Twenty-five years have produced several important lessons learned that can collectively shape more effective future investments.
Impact investing possesses enormous potential to direct much-needed capital to the most pressing issues our society faces, including education, affordable housing, job creation, and training – all of which are often more acutely felt in urban environments.
Prudential Financial was founded more than 140 years ago with a clear purpose: to give working families a way to protect their financial well-being. For more than 40 years, impact investing has been essential in delivering on that purpose. We formalized our impact investing program in 1976, and since that date we have invested over $2 billion in organizations that advance our mission of creating opportunities for financial security. We presently hold more than $500 million in active investments, with a commitment to build a $1 billion impact investment portfolio by 2020.
As we reflect on the 25 years since the founding of Living Cities, which Prudential helped lead, there are important lessons learned that collectively shape even more effective future investments.
Increased access to capital: When I first joined Prudential in 1997, there wasn’t a single mainstream banking institution on Broad Street in our hometown of Newark, NJ. Today, nearly every major national lender has a presence there, making reasonably priced credit available to borrowers who fit their standard profile. There are still massive holes in the market—particularly for non-traditional projects and borrowers—but it is undeniable that access to capital has made considerable gains, and some institutions are becoming more creative to address identified gaps. One example of this creativity is the Newark-based City National Bank of New Jersey (CNB), one of the ten largest African-American led banks in the country. CNB suffered significant losses during the recent financial crisis, but finished a successful recapitalization in 2015, motivated in part by the bank’s desire to serve emerging underserved communities, including immigrant populations. Prudential invested in the recapitalization because we believe that banks with their roots in local communities are a critical part of the necessary financial services landscape.
A higher-capacity system for building affordable housing: When the Low-Income Housing Tax Credit was created in 1986, the federal system for providing affordable housing shifted away from fully publicly controlled programs to an array of incentives designed to catalyze private action. This has created an incredibly robust array of skilled practitioners and effective implementation systems across the country working to make affordable housing a priority. At Prudential, we’re committed to using our capital to finance projects that connect housing to broader economic opportunity. For example, we’ve invested in the redevelopment of Newark’s iconic Hahne & Co. building, which will include 64 income-restricted apartments adjacent to over 75,000 square feet of retail space (including a Whole Foods) and 50,000 square feet of educational space via Rutgers-Newark.
Better metrics: As the impact investment sector grows at a rapid pace, there is a growing need to focus on rigorous impact measurement. The creation of the Global Impact Investing Network (GIIN) and B Lab, organizations dedicated to building a framework of metrics and standards around impact, raised the profile and capacity of the field to attract new sources of capital and hold itself accountable to its stakeholders. By pushing for and utilizing these standards, impact investors have seeded the ability for those outside the space to understand and assess impact in their portfolios.
Blind Spots and Future Priorities
With increased enthusiasm for impact investing and thus growing potential to fund meaningful solutions, we (both individually and field-wide) must assess our own blind spots and continue to drive innovation in the sector.
Consider the context: Collectively there is a lot of attention and interest in urban settings, particularly the so-called “sexy seven” (New York City, San Francisco, D.C., Boston, Los Angeles, Seattle, and Chicago) where there’s massive demand for housing, high-capacity capital markets and government actors, and strong institutions. Solutions in those markets don’t translate to locations where poverty is becoming increasingly concentrated, including small and mid-sized cities, rural areas, or suburbs.
Invest in long-term solutions: Programs designed to bring capital to underserved populations have continuously over-emphasized asset-backed solutions over investments in business and job creation. At Prudential, we invest in small and medium businesses, helping create quality jobs that are likely to enable people to reach the next rung on the ladder of financial security. For example, making long-term investments in training keeps people learning on the job and on the path to creating their own financial security.
Work cooperatively with local governments: Local governments are complex but vital. Investors and businesses are often prone to restrict engagement with local governments, or in the opposite extreme, expect them to take the lead in making highly sophisticated and detailed planning choices. Instead, our experience has shown that by adopting a partnership model, and working closely with local governments, we can find better solutions that pave the way for more effective investments.
Welcome new perspectives: Impact investing is still not a fully inclusionary sector – even less so than with conventional finance. To fulfill its promise, impact investing needs to draw from broader talent pools and find pathways to inclusion at the investor and investee level. While the sector has several promising initiatives to address this trend, we need to push harder to diversify the table.
Lessons Moving Forward
Think big: We must develop solutions that can rapidly scale versus those that work on a particular issue or in a particular geography—though not at the expense of experimentation and smart risk-taking. Don’t be afraid to invest in a broad portfolio of areas to test out and identify solutions that work versus those that don’t. And when you identify a winner, double or triple down on it, scaling it to create the greatest impact.
Listen to—and adequately fund—your partners: Our investees are the ones in the trenches. No one has the same level of understanding of the challenges or the nuances than they do. All impact investors must recognize we’re in this together with our partners; their insights are invaluable to ensuring our investments create the most good. We should also ensure that on-the-ground partners have sufficient capacity, capital, and staff to deliver the results we all want and need.
Build skills: Impact investing is a business, and as such it demands a specific skill set built and refined over time. It is not an “add-on” to conventional investing expertise, nor a business-like approach to philanthropic work. As this financing vehicle becomes more widely used, we must continue developing talent and sharing best practices.
When all parties work together, the measurable impact we create for ourselves, our stakeholders, and society at large is greater. Not being afraid to tackle complex problems, choosing to commit to local partners for the longterm, and infusing purpose into core business strategies can position the field to do the most good for another generation.
Originally published on LivingCities.com