the scope. To our thinking, creativity fuels every successful human enterprise. Creativity, to form something new and valuable based upon a different perspective, is essential for economic development and capital formation. In fact, in the ancient world the concept of creativity was simply seen as “discovery.” In truth, it is. And there is no better time than now to put this capacity to work. If we are to address to world’s pressing challenges ranging from climate change, the extinction of species, and the poisoning of our seas, to advancing gender and racial equity, and access to nutrition, healthcare and education, then we need to deploy all the resources at our disposal to discover and scale solutions. After all, as Sharon Percy Rockefeller has stated, “Art is the conscience of a nation.”
And there are compelling reasons to consider “creativity and the arts” as an investment theme in its own right. Cornerstone’s Head of Research and Corporate Governance, John Wilson, lays out the case for investing in the “creative economy” as one way to counter the negative effects of widening income and wealth inequality, and the opportunity gaps, that have resulted from the “knowledge economy.” Laura Callanan, a Founding Partner of the field-building organization Upstart Co-Lab, cites creative enterprises as “an on-ramp to wealth-building for entrepreneurs including women, people of color and others who benefit from lower barriers to entry to a sector of the economy more interested in merit than advanced degrees and pedigrees.”
As for the historical tendency to view “the arts” as the purview of nonprofit organizations and grant-making, Gary Steuer of Bonfils-Stanton offers a compelling argument for eliminating the “artificial distinctions between enterprises rooted in what are often arbitrary or historical decisions on legal corporate structure,” instead finding the best mix of funding, whether philanthropic, concessionary lending or market-rate equity or debt, to invest in creative enterprise. His unique perspective as a leading philanthropic voice whose career has spanned a variety of roles in the for-profit, government and nonprofit worlds has led him to see the “enormous opportunity to drive economic growth and employment through coherent, broad-based strategies to invest in this space.”
This report is intended to provide a window into the rich array of opportunity to make meaningful and profitable investments that empower entire communities both economically and culturally. We thank all of our contributors for their enthusiastic support in bringing these stories together. We would like to offer special thanks to Laura Callanan and Upstart Co-Lab for their tireless efforts to build awareness of creative enterprise as a distinct impact investing theme, and for introducing us to a number of the organizations and individuals who made this report possible.
Individual contributor posts:
Investing to Sustain Innovation, John K.S. Wilson, Cornerstone Capital Group
A Creativity Lens for Impact Investing, Laura Callanan, Upstart Co-Lab
From “The Arts” to “Creative Enterprise”: Perspective from the Philanthropic Sector, Gary P. Steuer, Bonfils-Stanton Foundation
Creating a Seat at the Table, Adam Huttler, Exponential Creativity Ventures
The Creativity Lens in Practice: LISC’s NYC Inclusive Creative Economy Fund, Sam Marks, LISC NYC
Artists, Cultural Enterprises and the Affordability Crisis, Mark Falcone, Continuum Partners LLC
Public/Private Partnerships Fueling a Renaissance, Franklyn Ore, The Newark Community Economic Development Corp
Unlocking Embedded Community Assets, Deborah Cullinan, Penelope Douglas, CultureBank
An Exceptional Model: The Bell Artspace Campus, Greg Handberg, Artspace
Investing for Good: A Creative Land Trust for London, Will Close-Brooks, Investing for Good
Everyone Together, All Forward, Christopher Johnson, Danika Padilla, Drew Tulchin, Meow Wolf
Gaming on a Mission, Amy Fredeen, Alan Gershenfeld, E-Line Media
Make Local Work: The Story of an Artist Entrepreneur, Mary Stuart Masterson, Actress, Filmmaker and Entrepreneur
Why and How Impact Investing in the Creative Economy Fosters Innovation, Todd Siler, Ph.D., Visual Artist and Educator
How Consciousness and Creativity Amplify Impact, Robyn Ziebell, Resolve4Life
Creativity and the Arts: Integral to Impact, Phil Kirshman, CFA, CFP, Cornerstone Capital Group
Note: Certain contributors to this report may represent asset managers or specific investment opportunities. Their inclusion is not intended to be, nor should it be construed, as a recommendation or endorsement of their products or services by Cornerstone Capital Inc. The views expressed by external contributors do not necessarily reflect those of Cornerstone Capital Inc.
Do we invest enough in creativity? The question may seem absurd in an era dominated by the “knowledge economy,” in which companies create value through ingenuity and expertise, while many of our most important emerging product lines enable the advance and communication of knowledge. But a casual review of the business press reveals that some companies that market themselves as innovators also suffer from toxic workplace cultures and dysfunctional corporate governance. These problems suggest that it is not enough to invest in “knowledge” while neglecting the people who create this knowledge. The contributions to this report offer impact investors a roadmap for investing directly in the individuals and communities that make creative enterprises possible.
