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 firstname.lastname@example.org or via our website Contact Form.
As a firm dedicated to a vision of a more inclusive and regenerative world, we at Cornerstone wonder, will humanity look back at this season of fear and be proud of how we responded? Will we appreciate those who gave more than their fair share to fight the pandemic? Will we recognize the synchronicity in which much of humanity comes together to observe traditions marking rebirth, recommitment to faith, family and community, and humble recognition of our role in healing the world?
As we observe the holidays of Passover, Easter, and Ramadan this month, there is another notable eternal connection between us. Abraham Lincoln’s death, marked in the Hebrew calendar, coincides with Passover every year. And Lincoln said, as if to us today, that “My great concern is not whether you have failed, but whether you are content with your failure.” Have we learned the lessons from past disasters? Have we mitigated the destruction that this virus without borders has caused? Have we eased the spiritual and financial hardship descending upon so many people around the world? Can we move forward?
I am not content with failure. While we know we are in a global health crisis, and we are certainly in an economic crisis, we are also in a crisis of confidence … confidence in our governmental institutions, confidence in our financial institutions, confidence in our capitalist institutions. I am not content to stand by in this very special season and allow confidence to be forever lost. So, right now we need to use our traditions to begin to heal ourselves and our institutions, and to move forward.
So much of the symbolism and tradition across the three major religions describes the same events, just from different points of view. Passover is the story of freedom. It is the story of the liberation of body and spirit. With the storytelling come lessons of humility — the belief in something larger than ourselves. Passover marks our move from slavery to liberation. We commemorate the hardships and the miracles, and we move forward, celebrating our freedom with family and food.
Easter is closely linked to Passover, of course, not just by the (presumed) historical concurrence of the Last Supper with a Passover seder, by also by ancient symbols. As the Seder plate holds an egg to symbolize the cycle of life, rebirth, and renewal, in Christianity the egg became associated with the resurrection. And across the centuries, these stories have never lost the power to inspire the imagination of generations of humankind as we move forward.
And with Ramadan, we have another holy time for families. Ramadan is a time of rededication to core values. It balances the deep introspection of the long day’s fast with gatherings to strengthen the bonds of family and friendship. And what could society need more right now than the pillars of Islam, among them charity and philanthropy, tolerance, justice and honesty?
So, in this very important season, in these very dark days, we move forward. And to Cornerstone Capital Group, moving forward means maintaining our belief that confidence in the capital markets can be restored. That good governance is a proxy for quality. That a long-term commitment to sustainable and impact investing can provide positive social impact as well as strong returns over time. And most importantly, that investments must create solutions to the world’s greatest challenges, must drive innovative, resilient and inclusive growth. And we move forward.
On behalf of the Cornerstone family I wish you peace, health and a renewed sense of hope and determination,
Erika Karp, Founder and CEO, Cornerstone Capital Group
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.
Psychedelic-assisted psychotherapy is seeing a resurgence as a treatment approach for mental health disorders. It melds pharmacology and psychotherapy, using psychedelic substances such as lysergic acid diethylamide (LSD) and psilocybin, under medical supervision, to treat conditions such as post-traumatic stress disorder (PTSD) and extreme depression. Psychedelic therapy was a popular research topic in the 1950s and 1960s; however, it lost favor by 1966 due to backlash around poor research and a growing association with the ‘60s counterculture. In recent years, interest in psychedelic therapy has regained steam. Significant, rigorous research is being funded, and FDA trials are under way for certain treatments.
The old: mid-century experimentation
Movie star Cary Grant, writer Aldous Huxley, movie director Sidney Lumet and playwright Clare Boothe Luce, along with thousands of people globally, were tested and treated with LSD and other psychedelics between 1950 and 1965. More than 1,000 published studies and six international conferences on these studies were produced during this period. However, by 1962 US regulators began to restrict the use of LSD, and possession of the drug was made illegal in 1966.
This shift in attitude was the result of poorly constructed scientific research, reports of “bad trips” and the growing association of LSD with the political counterculture. For example, Harvard psychologist Timothy Leary was accused of giving psychedelics to undergraduates without medical supervision. He was also famous for his counterculture quote, “Turn on. Tune in. Drop out.” This backlash negated some of the past accomplishments in helping individuals cope with chronic depression and other psychological problems. 
The new: mainstream medical research
Starting in the 1990s, academics began a new round of psychedelic psychotherapy research focusing on depression and anxiety in people with cancer. Today research is moving forward and broadening in scope. Several psychedelic drugs, including ketamine, methylenedioxymethamphetamine (MDMA), psilocybin, and the aforementioned LSD, are being studied for use in treating psychiatric disorders including PTSD, depression, drug, tobacco and alcohol addiction, obsessive compulsive disorder (OCD), anxiety disorders and existential anxiety related to life-threatening diseases such as cancer. 
In September 2019, Johns Hopkins announced the launch of the Center for Psychedelic and Consciousness Research. Its goal is to study LSD and psilocybin for various mental health problems, including addiction and depression. The center was established with $17 million in commitments from wealthy private donors and a foundation. This announcement followed the launch of a similar center at Imperial College London in April 2019 with $3.5 million from private sources.
Mental health disorders: demand for better treatments
According to the National Alliance of Mental Illness, a patient advocacy organization, one in five U.S. adults (over 19% of the population, or 47 million people) experience mental illness annually. This figure includes one in 25 adults (11.4 million people) facing serious mental illness each year.
People with mental health issues often do not receive help until they are in crisis. Nearly 60% of those with a mental health disorder did not receive treatment in the previous year. Also, despite the introduction of a variety of medications during the past decades, the rates of mental illness are not declining – in stark contrast to the success of pharmaceutical advances in treating infectious diseases.
Given the scope of the problem and questions regarding the effectiveness of current treatments such as antidepressants, which often entail unpleasant side effects, interest has grown in new areas of treatment. Recent studies have been promising. In psilocybin trials at Johns Hopkins and New York University (NYU), 80 cancer patients suffering from cancer-related anxiety or depression received psilocybin in a session guided by therapists. In the resulting study published December 2016, 80% of the Hopkins volunteer subjects were reported to have experienced significantly reduced depression and anxiety from a single large dose of psilocybin. These improvements continued for six months or more. 
The challenge in considering use of psychedelic therapy is how to obtain FDA approval; the FDA typically focuses on the effectiveness of a medication rather than the effectiveness of a therapy. According to Dr. Thomas Insel, former Director of the National Institute of Mental Health, it is key that researchers focus on safety and medical/psychotherapeutic use, rather than recreational use. One very negative experience can risk derailing the research efficacy.
Promising trial results
In a step forward toward FDA approval, the non-profit Multidisciplinary Association for Psychedelic Studies (MAPS) is studying MDMA-assisted psychotherapy for people with PTSD. The objective is to find out whether MDMA-assisted psychotherapy can help heal the psychological and emotional damage caused by sexual assault, war, violent crime, and other traumas.
