Calls for racial equity in the financial system have rightfully been increasing since the murder of George Floyd last year.  In the past few months, we have seen virtually every major investment bank and many smaller advisors and asset managers decry systemic racism.  This is a welcome advancement. No longer is the industry focusing only on basic questions of diversity, which we regard as table stakes in a movement for social change; instead, the investment industry and society are asking hard questions about the role of financial institutions in perpetuating racial inequality.  In particular we are seeing mainstream industry actors finally examining the roots of economic injustice.

And yet … with all of this talk, we are seeing little movement, especially among consultants and advisors.  Investment consultants and advisors serve as critical intermediaries between asset owners (foundations, high net worth individuals and families, pension funds, etc.) and actual investments, which are largely managed by asset managers.  As an industry, the investment and financial services field must make deliberate efforts to change the practices they use to determine which asset managers have the privilege and responsibility to manage money, deliberately opening opportunities for new and diverse asset managers – especially BIPOC (Black, indigenous and people of color) and women managers.  Just saying it needs to happen won’t make it so. Rather, as a group of asset managers of color and advisors has recently called for, there must be a concerted effort to change the behavior of consultants and advisors to systematically remove the barriers that prevent the flow of capital to BIPOC and women asset managers.

For context: White, male asset managers control 98.7% of the investment industry’s $69 trillion in assets under management. [1,2]

The Due Diligence 2.0 Commitment  makes the case for changing the methods by which asset managers are evaluated and selected. The Commitment is based on a framework developed by Rachel Robasciotti, Brent Kessel, Tracy Gray and Erika Seth Davies, with contributions from over a dozen BIPOC asset managers. It offers a detailed roadmap for inclusive due diligence practices that are rooted in common sense and a commitment to breaking down the barriers facing BIPOC and women asset managers.

At Cornerstone Capital Group, we have been following many of these practices and advocating for investing with a racial equity lens for years:

Despite our long-standing focus on diversity and equity, we know there is more work to be done. We are proud to become one of the first signatories to the Diligence 2.0 Commitment.  We invite our colleagues at other investment firms to join us and the others who have already signed in this important effort. We invite investment consultants and advisors across the industry to help break down the systemic barriers that have prevented BIPOC and women managers from attaining critical positions managing assets and helping to ensure capital is being used more responsibly and equitably.

[1] www.duedilligencecommitment.com

[2] https://knightfoundation.org/reports/diversifying-investments-a-study-of-ownership-diversity-and-performance-in-the-asset-management-industry/

Cornerstone’s Chief Impact Strategist, Katherine Pease, moderated a panel at The Exchange 2020, the annual conference organized by Social Impact Exchange (SIE). For the past ten years SIE has hosted the nation’s only annual conference exclusively focused on scaling social impact. At this year’s event the focus was “Unifying Leadership.”

The session “Financing Change and Financial Inclusion explored innovative and promising financing strategies that support systems change efforts over the long haul and at the appropriate levels. The panel discussed how to increase effective capital flow into low income communities and what it takes to build the field infrastructure to do this well and at scale, such as the necessary structural adaptations and firms that are driving different investment models to shift the system.

Panelists:
— Ben Bynum, M.D., Portfolio Director, Program Related Investments, Colorado Health Foundation
— Eleni Delimpaltadaki Janis​, Chief Capital Markets Officer, National Community Reinvestment Coalition
— Jake Segal, Vice President of Advisory Services, Social Finance
— Ebony Thomas, Racial Equality and Economic Opportunity Initiative Program Executive, Bank of America

 

Since we published the first edition of this report in 2018, there has been a widespread increase in the general public’s awareness about structural racism and the many ways people of color have been systematically denied access to social and economic opportunity since the earliest days of European arrival to what is now the United States.

The COVID-19 pandemic has exposed alarming weaknesses in the systems we depend on upon in everyday life in the U.S. – healthcare, education, and economic systems, to name just a few. It has cast a harsh light on the disproportionate impacts of these weaknesses on people of color, whose health and wealth have been decimated at far greater rates than those experienced by whites.

Moreover, there has been a dramatic growth in awareness of how the financial system has functionally been closed off to people of color, starting with the largest companies, most of which pay lip-service (at best) to racial equity and many of which do not address the issue at all.