Challenges of Today’s “Knowledge Economy”
Why have so many companies dependent on a motivated and engaged workforce become so toxic for employees? Finance may be part of the problem. The need to deliver financial returns pressures companies to bring products to the broadest possible market in the shortest amount of time. Achieving scale rapidly allows companies to dominate their market and generate outsized returns to investors, while companies that fail to deliver scale in a short timeframe often get left behind. The pressure to focus solely on growing revenues, market share and company valuations can distract from critical, but less tangible, imperatives such as developing constructive corporate cultures in which creativity can thrive over time.
This model of growth fuels expanding inequality as a few companies come to dominate the market. The six largest U.S. technology companies make up almost 18% of the S&P 500 by market capitalization. Despite their size, these companies employ few workers relative to the industrial giants of the past—General Motors employed about 10 times as many people in 1979 as Alphabet does in 2018.
While those who work at top companies enjoy generous pay and benefits, incomes for the most families have stagnated as middle-class manufacturing jobs have been replaced by lower-paying service jobs. By 2017, median household income in the United States had grown only 2% since 1999. During this time the typical household had suffered through two substantial downturns in median income (2000 and 2008), both of which exacerbated inequality as top incomes recovered quickly and continued to grow.
Inequality may insulate top corporate executives and professionals from the communities that are impacted by their actions. They may forget that their companies can do harm as well as good, and may come to tolerate inappropriate and unacceptable workplace behaviors. Their product offerings may cater to the elite audience that is familiar to them, neglecting the needs of the broad population that may have very different needs and interests.
Employees may hesitate to bring concerns for fear of seeming disloyal or insufficiently committed to the goals of the company. Customers may feel powerless to challenge companies with near monopolies over services that seem essential to modern life. Many traditionally marginalized social groups, including women, people of color, and rural communities, find that barriers to inclusion in the “knowledge economy” remain as high as ever.
As numerous examples (e.g., Uber, SoFi, Weinstein Co.) demonstrate, the resulting tensions and resentments may undermine the company’s ability to continue to innovate. This is bad news not only for investors, but also for employees and a public that hopes for a continual flow of new products and services that improve lives.
An Alternative Approach
An alternative is to invest directly in enabling and nurturing creativity itself. Each of the business models described in this report exists to develop the human capital embedded in every community, especially those marginalized groups who struggle to compete in the economy because of a lack of resources or because the existing knowledge economy does not sufficiently value their unique capabilities. The role of these entities is to empower people to transform local artistic, design and cultural resources into sustainable businesses that serve their communities and create engaging work opportunities that will not be lost to outsourcing or automation.
Scale is achieved not by dominating markets with commoditized products but by replicating successful local models in ways that are tailored to the needs of each individual community. While financial capital is an important resource for these companies, the interests of the community, not the demands of capital, drive business strategy. Market returns are delivered by unlocking talent untapped by the market and by the creation of sustainable businesses that are deeply embedded in local culture and traditions.
There may be many strategies for accomplishing these goals. The organizations represented in this report are each involved in one or more of four “enabling technologies” that provide access to resources that are critical to the success of local, sustainable, and replicable cultural production.
Access to Affordable Spaces: The concentration of U.S. economic activity into a relatively small number of urban centers has created an affordability crisis for many artists and creative professionals who live there. In many cases, the appeal of these cities is in part the presence of art and cultural institutions that moved in and preserved these communities when industrial and retail companies abandoned them. Artspace and Continuum are now in the process of developing affordable living and working spaces that will nurture artistic communities and allow them to continue to serve their surrounding areas, network and collaborate with one another, and serve as a platform that amplifies their work. Over in the U.K., where London’s notorious real estate prices have created a similar squeeze on artists, impact investing firm Investing for Good has formed The Creative Land Trust, which intends to build a network of sustainable, permanent spaces that will remain affordable for artists and creative producers in perpetuity.
With projects such as these, government entities often have a role to play, as illustrated by the work of the Newark Community Economic Development Corporation to close funding gaps for private development projects that bring specific benefits to the arts and creative communities; in representing the city of Newark, New Jersey, the NCEDC’s goal is to foster economic revitalization while preserving that city’s vibrant identity as a cultural melting pot.
The actor Mary Stuart Masterson is taking a slightly different approach with her nonprofit organization Stockade Works and intention to launch a for-profit production facility, Upriver Studios. These organizations are intended to build a television and film production industry in the Hudson Valley of New York, which not only offers a beautiful backdrop for the creation of content, but also a high quality of life and reasonable cost of living, making it attractive to the thousands of professionals who work in the film and television industry.