In 2017, the FDA granted Breakthrough Therapy Designation for a MAPS Phase 3 clinical trial of MDMA. Phase 3 is the final phase of research required by the FDA before deciding whether to approve a drug as a legal prescription treatment, which in this case involves MMDA to treat PTSD. Prior Phase 2 clinical trials showed that MDMA can reduce fear, enhance communication and introspection, and increase empathy, augmenting the therapeutic process for people suffering from PTSD. In the trial, participants all had suffered chronic PTSD for an average of more than17.8 years. After three sessions, over 60% of participants no longer had PTSD, and in a 12-month follow-up, 68% no longer had PTSD.
The advantage of MMDA-assisted psychotherapy is that MMDA is only administered a few times, unlike most medications for mental illnesses which are often taken daily for years, and sometimes forever. Many of these medications have unpleasant side effects as well.
MAPS also completed a Phase 2 pilot study using LSD-assisted psychotherapy sessions. The completed study found positive trends in reducing anxiety following two LSD-assisted psychotherapy sessions. LSD in these sessions seemed to be safely administered – and may justify further research. 
How and why does psychedelic therapy work?
In psychedelic therapy, neural networks are activated under the influence of LSD or psilocybin. The effect appears to link with the marker most correlated with personal “ego dissolution.” From the patient’s perspective this amounts to a “mystical experience.” 
Michael Pollan, a journalist and author who has written extensively about medical research related to psychedelic drugs, discussed his interviews with cancer patients participating in psychedelic tests using psilocybin at NYU and Johns Hopkins. Several described their guided psychedelic journey as similar to birth or enlightenment. It is important that participants are supervised by a qualified guide in case they have an episode of extreme anxiety, also known as a “bad trip.” The guide is there to ensure the participant has a positive experience while undergoing this type of therapy. 
A common theme that many test participants discussed was finally understanding the secrets of the universe or realizing that “we are all one.” Mysticism, love or unity are recurring themes. Many said that they visually encountered their cancer, and this had the effect of reducing its power over them. One woman who had been diagnosed with ovarian cancer years earlier and was worried about a recurrence said she envisioned a black mass while looking into her rib cage. This mass, she realized, was her fear of cancer and not the cancer itself. She confronted the mass aggressively and said she stopped worrying about a recurrence after the trial. This was one of the objectives of the trial.
Researchers know “how,” but not “why,” psilocybin tends to work in psychedelic therapy. One theory is that the drug interrupts the circuitry of self-absorbed thinking that is prevalent in depressed people, paving the way for a mystical experience. A neuro-imaging study at imperial College in London may explain why this therapy works:
The drugs appear to change “the default mode network” (shown above in (a) where there is heavier traffic over fewer connections) in the brain, which tends to be hyperactive in depression and is subdued when on psilocybin or in deep meditation. Information is usually processed in the brain using various circuits. Some circuits experience a steady stream of informational traffic while others are rarely used. Psychedelics appear to open up different circuits (shown in (b) above where more connections are utilized, freeing up space along the more heavily used ones shown in (a). This may explain the expanded sense of awareness and new perspectives among participants in psychedelic-assisted psychotherapy sessions.
Potential beyond mental health
Chronic low-grade inflammation is at the root of aging and age-related disease. Termed “inflammaging,” this impairment of the immune system contributes to the disease burden in older adults and accelerates the aging process. One notable example of this phenomenon is Alzheimer’s disease.
Studies dating back decades indicated that illnesses ranging from tuberculosis to diabetes responded well to treatments with peyote (taken in low dosages). According to Shlomi Raz, founder of the company Eleusis, which is focused on research in this space, “In 2008, the psychedelic compound related to the primary psychoactive alkaloid in peyote, mainly mescaline, was discovered to exert ‘extraordinarily potent’ anti-inflammatory effects at very low drug concentrations.” Very low dosages of this compound didn’t tend to induce changes in brain function that might alter perception, mood or behavior.
Additional studies have confirmed the capacity of psychedelics to modulate processes that perpetuate chronic low-grade inflammation. The psychedelics seem to exert significant therapeutic effects in a diverse array of preclinical diseases, including asthma, atherosclerosis, inflammatory bowel disease and retinal disease. 
Given the large and growing problem of mental health disorders today, it appears that current standard pharmaceutical options are insufficient to the challenge, especially for treatment-resistant conditions such as PTSD, chronic depression, high anxiety related to terminal illness, and persistent drug or alcohol addiction. A new approach, such as psychedelic-assisted psychotherapy, may offer a solution to a problem that traditional pharmaceuticals haven’t solved.
Currently, with a few exceptions, research in this space is still in the early stages. While near term investment options are very limited, this is a topic that bears watching and may offer some good impact investment options in the near future.
 Paul Summergrad (psychiatrist) & Thomas Insel (neuroscientist): Future of Psychedelic Psychiatry- April 26, 2017 with George Goldsmith – Executive Director of Compass Pathways
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.
SDG 3 seeks to promote health and well-being for all. While the overall health of the world’s population has improved, many population groups have been left behind. Many diseases remain widespread and deadly, yet are preventable with access to appropriate healthcare. Unsafe drinking water, polluted air, and poor housing conditions are all linked with negative health impacts, and the goal calls for change in each of these areas. Progress in SDG 3 means stronger, more productive individuals and communities, and fulfills the basic requirement of good health for the successful pursuit many other SDGs. SDG 3 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 Good Health and Well-Being also promote progress toward SDG 5 (Gender Equality) and SDG 6 (Clean Water and Sanitation). Below are a series of synergies that can come from providing access to products, services and systems that address Good Health and Well-Being.
Access to Healthcare Services
Expanding access to healthcare services is fundamental to improving health and wellbeing. In many parts of the world, lack of access to essential care means high numbers of preventable deaths. More than 300,000 women died from maternity-related causes in 2015, mainly in regions where antenatal care is less common and where most women do not receive professional assistance during birth.1 Vaccine and medicine access worldwide is also insufficient for diseases like HIV, pneumonia, and measles, allowing outbreaks to persist.2,3 Even where quality health services are available, affordability often proves to be the greatest barrier; low-income individuals in the US are less likely to have health insurance or to pursue primary or specialty care,4 facing higher rates of morbidity and mortality as a consequence.5 Recent action to bring health care to more people has made great strides in each of these areas, but more work remains to be done.
Access to Clean Water
Safe drinking water is fundamental for a healthy life, yet 2 billion people still use a drinking source contaminated by human waste, and over 800 million lack access to a basic drinkingwater source.6 Contaminated water spreads diseases like typhoid, cholera, and diarrhea, which kills more than 2,000 children each day — a greater toll than AIDS, malaria, and measles combined.7 Even where improved water systems exist, contaminants like lead and nitrates can elevate the risks of blood poisoning and cancer.8,9 Few cases better illustrate the fundamental link between clean water and health than the recent water crisis in Flint, Michigan; in the 18 months following a switch in water source for Flint residents, 12 people died and 87 fell ill from the unsafe water.10 Fortunately, solutions are possible and impactful: A $1 intervention to provide clean water access creates $25.50 of benefits on average as people spend less time and money dealing with illness, and as deaths from unsafe water are prevented.11
Access to Clean Air
The health effects of poor air quality are a growing concern as pollution levels increase globally, contributing to one out of every nine deaths12 and creating unhealthy air conditions for 95% of the world’s population.13 The use of coal and fossil fuels releases a large amount of pollutants, including particulate matter and black carbon, which causes respiratory disease, cardiovascular disease, and cancer.14 Indoors, nearly 40% of the population still relies on the burning of biomass, coal, and charcoal for heating and cooking, making air inside the home unsafe to breathe.15 Replacing exposure to unsafe air with access to clean air is an urgent need to enable healthy and full lives for all.