Investors can contribute to the narrowing of economic disparities by investing in communities of color. In this report, we update the findings of our original work in 2018. We also offer fresh insights into how both the #MeToo and Black Lives Matter movements have galvanized shareholder engagement initiatives, with investors increasingly pressing companies to be more transparent and accountable regarding their policies, practices and cultures. We have added a section as well regarding support for diverse asset managers with strong track records who are often overlooked. Lastly, we are pleased to note that over the past two years there has been growth in the number of investment solutions that seek to address racial and ethnic economic disparities.

Download Investing to Advance Racial Equity.

We are pleased to present this replay of our recent panel discussion with leaders in the LGBTQ movement for equality  — access the event replay above. Our panel addressed:

Here are some links you may find useful in further exploring the issues raised in our discussion:

LPAC

Vaid Group

Relevant Cornerstone Research in chronological order (we are pleased to announce the imminent publication of an update to Investing to Advance Racial Equity.)  

Structural Complicity: Sexual and gender-based violence as an emerging investment risk

Investing to Advance Racial Equity: Practical ways to tackle economic inequality

Two Lenses, One Vision: Investing for LGBTQI and Gender Equity

Advancing “Access” in Gender Lens Investing

Women Entrepreneurs: Foundational to Economic Recovery

 

Our Panelists

On May 5th, Cornerstone Capital hosted a webinar about Covid-19 and its disproportionate impact on some communities. Race, income, ZIP Code – all are factors that influence one’s chances of making it through the crisis personally and financially. In New York City, black and Hispanic/Latinx residents are twice as likely as white residents to die from the disease caused by the novel coronavirus. This fact is directly related to the lack of economic opportunity in some communities, especially communities of color anywhere in the US, as well as other structural issues including who has access to investment capital.

How can investors address the inequitable impact of COVID-19?

Katherine Pease, Managing Director, Head of Impact Investing at Cornerstone moderated our call with three investors and entrepreneurs with expertise in venture capital and investing for impact for women, communities of color and social justice:

NATHALIE MOLINA NIÑO is an entrepreneur, an investor (at O cubed) and tech globalization veteran focused on high-growth businesses that benefit women and the planet. She is the author of LEAPFROG, The New Revolution for Women Entrepreneurs (Penguin Random House, Tarcher Perigee) and serves as a Venture Partner at Connectivity Capital Partners. Molina Niño launched her first tech startup at the age of twenty and is the co-founder of Entrepreneurs@Athena at the Athena Center for Leadership Studies of Barnard College at Columbia University.

PRIYA PARRISH is the Managing Partner of Private Equity at Impact Engine. Prior to joining Impact Engine, she served as Chief Investment Officer at Schwartz Capital Group, a single-family office investing across global markets. Priya currently serves as Adjunct Assistant Professor of Strategy and Impact Investor in Residence at the University of Chicago Booth School of Business.

MORGAN SIMON is co-founder of Candide Group. She has close to two decades of experience making finance a tool for social justice. Morgan has influenced over $150B in investments and is a regularly sought out expert on impact investing. Her first book, Real Impact: The New Economics of Social Change, has been featured widely.  Prior to Candide Group, Morgan was the founding CEO of Toniic, a global impact investment network.

The link between health and the economy

Nathalie began the webinar by noting that the existential danger facing black and brown businesses is directly correlated to their communities’ economy and health. She noted that banks have a long history of rejecting people of color for loans. They are often asked for more qualifying material compared to white borrowers. If loans are received, they are typically issued at higher interest rates that whites obtain. As a result, Nathalie was not surprised that $559 billion in PPP (paycheck protection program) loan money which was deployed through banks went to borrowers with whom the banks already had existing relationships vs. black and brown business owners. As a further barrier, the program excluded people with prison records, which disproportionately impacts entrepreneurs of color.

Morgan noted that $30 billion of the PPP has been designated to be disseminated through Community Development Financial Institutions (CDFIs) and smaller community banks (under $10 billion in asset size). She is angry that this relatively small amount is dwarfed by the $500 billion-plus being targeted at large companies, including $17 billion to Boeing. She believes that this policy failure should be addressed by investors and noted that her organization, Candide, publicly makes political contributions to advocate for broader access to capital for all. Candide has 75 women-owned companies in its portfolio, of which 18 successfully applied and were approved for PPP, in part because they had investors that advocated for them. Candide leveraged its financial connections to help business owners, including some who are not in their portfolio, to gain access to funds.