Access to ownership and influence: Core to the philosophy of the creative economy is inclusive decision-making and common ownership of resources. CultureBank and Meow Wolf are exploring new models of inclusive ownership that give creative professionals a stake in the organization and ensure that the organizations serve the interests of their stakeholders. Meow Wolf is expanding on the initial success of its business model in the Santa Fe area by constructing and operating arts and entertainment spaces that are in part owned by the artists who will display and perform their work there. In exchange, the artists donate their time to building and maintaining the space itself, which ensures that the properties will themselves be entertaining works of art.
CultureBank seeks to unlock the “assets of value, opportunity and inspiration” held by communities “traditionally understood as poor.” It seeks to create businesses where all stakeholders are considered investors. Founded in collaboration with the Yerba Buena Center for the Arts, CultureBank plans to include local academics and cultural institutions to perform due diligence on possible investment recipients and to invest through collaborative “gifting circles” that unlock community assets such as language skills, natural green spaces, or creative approaches to food security.
Access to Expertise: Local communities, such as indigenous communities or communities of color, are often rich in history, tradition and capability but may not possess the technical skills to bring their narratives to a wide audience. Creative economy companies can connect this needed expertise with local cultural assets to reach a wider audience.
E-Line Media offers a compelling case study of the possibilities. What began as an idea of Alaska’s Cook Inlet Tribal Council—to use gaming as a way to connect Alaska Native individuals to their culture and to increase self-sufficiency—grew into a highly profitable partnership that is now extending to other creative initiatives. E-Line media made this venture possible by connecting the community to experienced game designers who could make their vision a reality.
Stockade Works, mentioned above, is training local people in the Hudson Valley for well-paying jobs in the film production industry.
More broadly, Think Like a Genius® makes use of some proven, arts-based learning methods and tools for catalyzing and cultivating innovative thinking, while creative entrepreneur Robyn Ziebell uses her unique methodology to help clients from a variety of backgrounds tap their innate creativity to see solutions and opportunities.
Access to Capital: Often, creative enterprises lack access to finance, which flows more readily to technologies that scale. Fortunately, there are companies exploring ways to provide essential financing to distinctive cultural products that can sustainably serve niche markets and maintain market diversity.
Exponential Creativity Ventures believes “creativity and self-expression are human rights.” It makes market rate investments in “human centered creativity platforms, global networks for developing creative voices, and frontier innovation.”
LISC (Local Initiatives Support Corp) has a long history of serving as an intermediary connecting funding sources with hard-to-reach communities. The LISC NYC branch of this community development organization is launching a fund specifically targeting investments to support creative businesses in the city.
Our present era of inequality of opportunity brings with it previously unimagined new products and services that enrich lives. It also brings abuse, exclusion, and inequality. By investing in creativity and the arts, investors can contribute to sustainable innovation that nurtures talent, empowers communities and brings diversity of thought to the market.
This is an excerpt from Cornerstone Capital’s report Creativity & The Arts: An Emerging Impact Investing Theme.
The creative economy is large and growing. But until now impact investing has not focused on the creative economy in a significant way.
Defining the Creative Economy
The term creative economy was introduced in an article by Peter Coy in 2000 about the impending transformation of the world’s economy from an Industrial Economy to an economy where the most important force is “the growing power of ideas.” John Howkins elaborated in his 2001 book, The Creative Economy: How People Make Money from Ideas, calling it a new way of thinking and doing that revitalizes manufacturing, services, retailing, and entertainment industries with a focus on individual talent or skill, and art, culture, design, and innovation.
Today, creative economy definitions are typically tied to efforts to measure economic activity in a specific geography. A relevant set of art, culture, design, and innovation industries is determined, and the economic contribution of those industries is assessed within a region. A unique set of industries defines each local creative economy reflecting the culture, traditions and heritage of that place.
Based on research by the Creative Economy Coalition (CEC), a working group of the National Creativity Network; the National Endowment for the Arts and the Bureau of Economic Analysis; Americans for the Arts; the U.K. Department for Culture, Media and Sports; Nesta, a U.K.-based innovation foundation; and the United Nations Educational, Scientific and Cultural Organization (UNESCO), Upstart Co-Lab identified a set of industries comprising the creative economy using the North American Industry Classification System (NAICS). Available here, these NAICS codes describe businesses engaged in the inputs, production, and distribution of creative products.
Impact Investing and the Creative Economy
The creative economy in the U.S. represents more than 10 million jobs and $763 billion of economic activity, or 4.2% of U.S. GDP. The creative economy is growing at 9% annually around the globe, and even faster—at 12%—in the developing world.
Despite the growing significance of the creative economy, in 2018, the Global Impact Investing Network’s (GIIN) Annual Impact Investor Survey reported Arts & Culture as 0.3% of the $228 billion worth of impact assets under management by its 226 global members. This conclusion overlooks the likelihood that investments in the creative economy are counted in the survey’s other categories such as Microfinance, Food & Agriculture, Manufacturing, ICT and Other.