Access to Adequate Housing and Living Conditions
Access to affordable and quality housing is foundational for healthy lives. Individuals who experience homelessness or housing instability suffer negative mental health impacts and have more difficulty adhering to health treatment.16 Poor housing conditions also have adverse effects on well-being, often linked to respiratory problems when mold or hazardous materials are present.17 Problems such as these combine with lack of sanitation and clean water for the nearly 1 billion people living in substandard housing conditions in the southern hemisphere.18 Fortunately, efforts targeting better access to stable and adequate housing have been shown to improve health outcomes for many residents.19
SDG 3: References
1 World Health Statistics 2018: Monitoring health for the SDGs, World Health Organization (WHO)
3 Progress and challenges with achieving universal immunization coverage: 2016 estimates of immunization coverage. WHO/UNICEF Estimates of National Immunization Coverage (Data as of July 2017). Geneva: World Health Organization; 2017
4 Dhruv Khullar Dave A. Chokshi. 2018. Health, Income, & Poverty: Where We Are & What Could Help. Health Policy Brief. Health Affairs
5 Andersen, R. et al. 2002. Access to Medical Care for Low-Income Persons: How Do Communities Make a Difference? Medical Care Research and Review
6 Progress on drinking-water, sanitation, and hygiene, 2017. WHO
7 Diarrhea: Common Illness, Global Killer. CDC
8 Elevated Blood Lead Levels in Children Associated with the Flint Drinking Water Crisis: A Spatial Analysis of Risk and Public Health Response. Hanna-Attisha M, LaChance J, Sadler RC, Champney Schnepp A. Am J Public Health. 2016; 106(2):283-90
9 Environmental justice and drinking water quality: are there socioeconomic disparities in nitrate levels in U.S. drinking water? Laurel A. Schaider, Lucien Swetschinski, Christopher Campbell, and Ruthann A. Rudel. Environmental Health. 2019
10 Flint Water Crisis: Everything You Need to Know. NRDC. 2018
11 Diarrhea: Common Illness, Global Killer. CDC
12 Ambient air pollution: A global assessment of exposure and burden of disease. 2016. WHO
13 State of Global Air. 2018. Health Effects Institute
15 Access to Modern Energy: Assessment and Outlook for Developing and Emerging Regions. 2012. IIASA.
16 Taylor, Lauren. Housing And Health: An Overview of the Literature. Health Affairs Health Policy Briefs. June 2018
17 Butler, Stuart and Marcella Cabello. Housing as a Hub for Health, Community Services, and Upward Mobility. Brookings Institute. March 2018
18 Slum Almanac 2015/2016. Tracking Improvement in the Lives of Slum Dwellers. Participatory Slum Upgrading Programme. UN Habitat
19 Taylor, Lauren. Housing And Health: An Overview of the Literature. Health Affairs Health Policy Briefs. June 2018.
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.
In our recent report Sustainable Protein: Investing for Impact at the Nexus of Environment, Human Health and Animal Welfare, we pointed out that in developed countries, diet-related health concerns and less- or no-meat lifestyles have sharply reduced consumption of red meat. Flexitarian, vegetarian and vegan preferences have been driven, in part, by animal welfare and climate change concerns.
Today, a flexitarian diet – one that doesn’t adhere to a specific eating style and may combine plant-based and meat-based dishes – is now practiced by 31% of Americans, with another 13% subscribing to a specific eating lifestyle such as veganism or vegetarianism. In the U.K., almost 13% of the population is now vegetarian or vegan, with a further 21% identifying as flexitarian, according to a 2018 survey of British consumers. Our report also highlighted a preference by consumers for fresh and organic products.
On February 21, Kraft Heinz announced that it was writing down the value of some of its best-known brands by $15.4 billion which, according to a Bloomberg article was “an acknowledgment that changing consumer tastes have destroyed the value of some of the company’s most iconic products.” Subsequently, the stock price of Kraft Heinz plunged 21%.
Another Bloomberg article observed that “all the old guards of the supermarket aisles are struggling as consumers opt for fresher, less-processed and more on-the-go food items from upstart businesses.” In our report, we pointed to rapid growth in the organic yogurt, almond milk and protein bar categories in recent years, with many of the leading companies being relatively young start-ups. While Kraft Heinz attempted to respond to these trends, its efforts haven’t been enough. As Bloomberg observed, the company “has tried to spruce up a tired suite of brands — from organic Capri Sun to natural Oscar Mayer hot dogs.”
Our report concluded that, reflecting the shift to sustainable protein, opportunities exist in alternative proteins, organic foods, new agricultural technologies, sustainably managed farmland, and sustainable fisheries and aquaculture.
 Kraft Heinz Falls Near Record Low on $15.4 Billion Writedown, 2019-02-22
 Kraft Heinz’s Financial Recipe Turns Sour, 2019-02-22
Advances in agricultural technology, changes in human diet, and rising awareness of the environmental destruction caused by factory farming are accelerating the rise of sustainable protein.
Investors can target a number of outcomes — access to a sustainable food supply, lower greenhouse gas emissions, more plentiful and cleaner water, and a reduction in animal cruelty — through sustainable protein related investments. Opportunities exist in alternative proteins, organic foods, new agricultural technologies, sustainably managed farmland, and sustainable fisheries and aquaculture.
In this report we outline how a confluence of behavioral, technological, and regulatory changes have fueled the trend toward sustainable protein; identify emerging developments in the “alternative protein” space; and highlight ways to consider sustainable protein investment across asset classes.
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.
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.
I have been thinking about and working in and around the role of capital in arts and creative enterprise for over 40 years. I have watched the rise of the terms creative economy, impact investing and creative placemaking. We may finally now be reaching a critical place where we can do away with the artificial distinctions between enterprises rooted in what often are arbitrary or historical decisions on legal corporate structure—nonprofit, for-profit, independent artist—and consider creative enterprise as a sector that encompasses all these structures. And we can then look at sources of capital — equity, debt, philanthropy—based on their appropriateness for the project or organization.
The arts sector is filled with many for-profit activities. Broadway and dinner theatre; most community dance schools; many music venues (and related music businesses such as producers, recording studios, music publishing, promotion); art dealers, galleries, framers and art handlers; lighting and sound supply companies; literary publishers and agencies—just to name a few.