Priya voiced a somewhat optimistic outlook on the economy. She noted that PPP is not an economic stimulus plan per se but rather a relief package. She sees a long road ahead with actual fiscal stimulus and investor tax incentives. She expects a larger amount of capital to be deployed going forward.

Access to capital a challenge to black and brown communities

But with regards to access to capital, networks or key.  Those who have access to a managing director at a venture capital (VC) firm are typically people from privilege, not just a particular race or gender. Priya noted that VC is a high risk/reward asset class and most who invest in venture can afford to take those risks. If you do not come from money, you’re an outsider. The VC firms tend to look for larger, high tech firms that can have big returns. Those firms’ founders/owners tend to be white and male (as are most VC partners).

Priya also noted that venture firms with female and diverse partners may be open to a variety of investments, not just the high-risk, high-reward kind. As an example, the firm invests in a telemedicine company that provides mental health services to 50% of the counties in the U.S. that do not have access to a mental facility. That is impact, in Priya’s estimation.

Nathalie said it’s likely that half of businesses owned by people of color will be gone soon. She believes there must be policy solutions at the municipal and state level. She hopes some policies will be initiated quickly by both the public and private sectors to try to save some of these businesses. Nathalie notes that the needs of both black and brown main street and high-growth companies should be addressed. With people of color a growing US demographic, the needs of main street companies need to be addressed to support near term and future economic health of the US. High growth companies with Black and Brown founders also need access to capital. The challenge is that there are few asset managers of color running funds. Nathalie proposed that governments, corporations and limited partnerships should allocate 30% of money to managers who are people of color to address the growing need for capital by companies run by people of color.  Priya agreed but went further by suggesting that managers and investors need to look at who the company is serving and to invest in companies whose products and services support underserved communities.

Finally, during the discussion, both panelists and attendees shared a variety of articles and links to additional resources regarding small business relief, impacts on communities of color, and philanthropic opportunities:

www.BuilderCapitalist.org

https://www.theimpactengine.com/

https://iff.org/nonprofits-the-payroll-protection-program-you-can-now-apply-through-us/

https://movement.vote/

https://act.colorofchange.org/sign/blackbusiness-coronavirus/

https://refugeeinvestments.org

https://www.caminofinancial.com/

https://capitalgoodfund.org/en/

National Federation of Independent Businesses

www.leapfroghacks.com

http://www.ccminvests.com/wp-content/uploads/2020/05/CCM-COVID-19-Relief-Initiative.pdf

https://www.forbes.com/sites/morgansimon/2020/05/05/the-stimulus-bill-didnt-save-us-10-ways-it-actually-hurt-us/#3790989e40c6

https://www.forbes.com/sites/morgansimon/2020/04/22/get-ready-for-round-2-now-new-small-business-relief-is-coming/#7840cf116901

https://www.forbes.com/sites/morgansimon/2020/04/14/covid-19-giving-guide-how-to-donate-to-reach-the-most-marginalized/#75815c5d1a72

https://www.newsweek.com/black-brown-businesses-next-relief-bill-could-lifeline-assault-opinion-1497757

https://www.bostonglobe.com/2020/04/30/opinion/planning-post-coronavirus-economy-must-focus-racial-inequities/

https://youtu.be/Wq0SLwdDkSY

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

Civic engagement and community education were common themes at CBCA’s Arts + Impact Investing Forum on Monday, August 19 at the Commons on Champa.

Attended by 100 people, the Arts + Impact Investing Forum was part of CBCA’s quarterly Arts + Industry Forum Series. Each forum in the series explores the unique intersection between the arts and a specific business sector significant to Colorado’s economy.

Expert speakers discussed why and how the field of impact investing should be looking at the creative sector when exploring investment options. There is ripe opportunity to seize on this trend of investing with a #CreativityLens (as advocated by UpStart Co-Lab), which can yield both powerful social and fiscal returns.