A narrow framing of “Arts & Culture” misses the significance of creativity and culture as targets aligned with four of the Sustainable Development Goals. It overlooks the creative economy as a source of 21st century quality jobs. It fails to recognize the creative economy as an on-ramp to wealth building for entrepreneurs including women, people of color and others who benefit from lower barriers to entry to a sector of the economy more interested in merit than advanced degrees and pedigrees.
The creative economy has been flying under the radar of impact investing. In low-income communities, creativity and culture have been part of comprehensive community development for decades. But only this year is the first dedicated investment opportunity—the LISC NYC Inclusive Creative Economy Fund—available to investors looking to direct their capital to support creative workspaces and quality jobs in the creative economy for low-income workers.
Although Upstart Co-Lab has identified 100 examples of impact funds that have included fashion, food, media and other creative businesses as part of their portfolios, when impact wealth advisors are asked by their clients for opportunities aligned with art, design, culture, heritage and creativity they typically—and erroneously—answer that no such opportunities exist.
Introducing a Creativity Lens
The creative economy’s lack of visibility within impact investing is why Upstart Co-Lab borrowed from the lessons of gender lens investing to introduce a Creativity Lens. A lens brings things into focus, magnifying what may be hard to see with the naked eye, and allows viewers to spot what’s approaching on the horizon. Upstart Co-Lab proposes a Creativity Lens to help see the impact investment potential of creative places and creative businesses, to reveal opportunities that up until now have not been fully recognized but are becoming more significant as the creative economy grows.
- Businesses in the creative economy make markets by informing and educating consumers about products that are organic, sustainable and ethical. These fashion, food and design businesses create demand throughout the supply chain, completing the work made possible by impact investors who support sustainable fisheries and organic farming.
- Media businesses producing video games, film, television, apps and other content harness the power of creativity and culture to educate our youth, help patients manage their chronic disease, teach tolerance and empathy, and catalyze positive action for the planet. These are high-leverage opportunities that can have a big impact on attitudes, individual behavior and even government policy.
- Real estate developers in places like Denver, Chicago, Nashville and Los Angeles are incorporating creativity and culture into large-scale mixed-use, mixed-income projects, adding value to their assets and to the surrounding communities.
A Creativity Lens gives investors the chance to spot these types of opportunities, and to help shape a creative economy that is inclusive, equitable, and sustainable.
Why Impact Investors Should Invest in the Creative Economy
There are three key reasons for impact investors to embrace a Creativity Lens:
More prospective investment opportunities and portfolio diversification: As impact investing goes mainstream, there need to be more quality opportunities to absorb the additional capital; including the creative economy puts new high-potential companies in scope. Adding another segment of the economy to the impact investing universe also offers investors a chance to diversify their market exposure. It offers diversification from an impact perspective as well, bringing cognitive diversity by including creatives as problem-solvers and getting more eyeballs on the issues.
More ways to get social impact: Investors can further their current impact goals by including creative businesses in their portfolio. Businesses in creative industries are delivering impact for the environment, health, and education, among other priorities. Investors aligning with the Sustainable Development Goals will find synergy as well. And the impact that creativity and culture contribute to low-income communities has already been well documented.
Build a sustainable creative economy now; no need to fix it later: The presence of capital that values inclusion, equity, and sustainability can ensure companies in the creative economy are providing quality jobs, acting positively for the environment, and strengthening their communities. Entrepreneurs leading companies in creative industries want to deliver impact and need impact investors to stand with them. The creative economy is growing. Let’s help shape the creative economy now so as grows, it grows the right way.
Upstart Co-Lab has identified a current pipeline of 125 investable opportunities in the creative economy that will drive impact. In aggregate, they are seeking more than $3 billion in impact capital. One-third of the opportunities are funds. Two-thirds are direct company and real estate investments, many of which are seeking a lead investor.
In the U.S., museums, performing arts centers, art and design schools, performing arts conservatories, artist-endowed foundations and other institutions connected to art, design, culture, heritage and creativity—with an aggregate $50 billion-plus in assets under management—have been sitting on the sidelines of impact investing. The creative economy can be the door to welcome these institutions into a larger conversation about aligning their financial assets with their missions and values.
This report demonstrates that the time is right to make a market connecting viable businesses in the creative economy that seek values-aligned capital with investors who understand the power of creativity to drive economic opportunity, offer quality jobs, strengthen communities, and improve social well-being and our quality of life.
This is an excerpt from Cornerstone Capital’s report Creativity & The Arts: An Emerging Impact Investing Theme.
Photo: Upstart Co-Lab meeting on definiting the Inclusive Creative Economy. ©Upstart Co-Lab.