It has long concerned me that in both the government and philanthropic arenas we have treated “the arts” as consisting purely of nonprofit arts organizations. The truth is that the arts is a fluid ecosystem that includes individual artists and for-profit creative enterprises. By focusing on only one segment of the sector, funders and policy-makers miss significant opportunities to build a holistic, thriving creative community and industry, at both local and national levels.
The U.S. Bureau of Economic Analysis in 2017 reported that the arts and “cultural production” contributed $764 billion to the U.S. economy, representing 4.2% of GDP (based on 2015 data), more than such other industries as construction, transportation/warehousing, travel/tourism, and agriculture. The analysis includes both nonprofit arts enterprises as well as such for-profit industry areas as advertising; interior design; landscape design; “arts support services” like lighting and sound rental, framing and art handling, etc.; publishing; motion pictures and broadcasting; and musical instrument manufacturing, just to name a few. In some states and localities the percentages can be much higher. Clearly there is enormous opportunity to drive economic growth and employment through coherent, broad-based strategies to invest in this space.
An Evolution in Thinking
Perhaps my perspective on this issue is shaped by having moved fluidly during my 40-year career in the arts between the for-profit side and nonprofit side, government and private philanthropy, actively producing and presenting art, and working more behind the scenes on advocacy and policy.
My jobs included serving as an aide to a US Congressman, managing a cabaret/musical theatre program at a nonprofit theater (that was actually structured as a largely earned income supported enterprise), directing programs for an arts service organization, producing commercial theater, serving as managing director of an Off Broadway theatre, running a facilities grant program for a state arts agency, leading a nonprofit theatre on Broadway, and then for over ten years serving as CEO of the Arts & Business Council in New York, up to and through its eventual merger with Americans for the Arts.
In 2008 my growing belief that we needed to change the paradigm of “arts = only 501c3 arts organizations” led me to take a position as the first Chief Cultural Officer for the City of Philadelphia, directing a newly created Office of Arts, Culture and the Creative Economy. While exact statistics are hard to come by, I believe that made me the first major city “arts agency” head to report directly to the Mayor and be part of the Mayor’s cabinet, AND the first to head an agency with an explicit creative economy focus. We commissioned a Creative Vitality Index study over a three-year period, which was the first time Philadelphia had looked at its “creative sector” including both for-profit and nonprofit businesses. The study methodology was not perfect, but it helped advance the conversation. We also used case studies that helped “tell the story” of creative entrepreneurs—including a maker space, an individual artist who worked in both nonprofit and commercial settings, a commercial manufacturing and cultural hub operating out of a former textile factory, and an innovative partnership between a commercial music club and a public radio station.
At one point we were able to access a significant allocation of the City’s Community Development Block Grant funding (CDBG) to support the creative economy in lower-income neighborhoods, and we created a program to invest in creative workspace facilities projects. This was open to both for-profit and nonprofit projects. That seemingly small detail made it groundbreaking. We did away with the artificial distinction and looked at our underlying objective: securing affordable space for artists and creative enterprises. Why should it matter that this was being executed by a business or entrepreneur marrying our capital with other sources, such as bank loans and tax credits, versus a nonprofit perhaps using entirely philanthropic capital?
The Challenge for Foundations
And now here I am in Denver, serving as President of the Bonfils-Stanton Foundation, which has a philanthropic focus on the arts in our local community. How do I bring this more expansive definition of creative enterprise to the work we do? As a private foundation we cannot make grants to for-profit creative enterprises, but we can explore utilizing impact investing with our corpus as a vehicle for helping to foster a robust creative sector. And this is what has led me to explore the role of impact investing in the arts and creative enterprise. My interest is on behalf of my own foundation, but is also based on my conviction that there are investment opportunities in this area and many other investors like us eager to deploy capital in pursuit of both reasonable financial returns and an arts and creative economy mission return.
While we have engaged in Program Related Investments within the arts—significantly below-market loans that from an accounting standpoint count as grants even though they are returned (one anticipates) with modest interest—we have yet to implement an impact investing program. Why, given our keen interest? Here are the questions we need answered:
- As a foundation with a mission focus on the arts, how do we do impact investing just in creative enterprise? There are targeted vehicles for other sectors like affordable housing or the environment, but not yet for the arts.
- Like most funders (and even many individual impact investors), we have a specific local focus —how do we do creative enterprise impact investing that is targeted to a locality or region?
- Again, like most foundations, virtually all our investment portfolio is deployed in funds or other investment vehicles that spread risk across a wide array of investments in companies within their investment category (emerging markets, mid-cap, etc.). We do not have the scale to do the due diligence of investing in individual companies. Can funds be created with a creative enterprise sector focus, one that will allow investors to make a single investment which is then aggregated with capital from other investors to support a diversified array of investment opportunities?
- And if such dedicated funds are not available, but are in fact part of a larger impact investing fund that includes creative enterprise, or if a creative enterprise fund is created but is only national in scope, how do we persuade boards and investment committees that a partial mission return is better than none?
It is my hope that research and education efforts like this publication can lead to greater understanding and awareness, the creation of new creative enterprise investment vehicles that meet what I believe IS a significant enough market demand, and ultimately the deployment of capital into creative enterprises that will help fuel creativity, innovation and vibrancy in our communities while also generating market returns that can satisfy boards and investment committees. Interest in impact investing in general is growing, and evidence of its efficacy now exists. What we need is the cultivation of comparable interest, tools, and evidence in the creative enterprise space. We, and many others, are poised to act.
This is an excerpt from Cornerstone Capital’s report Creativity & The Arts: An Emerging Impact Investing Theme.
Photo: Gary Steuer at the Museum of Contemporary Art Denver, where a Bonfils-Stanton Foundation-led PRI was part of a package of capital that resulted in dramatic debt service savings. ©Kelly Shoads.
Media consumption is passive. At least, that’s been the dominant paradigm for the last century or more. Under this unidirectional model, a small number of people control both production and distribution, deciding in the process whose stories are told and whose are silenced.
In recent years, however, the internet has lowered—and sometimes demolished—barriers of access, unleashing an explosion of meaningful creation, an increase in both the quantity and quality of work by amateur creatives, and an increasingly blurred line between consumer and creator.
Silicon Valley has largely failed to adapt to this emerging paradigm shift, choosing instead to continue pursuing maximum-growth-at-any-cost via the relentless commoditization of content. At the same time, existing models of impact investing in the arts have tended to follow a quasi-philanthropic model, emphasizing arts and community development, studio and performance spaces, and nonprofit arts organizations.
There’s nothing inherently wrong with either of those approaches, but at Exponential Creativity Ventures, we have a different philosophy that offers an alternative model for investors.
We’re in the midst of an historic moment for value creation in human-centered creativity platforms, thanks to the democratization of technological infrastructure and the disintermediation between artists and audiences (think YouTube, Etsy, Kickstarter, and many others). Fractured Atlas, our nonprofit parent organization, was an important player in the first wave of this trend: the DIY and indie arts movements. Its software platforms have come to provide 1.5 million artists across North America with essential back-office business infrastructure, freeing their time and energy for creative work. By leveling the industry playing field, Fractured Atlas has given independent artists and underrepresented voices opportunities to be heard.