Forum speakers were: Phil Kirshman, Chief Investment Officer, Cornerstone Capital Group; Chuong Le, Partner, Snell & Wilmer, Thadeaous Mighell, Curator at Understudy Arts Incubator Space and an Independent Community Outreach Program Consultant; Jana Persky, Opportunity Zone Program Director, Colorado Office of Economic Development; Chris Scharrer, Senior Financial Analyst, Meow Wolf; and Gary Steuer, President and CEO, Bonfils-Stanton Foundation. Emily Winslow, Senior Manager of Investments and Impact Opportunities at Social Venture Circle, moderated the panel conversation and provided an opening presentation to set the stage.

As part of his introduction, Kirshman compared investing to voting. It’s a way to empower people to act on their values and participate in the betterment of our society. Cornerstone Capital Group published a report in October 2018 on the emerging theme of arts and creativity in impact investing.

Mighell echoed the sentiment about community engagement and spoke about his work with BuCu West in Denver’s Westwood neighborhood. He highlighted the importance of hearing from local citizens about their needs and wishes, and to inform development decisions.

Persky further encouraged residents, including those in the arts, to get involved and have a say in revitalization projects in Opportunity Zones. This point is particularly true in rural Colorado, where the creative industries are often leading economic development strategies within their communities. Enacted as part of the 2017 tax reform package, “opportunity zone is a federal tax incentive for investors to invest in low-income urban and rural communities through the favorable treatment of reinvested capital gains and forgiveness of tax on new capital gains” (Colorado Office of Economic Development and International Trade).

Scharrer mentioned that Meow Wolf is also a B-Corporation. With that B-Corp status, Meow Wolf demonstrates their corporate commitment to the highest standards of social and environmental business practices. He also encouraged consumers to seek out B-Corps and support their social causes with your patronage. Once again, an intentional investment, no matter how small, is a powerful act.

There is still a lot of education needed to help investors and funders better understand the creative sector and develop formal tools to facilitate their investments. Winslow told the story of being in a room of investors when Meow Wolf was getting started and seeing their blank and confused stares. She said they didn’t know what to make of this unique investment opportunity as the standard tools for assessing risk and valuation didn’t apply.

Steuer talked about mounting interest in pooled capital to support creative enterprises in Colorado. He mentioned the newly launched NYC Inclusive Creative Economy Fund from LISC. This exciting new LISC fund is “an opportunity for accredited investors to invest in New York City’s affordable, inclusive creative work spaces, fostering 21st Century quality jobs for low- and moderate-income New Yorkers.” But what about Colorado?

As the evening went on, speakers and audience members also touched on creative business models, intersectionality in arts organizations (arts and…) and the need to match the right type of capital to the right type of project. Following the panel, attendees formed small breakout groups or chatted with new connections.

To support this emerging trend of impact investing in creative enterprises, we need more creatives participating in community development conversations, more education for investors on innovative artistic business models, and more awareness and appreciation for the wide-ranging social benefits of the creative sector.

The 2019 Arts + Industry Forum Series is sponsored by College of Arts & Media at CU DenverDenver Business Journal and Footers Catering. The Arts + Impact Investing Forum was sponsored by Bonfils-Stanton Foundation and RBC Wealth Management, with support from Colorado Association of Funders.

This recap was originally published by the Colorado Business Community for the Arts (CBCA). 

As progress is made to develop communities and economies, SDG 10 works to leave no one behind in the process. The share of the global population living in poverty has declined substantially in this century, but the benefits have been concentrated in a few countries, and have not accrued for disadvantaged groups within countries.1 Addressing inequality is not only key in poverty reduction — it also combats unequal opportunities today that would otherwise lead to unequal outcomes tomorrow. SDG 10 is further refined by targets that that can be more readily translated into actions. These targets highlight the interconnected nature of the goals: For example, strategies to support Reduced Inequalities also promote progress toward SDG 5 (Gender Equality) and SDG 3 (Quality Education). Below are a series of synergies that can come from providing access to products, services and systems that address Reduced Inequalities.