In the continuing democratization of arts and media tech, Fractured Atlas saw both a danger and also an opportunity. The danger was in allowing those technologies’ development to be driven and guided exclusively by profit-maximizing investors whose interest in appealing to the broadest possible audiences tends to lead to the commoditization of content. Allowing that to happen threatens one of our most cherished values: that creativity and self-expression are human rights. Allowing that to happen also marginalizes minority voices, fosters dangerous echo chambers, and leads to a global homogenization of culture, expression, and representation.
The flipside of this threat, however, was an opportunity. Fractured Atlas realized that it could pull up an alternative seat at the table, one committed to supporting an ecosystem of human-centered, creativity-enabling tech; to helping the entrepreneurs and innovators who are driving the paradigm shift toward creation; and to nudging the continued progress of these technologies in an inclusive, humanistic direction. We sensed we could provide that seat while also capturing some of the extraordinary economic value being created.
So, with an initial $2 million commitment from Fractured Atlas at the start of this year, we officially launched Exponential Creativity Ventures, a $20 million evergreen fund investing in human-centered creativity platforms, global networks for developing creative voices, and the underlying frontier tech innovation that makes it all possible.
Before re-entering the creative tech space as venture capitalists, we first had to ask: Would there be sufficient deal flow to achieve both the social and financial returns we were targeting? Very quickly, we determined the answer was a resounding yes. By leveraging Fractured Atlas’s existing network, we found ourselves with an extraordinary pipeline of opportunities straight out of the gate. Within our first month, we met with hundreds of great companies in their earliest stages. The founders who came to us included accomplished artists and casual creatives alike, and we were also pleasantly surprised by the diversity of this community.
The biggest challenge we’ve faced has been in explaining our model to investors. Exponential Creativity Ventures has an unapologetic mission orientation that prompts skepticism from “pure money” investors. At the same time, our focus on technology startups and market-rate returns means we don’t fit the traditional “impact investor” mold either. This straddling of silos led to some frustrating initial conversations with potential backers.
We eventually hit our stride, however, when we launched an “Ambassador Round,” targeting small investments from arts and creative industry thought leaders and influencers. From March to July 2018, we raised $300,000 (exceeding our $250,000 target) from an extraordinary mix of people—a Broadway producer, the CEO of a leading digital arts marketing firm, the founder of Creative Capital, a Google executive, a slow food movement entrepreneur, and a music industry data scientist, to name a few. None of these individuals are traditional LPs, but they deeply understand the markets, use cases, and constituents we’re serving. They also have some context for understanding Fractured Atlas’s track record and our credibility as investors.
As an evergreen fund, we can invest and raise in parallel, and to date we have made initial investments of a combined $1,085,000 in 11 companies. More often than not, we’ve been the first institutional investors on their cap tables, positioning us to help them raise much larger amounts in later rounds. These portfolio companies are working on projects ranging from augmented reality and artificial intelligence to new musical instruments and a global market for culturally iconic indigenous art. A complete list of these exceptional companies can be found on our website.
Among our bedrock values is the belief that a healthy foundation for creativity must be maximally inclusive. To that end, we are proud to report that 70% of our investments to date have gone to founders of color and 60% have gone to women founders.
Each of these creative technologies represents the kind of impact that Exponential Creativity Ventures aims to make: lowered barriers of access, the continued democratization of creativity and tech, and financial competitiveness, both for communities of artists and creatives and for underrepresented and underestimated founders, entrepreneurs, and communities writ large.
Photo: ECV portfolio company Roots Studio digitizes the work and stories of traditional artists in the developing world, then licenses and produces prints, apparel, and stationery. ©Roots Studio, Inc.
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.
LISC’s newly launched NYC Inclusive Creative Economy Fund marks both a bold, new direction for our organization and a natural extension of our long track record of bringing technical and financing resources to low- and moderate-income communities.
Over our four decades as a Community Development Financial Institution (CDFI), LISC has been an impact investing pioneer, raising and blending capital and then deploying that capital with a social purpose, making loans to borrowers in low- and moderate-income communities where typical financial institutions don’t reach. While LISC’s financing activities may be best known for affordable housing, our diverse loan portfolio has historically included a significant commitment to arts, culture, and creativity. As part of our partner Upstart Co-Lab’s 2017 report study, “Creative Places and Businesses: Catalyzing Growth in Communities,” LISC reviewed its lending activity since 1980 and found that we have financed 98 projects related to arts, culture, and creativity representing $139 million in direct lending volume and over $900 million in total development costs.
Thus, to some degree the NYC Inclusive Creative Economy Fund builds on LISC’s established tradition of financing the creative economy. Yet our new initiative signals a deepening of LISC’s commitment to arts and culture and a more intentional strategic approach. Working with Upstart Co-Lab, LISC has been applying a “creativity lens” to our core impact investing activities, which is having dynamic implications for our overall strategy, expanding our market niche as a provider of capital for arts and creativity and broadening our investor relationships. As Upstart Co-Lab founder Laura Callanan is fond of saying, “A lens is a view finder; it helps you to see, and it brings things into focus. Creative places and businesses have always been part of comprehensive community development. But it’s been flying under the radar.”
Solving for Today’s Challenges
LISC NYC was born in 1980 to solve for the problem of disinvestment in “redlined” neighborhoods like the South Bronx, helping reverse the city’s decline by investing in abandoned housing stock and bringing residents back to these communities. Today, by contrast, New York City is booming. The city’s population is growing, and private investment is flowing, even to neighborhoods that historically have been underinvested. The problem we are solving for today, then, is the danger of displacement for low- and moderate-income New Yorkers who are squeezed by the combination of high real estate costs and flat wage growth due to structural changes in the economy.
Historically, LISC NYC had focused on the affordable housing side of that equation. When Upstart Co-Lab and LISC began talking about teaming up to launch an impact investment opportunity, LISC NYC was in the process of reframing its local strategy to be more responsive to contemporary conditions. In 2016, with significant philanthropic investment from Citi Foundation’s Community Progress Makers Fund, we invested in staff and expertise to develop a strategy to apply our lending expertise to equitable economic development, with a focus on creating and preserving middle-skill jobs for New Yorkers.
With Upstart Co-Lab as a strategic partner, LISC NYC began to view its equitable economic development activities through a creativity lens. We began to build a pipeline of loans to a range of new partners that were building and stewarding spaces for enterprises that provide middle-skill jobs: supporting affordable artist studios, spaces for artisans and light manufacturers, and cultural venues that enable creative endeavors that would otherwise not find space to work or perform in New York City. ArtBuilt NYC, for example, has developed 50,000 square feet at the city-owned Brooklyn Army Terminal in Sunset Park, providing affordable work spaces with long-term leases to artists, artisans, and creative entrepreneurs.