Invest in Access to Fair Treatment and Equal Opportunity

The poorest segments of society often face unequal treatment and barriers to accessing the same opportunities as those of wealthier groups, fueling the cycle of inequality. Gender is a major basis for discrimination — girls in poor households are less likely than boys to be in school,2 and women everywhere are more often victims of gender violence,3 hiring discrimination4 and pay discrimination than men.5 Discrimination based on race and ethnicity also acts to perpetuate inequality. In the U.S. and abroad, rates of poverty, poor health, and low education for communities of color and marginalized ethnicities remain disproportionately high.6,7 Further fueling this cycle, certain policies and attitudes further disadvantage people simply because they are poor, leading to further segregation.8 To reverse the cycle of inequality and discrimination, systems of resource allocation and access to opportunities must be balanced.

Learn More About Investing in Solutions for Reduced Inequalities

Invest in Access to Financial Services

The percentage of the world’s population utilizing financial services is growing, up to 69% as of 2017,9 but many opportunities remain to improve access to this important tool to combat inequality. Financial services increase resiliency to financial risk and enable more household savings, leading to more spending on education and healthy food.10 Access to credit plays a similarly powerful role for low-wealth individuals who leverage it to become entrepreneurs, or in the case of the 2 billion households that depend on agriculture for income, to improve inputs and techniques for better production.11 Recent evidence suggests that access to financial services for all socioeconomic levels works to reduce overall wealth inequalities as both new entrepreneurs and wage earners benefit.12

Invest in Access to Healthcare Services

As wealth inequalities have grown, so have inequalities in access to the benefits of healthcare. The gap in life expectancy between the richest and poorest in the U.S. has only grown during the 2000s.13 Internationally, inequalities in health outcomes are also prevalent as gaps in both health service coverage and outcomes persist (and are even growing in some developing countries).14 Low-income individuals are less likely to have health insurance or to access to primary or specialty care, and face higher rates of morbidity, mortality, and hospitalization as a consequence.16 Poor health also acts to reinforce existing wealth disparities as it limits economic productivity and burdens households with the expenses of care.17 Expanding access to healthcare is a powerful solution to reversing these cycles of inequality.

Learn More About Investing in Solutions for Reduced Inequalities

Invest in Access to Education

Despite widespread appreciation for the importance of education, gaps in access persist for many around the world. Current estimates put the number of children and youth who are out of school at 262 million,18 and girls are still less likely to attend than boys, especially those from the poorest households.19 More education comes with better economic opportunity, better chances at employment, and increased income.20 A recent study in the U.S. found that higher education levels among communities of color led to lower unemployment and incarceration rates, and closed the wage gap compared to the white population.21 If quality education is made more accessible, it will reduce both social and economic inequalities as more people experience its benefits.22

Learn More About Investing in Solutions for Reduced Inequalities

SDG 10: References

1 https://openknowledge.worldbank.org/bitstream/handle/10986/25078/9781464809583.pdf
2 https://resourcecentre.savethechildren.net/library/every-last-child-children-world-chooses-forget
3 Anke Hoeffler and James Fearon, “Conflict and Violence Assessment Paper”, Copenhagen Consensus Center, 2014
4 Stanford Center on Poverty and Inequality. Discrimination: State of the Union 2018. ILO. 2016. Women at Work: Trends 2016. Geneva: International Labour Office
5 Sumner, A. (2012). The New Face of Poverty: How has the Composition of Poverty in Low Income and Lower Middle Income Countries (excluding China) Changed since the 1990s?
6 https://www.catholiccharitiesusa.org/wp-content/uploads/2018/04/Policy-Paper-Poverty-and-Racism-1.pdf
7 https://www.ohchr.org/Documents/Issues/Poverty/A.66.265.pdf
8 The Global Findex Database 2017. Measuring Financial Inclusion and the Fintech Revolution. World Bank.
9 Ibid.
10 Rural and Agricultural Finance Learning Lab and Initiative for Smallholder Finance
11 Inflection Point: Unlocking Growth in the Era of Farmer Finance. 2016
12 Household Access to Finance: Poverty Alleviation and Risk Mitigation. 2008. Ch3 of Finance for All? Policies and Pitfalls in Expanding Access. A World Bank Policy Research Report
13 Chetty et al. 2016. The Association Between Income and Life Expectancy in the United States, 2001-2014. Journal of the American Medical Association
14 Progress on Global Health Goals: Are the Poor Being Left Behind? World Bank. 2014
15 Dhruv Khullar Dave A. Chokshi. 2018. Health, Income, & Poverty: Where We Are & What Could Help. Health Policy Brief. Health Affairs
16 Andersen, R. et al. 2002. Access to Medical Care for Low-Income Persons: How Do Communities Make a Difference? Medical Care Research and Review
17 Bor, Jacob; Cohen, Gregory H; Galea, Sandro. 2017. Population health in an era of rising income inequality: USA, 1980–2015. The Lancet
18 UNESCO Institute for Statistics. Global Education Database. 2017. http://data.uis.unesco.org/
19 Education for All 2000-2015: achievements and challenges. EFA global monitoring report. 2015
20 https://www.eda.admin.ch/dam/deza/en/documents/aktuell/news/20160923-weltbildungsbericht_EN.pdf
21 Fryer, Roland G. Racial Inequality in the 21st Century: The Declining Significance of Discrimination. 2010. Harvard University, EdLabs
22 Abdullah, A. et al. 2015. Does Education Reduce Income Inequality? A Meta-Regression Analysis. Journal of Economic Surveys.

As investors continue to make the case for LGBTQI equity, there is a practical and ethical mandate to fuse LGBTQI interests with those of gender lens investors who recognize the many benefits of establishing corporate cultures and practices that embrace all stakeholders. Cornerstone explored investing for the issue of LGBTQI equity in our recent report, Two Lenses, One Vision: Investing for LGBTQI and Gender Equity 

Following on from the report, Cornerstone Capital CEO Erika Karp and Head of Impact Strategy Katherine Pease hosted a live video session with Dr. Vivienne Ming, Founder of Socos Labs. Socos is an independent think tank that explores the future of human potential to guide private and public policy toward a more effective, human-centered world. The conversation focused on the interplay of gender identity and sexual orientation and offered practical insights into how investors can advance LGBTQI equity by aligning with gender lens investing strategies.

In the absence of clear and consistent government regulation, corporate policies have been pivotal to the provision of legal protections for LGBTQI workers. For companies, greater inclusion is associated with improved brand reputation, reduced turnover, and increased productivity and innovation. The most progressive companies seek to integrate their values into their operations, using their financial clout to push back on harmful practices even if they risk additional costs in the near term.

To be clear, policies have not eliminated discrimination: More than half of LGBTQI employees report that discrimination negatively affects their work environment.

As bias and discrimination toward LGBTQI people are related, at least in part, to normative expectations of gender within the workplace. Recognizing the intersection between gender discrimination and LGBTQI equity results in a profound reorientation of how investors and advocates can approach companies and their attitudes toward full inclusion.

As investors continue to make the case for full inclusion of LGBTQI people, there is a practical and ethical mandate to align LGBTQI interests with those of gender lens investors and others who recognize that the establishment of corporate cultures and practices that embrace all employees, customers and stakeholders, will benefit everyone.

In this report we make the case for this thematic fusion, discuss how investors and asset managers can consider LGBTQI alongside gender equity in their investment analysis, and highlight existing investment strategies that reflect this approach.

Download the full report here.

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.

Download a brief overview or our full report.

Key challenges

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:

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.

Investment opportunities

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.

This article originally appeared in Investment News on December 13, 2018. 

Sustainable and impact investors are set to intensify their decades-long support for action on climate change on the heels of a recent report from the Intergovernmental Panel on Climate Change and the Fourth National Climate Assessment, issued by the U.S. government.

The U.S. government notes that unless urgent action is taken, climate change could shrink the U.S. economy by hundreds of billions of dollars every year in direct costs. Consistent with these findings, the IPCC’s alarming (and unsurprising) conclusions are that urgent global economic transformation is needed to head off catastrophic damage to ecosystems, communities and economies beginning within a quarter century.

Many investors now understand that climate change is not merely an environmental issue but a material economic risk for long-term portfolios. However, investors should avoid a single-minded focus on climate change that ignores the relationship between ecosystems and human development.

The IPCC report stresses that an effective fight against climate change must include efforts to achieve sustainable development goals such as gender equality, the eradication of poverty, and food security.

In other words, how we fight climate change matters. Even the most optimistic scenarios will require substantial human adaptation to changed ecosystems, which will be especially challenging for poor or marginalized communities. Achieving sustainable development goals will strengthen the ability of poor communities to adapt to inevitable change and complement more direct efforts to mitigate climate change. However, these climate mitigation efforts by themselves may either help or hinder progress towards the sustainable development goals.