We are also lending to partners like the Brooklyn Navy Yard Development Corporation and the nonprofit developer Greenpoint Manufacturing & Design Center. Both of these nonprofits are providing affordable space to high-value, small-batch manufacturing firms that bridge so-called “knowledge workers” (the “design” side of design-build) with fabricators, machine operators, and craftspeople (on the “build” side). And our initiative includes loans to vibrant arts organizations like La Mama on the Lower East Side, whose mission is to provide performing space for artistic voices that otherwise might not be heard in this city. The lending activities emerging from this pipeline have not only adhered to LISC’s rigorous credit standards but also fit squarely in our mission to catalyze opportunities for low- and moderate-income people.
Applying a creativity lens to LISC NYC’s lending work has also opened an opportunity for us to attract new forms of impact capital. Like most CDFIs, our lending capital has come largely from financial institutions motivated by regulatory obligations under the Community Reinvestment Act (CRA) to lend and invest in low-income neighborhoods, leveraging equity-like investments from the US Treasury’s CDFI Fund. While LISC has successfully attracted program-related investments (typically from some larger national foundations), LISC has only rarely gained traction with impact investors such as high net worth individuals, family offices and endowed institutions.
We have just begun formally marketing our NYC Inclusive Creative Economy Fund and gaining traction with impact investors who find the impact, risk, and return profile of this opportunity compelling. LISC is issuing notes with an 8-year maturity that pay interest of 2.75% per annum. While proceeds from the notes will be used to fund loans supporting the inclusive creative economy, the notes are a general obligation of LISC, with recourse to the organization’s diversified balance sheet. In other words, purchasers of the notes do not take on project risk and can underwrite to LISC, which has been rated AA by Standard & Poor’s and has, for 40 years, repaid all of its borrowers on time and in full.
We are hopeful that LISC NYC’s initiative will be replicated across LISC’s national platform of 31 sites, and further, that the Fund will help make the case for a broader adoption of a creativity lens across impact investment capital. To accomplish this replication, LISC and its fellow impact investment practitioners could do the following: advance more locally driven intentional strategies to cultivate arts, culture, and creativity; and advocate for a more robust policy and subsidy support, to create a better enabling environment for inclusive creative economy real estate, making it a more central part of the public discourse.
Photo: A creative business housed at a building owned and operated by Greenpoint Manufacturing and Design Center in Crown Heights, Brooklyn. ©Tim Soter courtesty of LISC NYC.
Note: Information regarding the NYC Inclusive Economy Fund is provided for informational purposes only, and is being shown to illustrate the growing variety of impact investment opportunities creativity and the arts. It should not be construed as an endorsement or recommendation of the fund by Cornerstone Capital Inc.
One of the most significant legacies of the housing collapse, which triggered the Great Recession of 2008-11, was the undermining of confidence Americans had in the venerable single-family home. For generations, owning a single-family suburban home was a linchpin of most Americans’ retirement and savings strategies. The fracturing of that doctrine coincided with the demographic rise of the millennials into the housing market. These factors combined to shift capital flows to center-city rental housing at a pace city planners could only fantasize about for decades.
While this newfound prosperity in our urban centers is exciting news for policymakers long frustrated by the post-World War II decline of these downtowns, it has brought some unintended consequences. The pace of investment in these neighborhoods has driven up the cost of space for all property types at extraordinary rates. This has been good news for those of us in real estate with significant exposure to the affected markets; however, there is another side to that coin. For many residents and institutions that have historically been located in or near center-city neighborhoods, the market is now pushing them aside at alarming rates.
Continuum was formed in 1997 around the belief that the failed urban development policies of post-war America had caused intolerable long-term stresses on our center cities, their citizens and the broader regional environments. By the early 1990s, the complex set of regulations, tax subsidies and design doctrine that accumulated to drive the great American suburb had resulted in a systemic shift of investment capital away from center cities and their historic infrastructures to the green fields of these new suburban regional centers. Since 2010, however, center-city neighborhoods in all 30 of the largest U.S. metropolitan areas gained significant market share over their suburban counterparts. Gentrification is now the new crisis city leaders are urgently mobilizing resources around. Metro areas from Los Angeles to Denver are rushing to raise new tax dollars to provide more housing assistance to low- and median-income residents.
This abrupt shift in prosperity is having a broad range of unintended consequences. One particularly unexpected effect has been the backlash against artists and cultural enterprise spaces (such as art studios and galleries), which are now seen by some vulnerable communities as the tip of the spear for fresh waves of gentrification.
It is an ironic consequence given that during the decades of decline in American urban centers, employers moved out, retailers abandoned their downtown flagships, and even the churches relocated to new mega facilities on the urban edge, but artists and the institutions that support them steadfastly remained committed to the urban cores. In many situations the leadership of the signature art museums and performing arts organizations became essential drivers of the booster network for these center cities. Their employees also found reasonably priced housing in city neighborhoods and were engaged in neighborhood activism. Over the years Continuum has been a significant supporter of these institutions—and we are now confronting the realization that our business success is severely hampering their ability to continue to prosper.
Supporting the Link Between Culture and Neighborhood Stability
From our early days as a mission-focused development firm, we saw an essential link between a robust cultural economy, neighborhood stability, and real estate value. One of our earliest projects included a new Museum of Contemporary Art for the City of Denver. My wife and I donated a piece of land to the Museum in an up-and-coming neighborhood, around which Continuum went on to develop multiple projects. In the early 2000s we funded a new contemporary art space called the Lab at Belmar, embedded in the center of a 100-acre neighborhood we transformed from a broken regional shopping mall to a new 30-block precinct in Lakewood, Colorado.
As an organization we continue to find ways to support our local arts communities; for example, we recently opened the new Hotel Born at Union Station in Denver and commissioned more than 700 original works of art from Denver artists for the building.
None of these efforts is enough, however, to stem the generation-long effects which will result if we as a society allow the diasporization of these important creative thinkers and enterprises within our communities. We at Continuum think of ourselves as human ecologists and understand the value that diverse and politically courageous voices bring to the governance of our center cities. We are committed as an enterprise to working towards more equitable housing solutions for all constituencies in our society, but we see the challenge for artists as becoming particularly complex. Over the last couple of years, this issue hit a flash point in the Boyle Heights neighborhood in Los Angeles, where artists and gallerists were aggressively harassed when they entered that neighborhood in pursuit of more affordable spaces. Some members of this historically Latino working-class neighborhood decided they needed to send a clear message to the artists, some of whom ultimately closed their studios and galleries.
The link between neighborhoods rich in cultural enterprise and rising real estate values has become a foundational principle of real estate investing. New arts districts spring up in rural towns from Oregon to Georgia; suburban communities in Kansas City are onto the trend as well. The strategy has become a key economic revitalization tool for any aspirational community in search of a marketing message. The challenge for center cities is that the romantic notion of the bohemian creative seeking out a cheap space in an overlooked ghetto is a trite memory of an era gone by. Maintaining a healthy population of creatives is something no big city mayor or civic booster can take for granted. And now, instead of the artists living peacefully amongst an underserved population linked in common neighborhood advocacy, they are viewed by those same communities as the leading edge of the bourgeoisie who will follow.