For example, mitigation strategies such as reforestation or biofuel development may reduce the land available for agriculture at a time when crop yields are already declining because of rising temperatures and water stress. The resulting increases in food prices have the effect of reducing buying power and possibly destabilizing civic and political cultures in developing countries.

Conversely, sustainable agricultural strategies, conducted with attention to social equity, can increase food security and counteract some of the negative effects of climate change on drinking water, biodiversity and income inequality, while reducing greenhouse gases associated with intensive farming practices.

The empowerment of women can also support and reinforce both climate change mitigation and adaptation. Improving the quality of cookstoves available to poor women has the direct effect of reducing fuel use and deforestation. It also reduces asthma rates, which improves educational outcomes, and empowers women by freeing them from the labor-intensive “drudgery” of traditional cooking methods.

Numerous studies have also shown that as women gain education and empowerment, they earn more income and often choose to have fewer children, which is associated with reduced poverty and lower greenhouse gas emissions.

The introduction of modern technologies such as cookstoves into poor households would have an undeniably positive effect on quality of life for the poor and the resilience of their communities. However, the resulting increase in the demand for energy could undermine the intended climate benefits unless these strategies are accompanied by investments in renewable energy and energy efficiency — both of which come with additional benefits for income and energy access.

These and many other examples demonstrate the need for a holistic understanding of the connection between issues of climate and human development. Yet much of the financial capital flowing into climate mitigation today is motivated solely by opportunities for financial return arising from new public policies and the dramatic improvement in renewable energy technology.

These flows are important for achieving global scale for environmental solutions. However, a lack of attention to the social dimension of investment decisions may create a blind spot for unintended consequences that counteract environmental benefits.

The insights of sustainable and impact investment offer an essential complement to mainstream financial analysis. Integrating environmental, social and economic concerns into investment analyses can yield a more nuanced understanding of the complex interactions between climate and society. As part of this analysis, a commitment to stakeholder engagement will help investors incorporate the perspectives of local communities who will be impacted by investment decisions — because, as the IPCC report notes, climate change will impact people differently depending on geography, income and culture.

So what can investors who are concerned about climate change do? First, their investment policy statements should explicitly incorporate both climate change and key related social issues, such as gender equity, poverty, food security, and health. Second, the evaluation of investments or investment strategies intended to address climate change should integrate an analysis of their impact on broader sustainable development goals. Third, investors should use their voice to ask companies, governments and financial markets how climate change and sustainable development is incorporated into policy, planning and performance measurement.

An effective response to climate change will require the mobilization of every resource available to society, including governments, business, and civil society. Given the unique power of financial markets, investors can contribute to a long-term solution or exacerbate existing problems. Sustainable and impact investors have an opportunity to influence the outcome, if they choose to take it.

We recently hosted a live video webinar to discuss ways in which investors can contribute to the narrowing of economic disparities through a dedicated emphasis on investing in underserved minority communities. Our panel, moderated by Randall Strickland, Cornerstone’s Director of Client Relationship Management, featured Pat Miguel Tomaino, Director of Socially Responsible Investing for Zevin Asset Management, and Julianne Zimmerman, Managing Director of Reinventure Capital.

 

 

 

In today’s economy, the goods we consume are often produced far from where they are purchased, successively changing hands along complex and opaque corporate supply chains. The International Labour Organization estimates that across these supply chains, there are approximately 24.9 million victims of forced labor in the world.

Where forced labor risks are not addressed, they can result in serious legal, reputational, and financial repercussions for companies. Investors are uniquely positioned to help companies recognize the importance of managing this risk, and are increasingly using their voice to do so.

KnowTheChain is a resource for companies and investors to understand and address forced labor risks. We believe that companies and investors can be a powerful force for improving the lives of people who labor in their global supply chains.

Through benchmarking current corporate practices and providing practical resources that enable companies to operate more transparently and responsibly, we aim to drive corporate action while also providing considerations for investor action. KnowTheChain recently evaluated  38 of the largest global food and beverage companies on their forced labor policies and practices.