Finding New Solutions for Coexistence
Over the past 18 months, Continuum has been doing research on new ownership vehicles for real estate projects that are designed to create long-term rent security for their occupants. We are interested in establishing a new capital platform that can bring a more holistic solution to these complex societal challenges. We believe the existing capital and ownership vehicles driving this current transformation of our communities need to be reconsidered in a manner which allows more of the wealth created by the escalating values of these neighborhoods to remain in the local communities. It is our hope that through these new vehicles we can offer long-term neighborhood stability both to the artists and to the historical residents.
We expect to launch our first projects under this model in early 2019. Inherent in this model is a mechanism which would slow the rate of rent growth in high-value areas in perpetuity. The enterprises will be funded with tax-exempt debt instruments and include investments by a network of social impact investors. While our initial focus will be for members of our creative communities, over time we expect this vehicle can be extended to address other key populations such as teachers and other essential service providers in our cities.
Cities are dynamic ecologies. Stresses and opportunities shift constantly. The physical framework of our cities has deep impact, not only on the environmental footprint of our habitat but also on the social cohesion of our populations. We believe it is essential that our settlements are conceived and regulated in ways that ensure all its residents have reasonable access to jobs, education and cultural enrichment in order to maintain a healthy and durable community. It is our belief that the private sector should lead the path to these outcomes–after all, our investments depend on healthy and resilient neighborhoods to grow in value.
Photo: ©Shifting Narrative/Shutterstock
 Foot Traffic Ahead 2016 – The Center for Real Estate and Urban Analysis at George Washington University.
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.
Newark is the largest and most populous city in the most densely populated state in the U.S. It has a rich history dating to colonial days, a highly diverse population that has fostered a vibrant mix of cultural traditions, and sits in the heart of the broader New York metropolitan area. It has also seen more than its share of challenges, offering a classic example of the economic decline and blight that affected many large cities in the latter decades of the 20th century.
Today, Newark is experiencing a renaissance. Poets, musicians, actors, artists and intellectuals are moving from New York City and around the world to converge and collaborate with long-time local creative residents. The City of Newark is pushing the limits of its new narrative—to be known as a competing “livable city.” This urban cultural rebirth is gaining national attention, as evidenced by our joining the list of potential locations for Amazon’s second headquarters. Talented creatives, young professionals, entrepreneurs and real estate developers are capitalizing on the revitalization of Newark—but this attention brings risk to the multiple struggling populations that call Newark home.
The Newark Community Economic Development Corporation (NCEDC) is the primary economic development catalyst for the city. It is organized to retain, attract and grow businesses, enhance small and minority business capacity, and spur real estate development throughout the city’s 20 diverse neighborhoods. One of the NCEDC’s key current focus areas is to plan real estate developments that continue to serve the makers, creatives and artists who fuel the city’s unique culture. We know the classic story: Once a city’s market shows signs of economic and cultural reawakening, populations with deeper resources from neighboring areas engage as “urban pioneers.” The creative populations are then priced out of the same city they helped to make desirable. The NCEDC is working in partnership with the Mayor and the City of Newark’s EHD, and private developers, to prevent this from happening as Newark continues its resurgence.
For the emerging buildable market, the availability of funding sources makes it extremely challenging for property owners or developers to adequately rehabilitate properties to serve the valuable makers and creative population. Here is where the City of Newark, through the NCEDC, is playing a key role.
To illustrate how the city is working with private partners, we highlight two flagship developments, well underway in the planning phases, that will focus on affordable spaces intended to support and retain Newark’s creative resources.
Seaview Development Corp, a private real estate development firm based in New York, is proposing to build an 81-unit mixed-income, mixed-use project in Newark’s Central Ward, titled Makers Village.
The project centers on the restoration of the Krueger-Scott Mansion, which has been vacant for at least 30 years. The mansion was built in the late 1800s by a German immigrant who became a highly successful local beer merchant; it was later home to Louise Scott, founder of the Scott School of Beauty and one of the first African-American woman millionaires in the city. The legacy of the Krueger-Scott mansion as a home to entrepreneurs has inspired the idea of creating a nonprofit center serving the residents of Newark.
The proposed plan is to build an entrepreneurship center utilizing the mansion along with affordable loft commercial shops for makers. The development will also maintain an urban greenhouse farm and a commercial kitchen for chefs, which will be available to the public to rent or for chefs to host open events. A maker will be able to lease an apartment plus loft space for $1800 per month, enabling a start-up to affordably conduct light manufacturing within the space. The redevelopment plan entailed rezoning to allow for light manufacturing, residential and mixed uses specific to the Krueger-Scott project.
The total development cost will be approximately $30 million; the city is subsidizing the development with $9 million in support via sources such as a new market tax; historic tax credits, a redevelopment area bond, and affordable housing trust funds. Since the Makers Village project was announced, other developments within the immediate area with significant social and economic impact have sprouted up. It is important to note that these projects require deep subsidy by the City of Newark, the State of New Jersey and Federal funding. The projects must create a feasible return on investment in order for investors and the City of Newark to fund.
505 Clinton Avenue
The City of Newark is sponsoring another arts-focused development project along the Clinton Avenue artist corridor. The 27 live/work lofts mixed-use project will maintain another 2,000 square feet of retail and performance space for artists, poets and the community.
The development site is the former Clinton Trust Company, a stately building that also sat abandoned for decades. The building’s historic facade will be saved for this project with modern construction attached. Phase II of the project will contain performance studios and a gallery space at the cellar level. The total project cost is $8.5 million, which is being totally funded by the City of Newark and the Newark Community Economic Development Corporation as redeveloper. The project, conceived by Mayor Ras J. Baraka, is intended to revitalize the South Ward neighborhood and serve as an anchor of culture and the community. The project will also maintain a Trust ownership for the local creative population. Most developments that provide an economic good to the low- to moderate-income populations require at least 10-15% subsidy within the capital stack in order to make these projects financially feasible.
The City of Newark has faced the challenge of standard affordable housing development policies not adequately addressing creative low- and moderate-income populations. To obtain the city’s and NCEDC’s support, development proposals must leverage the unique talents of the creative class, as they were the original stabilizers of the “Newark Renaissance.” This is a space whereby investments can generate reasonable returns. Subsidies provided by local, State and Federal governments are leveraged as funding sources that decrease risk to investment institutions and individuals to support the dual goals of financial feasibility and economic and social vitality.
Photo: Conceptual rendering of the Makers Village project. ©Makerhoods.org.
The heart of CultureBank is this:
Communities that have been traditionally understood as “poor” are not. They hold assets of value, opportunity, and inspiration. Undeveloped assets in marginalized communities—assets like music, dance, cultural tradition, diverse language skills, natural green spaces, oral narratives, and people themselves—are extremely valuable in achieving long-term health and shared prosperity. Identifying and unleashing the potential of these assets will help communities thrive.