The 2018 Food and Beverage Benchmark Findings Report finds that while many of the companies evaluated may have policies and commitments in place, the majority do not provide evidence that their policies and practices are being effectively implemented. Without evidence of implementation of these policies, companies may be unprepared to respond to an egregious abuse uncovered in their supply chain by an NGO, trade union, or reporter.

Agriculture workers are particularly vulnerable

Human Rights Watch tells the story of Saw Win, a Burmese migrant worker smuggled into Thailand on the promise of a food processing job for US$4.50 a day. He was sold to brokers who were controlling work crews at fishing piers in a Thai port town. Initially, he worked on a trawler with no pay for three months. Upon returning to the port town, he was locked in a room for three days before being sold again to another boat. Eventually, Saw Win escaped by jumping overboard near the Malaysian coast and returned to land for the first time in two years.

Men and women seeking gainful employment in the agriculture industry are particularly vulnerable to exploitation – whether through force, fraud or coercion – and are often made to work for little or no pay, cut off from their homes or families. As the food and beverage sector increasingly pushes agricultural work into more rural areas to accommodate its land-intensive activities, it’s exacerbating the remote nature of the work and putting workers at greater risk.

How are companies scoring?

Unilever, which was the top scoring company in KnowTheChain’s first food and beverage sector benchmark in 2016, remains at the top with a score of 69 out of 100. Kellogg took second place with a score of 66.

Five companies score below 10 out of 100. None of them have a publicly available supplier code of conduct, nor do they take any action on worker voice and recruitment.

Scores by theme

The average score across the benchmark remains low, at just 30 out of 100, indicating that companies need to take further action to address forced labor risks across all tiers of their supply chains.

Overall, companies scored the lowest on indicators of worker voice and recruitment, suggesting that little or no action is being taken to listen to, engage with, or empower laborers across supply chains. These themes have the most direct impact on the lives of workers, and concerned investors can ask companies about their practices.

Improvements are (slowly) being made

Comparing the 2018 benchmark to its 2016 counterpart, we can see that more companies now have policies prohibiting recruitment fees, and in general, companies are providing more substantive examples of how their policies are used in practice. Of the 19 companies benchmarked in both 2016 and 2018, 17 disclosed additional steps taken to address forced labor risks.

It’s encouraging to see some companies making additional commitments since the 2016 benchmark, but progress for workers is not moving fast enough. Companies across the board must do better to make demonstrable improvements for workers.

Investors are taking action

In addition to scoring and ranking companies, this report provides good practice examples and recommendations for companies as well as considerations for investor action.

Investors representing more than $3 trillion in assets have signed the KnowTheChain Investor Statement, which lays out expectations for how companies should address forced labor risks, in-line with international standards and existing human rights due diligence tools.

Investors may wish to integrate KnowTheChain’s findings into their investment decision-making and active ownership practices. Shareholder advocacy organization As You Sow introduced a resolution on behalf of Monster Beverage shareholders, citing its 0/100 score in our 2016 benchmark report and asking the company to address the lack of transparency regarding slavery and human trafficking in its supply chain. (Monster scored 4/100 this year.)

Through responsible purchasing practices, strategic collaborations, and extended standards on issues such as ethical recruitment to lower-tier suppliers, companies can positively impact working conditions across their supply chains.

Investors who hold any of the companies KnowTheChain has benchmarked can use KnowTheChain to engage their portfolio. For each company in the benchmark, KnowTheChain has created a two-page summary identifying what steps the company can take. These company scorecards can provide a clear path for engagement for investors. Investors can further ask how companies are working to ensure migrant workers are not exploited, and how they engage with workers in their supply chains to empower them to exercise their labor rights, while ensuring that an early warning system is in place for when abuses occur.

KnowTheChain will be releasing a similar benchmark report on the apparel and footwear industry in the very near future, and we hope the audience for this research continues to grow.

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.

Download Creativity & The Arts: An Emerging Impact Investing Theme

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[1]. 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.

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.

Looking Ahead

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.

[1] https://thegiin.org/assets/2018_GIIN_Annual_Impact_Investor_Survey_webfile.pdf

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:

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.

This is an excerpt from Cornerstone Capital’s report Creativity & The Arts: An Emerging Impact Investing Theme.

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.