But developing these assets requires a new model for investment and for assessing returns on investment. CultureBank is an entirely different investment platform, seeking to trigger a cultural shift in social impact investing and community development so that assets of all kinds can be understood, leveraged, valued, and shared. In its very early stages of development, CultureBank is founded on three critical concepts:
- CultureBank believes that artist-driven enterprises are essential to nurturing and revealing community value because of their demonstrated ability to identify and lift assets in communities; we therefore seek to develop our ecosystem of artist-driven enterprises.
- Rather than return on investment, CultureBank seeks a “ripple of investment” through imaginative structures that create value that can be commonly experienced, and where everyone is an investor—the artist, the financier, the community members.
- By leveraging unique investment structures, CultureBank aims to feed a rich but underinvested ecosystem of artists and connect them to growing movements to incorporate health outcomes into broader equity efforts.
What Is CultureBank, and How Will It Work?
CultureBank began as a series of conversations between Deborah Cullinan, CEO of Yerba Buena Center for the Arts (YBCA), and Penelope Douglas, a longtime community investment and social enterprise leader.
YBCA is pioneering a new model for an arts organization, one that builds the ecosystem of artist entrepreneurs and creates the conditions for diverse thinkers, inventors, innovators, and artists to come together around the critical questions in our communities and our society. CultureBank is a leading example of the kind of big idea that YBCA is interested in bringing into the world. We focus on a process of inquiry and then investment, empowering artists to become truly important early-stage investors in communities.
The concept behind CultureBank is best illustrated through our first pilot community, in Dallas.
The initial work establishes new forms of collaboration among academia (Southern Methodist University and its Meadows School), community arts and culture intermediary organizations (Texas Arts and Culture Alliance), civic engagement leadership (Ignite Arts/Dallas), formal and informal community leaders (social activists, citizens of all kinds, private wealth holders and entrepreneurs), and artists.
These collaborators participate in conversations led by artists who are working in Dallas’s underserved communities. The conversation focuses on critical questions about community assets. Inquiry might look like this:
- “How do we overcome stressors on our community?”
- “Which assets in our community most inspire us?”
- “What are the most valuable assets we have to increase community safety?”
For CultureBank, these conversations are the part of investment. Mainstream impact investors go through a due diligence process; CultureBank follows a model using a process of inquiry initiated by artists and their community. In the CultureBank model this core function is called Asset Discovery and Development.
In the next step of the Dallas pilot, philanthropic capital will be raised through Donor Advised Funds and invested in a radically different manner. Decisions regarding investments (likely to be grants in the first several cases)—who will receive them and what results will be targeted—will be made by and through a gifting circle. For CultureBank, everyone in the circle is considered an investor, and investments focus on supporting artists who are lifting and celebrating assets in the community. Assets in a community might include language skills, knowledge of local geography, natural green spaces, creative approaches to food security, or the factual narratives of communities. Investments are successful if the collaborators are able to identify and plan to further develop these assets. Within the first year of the pilot, our aim is to make between two and four grants for such development.
Later stages of investment will further these goals, so that pilot communities develop their shared vision for their future, focused on stewardship of value built within the community. Debt, non-controlling equity, and equity for shared ownership investment forms will be refined and put to use, based upon the learning from the pilot. As value is built, CultureBank will collect and share the early indicators of impact to build the next phases and collaborations. CultureBank is based on a long-term theory of change, as its goal is to effect outcomes that are enduring.
In addition to processes of Asset Discovery and Development and Investment, CultureBank is also focused on building a rich knowledge base by collecting stories and cases of artists and their community-changing enterprises around the country.
The Development of CultureBank to Date
There have been several milestones in the development of CultureBank to date:
- Publication of working paper about CultureBank by the Federal Reserve Bank coauthored by Penelope Douglas and David Erickson of the Federal Reserve’s Community Development Division
- Funding for CultureBank from the Surdna and Kenneth Rainin Foundations
- Design of and implementation of a Think Tank including impact investors, social entrepreneurs, field experts, and arts and culture leaders
- Formal collaboration with RSF Social Finance
- Decision to use 2018 to complete design work and case studies of artists, build out concept
- Completion of several case examples of artists and their enterprises
- Meadows Prize Awarded to CultureBank by SMU’s Meadows School
- Confirmation of first Pilot collaboration with Dallas stakeholders with formal announcement in November
- Continuation of CultureBank Pilot conversations, collaborations, and artist case story development in several communities including Kansas City, Philadelphia, New Orleans, Hawaii, and the Bay Area
Current Funding and Structure
CultureBank has its home and is being incubated at YBCA in San Francisco. It is designed to be replicable in other communities. Culture Bank is built on a series of somewhat radical collaborations among unlikely partners and will continue to form partnerships for pilot initiatives in local communities.
Funding for the early phases of CultureBank has come from two major funders, the Surdna and Kenneth Rainin Foundations. These funds have been invaluable, and now CultureBank is at the stage where new and talented people need to be hired.
The Pilot Phase, late 2018 – 2020
For each pilot initiative, CultureBank and its local partners will raise approximately $2 million of donor funds for investments, and $2 million for operating expenses for CultureBank at YBCA. In addition, CultureBank is exploring the use of art assets as part of the inflow of resources to be invested in communities. There is an important opportunity for CultureBank investors to reimagine the use of their own assets as part of a transformation in communities. Art assets held by investors might be pledged, for example, as a means of providing credit enhancement or risk mitigation for loans and other investments by CultureBank in artists’ enterprises.
Each pilot will demonstrate the four core functions of the CultureBank business model. These are:
- Asset Development and Discovery Services
- Work with the pilot community to illuminate assets of value and envision the future together
- Prepare for CultureBank investment with artists/their enterprises
- Deepen the network of stakeholders
- Funds Development and Demonstration Investments
- Complete funds development for investment
- Invest in artists with integrated capital and CultureBank investment structures
- Foster the goal of upending traditional notions of “investor” and “investee” in a community
- Knowledge and Storytelling
- Collect hundreds of artist case examples and build the knowledge base
- Create collaborations and seek allies in new communities of interest for replication opportunities
- Narrate the story of CultureBank as it progresses
- Education and Convening
- Bring artists into investment discussions in many different settings and put key questions out for inquiry among artists, investors, and community members
- Educate the audiences of institutions, health organizations and foundations about CultureBank and its groundbreaking model
For the pilot phase, donor capital is the most important financial support mechanism. These early donor/investors will be inspired to experience the initial steps in a model of community investment for shared prosperity and greater well-being. CultureBank seeks to build value within communities and does not aim for any sort of traditional ROI during its pilot phase.
At the next phase, CultureBank will source capital from impact investors seeking an “evergreen” investment model, with return of principal as well as the direct experience of a community’s cultural assets as a participant in the CultureBank Commons.
For any individual or institution considering how to rethink the design of a community investment system, or how to transform hidden value in marginalized communities into shared inspiration, CultureBank offers a new model.
Photo: Black Women Rock at the YBCA Transform Festival. Hunter Franks, ©Tommy Lau.