Jed Emerson’s email signature is a neat encapsulation of his life philosophy. Readers are advised to “Keep your hat on…We may end up miles from here…”
Though he has zero interest in labels, there’s no mistaking the fact that Emerson is a pathfinder.
He has been at the vanguard of the impact investing movement since the 90s (his is the first name that appears in the Wikipedia entry for impact investing). In 2000, he coined the term blended value to expand the thinking about value creation.
Emerson has established nonprofits and philanthropic foundations, held appointments at Harvard, Stanford and Oxford business schools, and co-authored a slew of books including The Impact Investor and Impact Investing: Transforming How We Make Money While Making a Difference. These days he is Chief Impact Strategist at Impact Assets and advisor to six ultra high net worth (UHNW) families scattered across the globe.
He’s also a free thinker and a truth teller. Hold on to your hats.
NR: You talk a lot about your preference for ‘the journey’ as opposed to ‘the process.’ Can you talk a little about your personal journey that brought you to where you are today?
JE: Well, without going into a therapeutic posture, my dad was a minister and my mum was a social worker. When I was younger, we were raised and based in the New York area, and I started as a peer tutor in Harlem when I was in seventh grade.
To be in New York in the late 60s and early 70s was a very tumultuous period, so I was very aware of what was happening and when we moved to Colorado in my teens, I was a youth organiser working on public school integration and communication between different parts of the community in Denver.
I ended up as the founding director of (San Francisco-based) Larkin Street Youth Center in my early 20s and so I’ve always been very committed to social justice and change and that whole agenda. But, after about four years of running Larkin I became very disillusioned with traditional social work and nonprofit management.
I decided that something was wrong and I needed to take a different approach. I wasn’t sure what that was, but I knew that the traditional youth services model and the philanthropic and public funding processes that supported it wasn’t working as well as we needed or should expect so I exited the nonprofit track to find something else.
Around the same time I was introduced to a financier named George Roberts who’s the founding partner of Kohlberg Kravis Roberts (KKR) which is now one of the largest global investment firms and even though he was on a very different path, he was basically reaching a very similar conclusion to mine.
He was an ultra high net worth individual and there was an expectation that he would fund the ‘SOBs’ (symphony, opera, ballet). The way he’d made his money was in business and in free enterprise and the markets, and yet, the way he was being asked to give his money away had nothing to do with how he’d created value in the market—there were no performance metrics or link between performance and capital.
So, in 1989 he and I began some conversations around what would it look like to take an investment approach to philanthropy and to use some of the thinking and mindset of business to redirect that to community and social change. These were questions like how do you think about investing, how do you think about the creation of social value, how do you think about the capital structure of nonprofits—how do you take all these ideas and create the equivalent of a financial return on investment framework for social value?
That’s how I kind of morphed into this whole conversation from wanting to do well and do good, to wanting to optimise value.
So, measurement was the linchpin?
Yes, but now I struggle with that a little bit. Today, everybody talks about data and metrics and outcomes—yet I think we’re still largely missing the mark. So, earlier this year I wrote a piece called The Metrics Myth. It’s basically about the idea that on the one hand, yes we need to have accountability, we need to track performance, we need all these things but at the end of the day, nothing we do in that regard captures the full aspect of the value we’re actually creating and we need to be honest with ourselves.
I mean, if you think about traditional business, any smart business person knows that the numbers are just one lens that you look at corporate performance through. In order to really understand the prospects of the company, you look at the numbers but you also have to understand the market, the strategy, the management team, all of these things that go well beyond simple numeric assessment, and I think the same thing is true not only of philanthropy but with impact investing.
What we’re really doing is executing on multiple levels simultaneously and the metrics give you one aspect of understanding reality, but ultimately, the truth is much more than what the numbers represent. You need to always be looking for accountability and performance but at the same time understand that value is something that transcends numeracy and our ability to just track numeric aspects of performance.
Most of my work for the last 15 years has focused not on non-profits or for-profits but on the core question of understanding what’s the value you’re trying to create and understanding that non-profit and for profit are simply legal constructs. They’re just vehicles we’ve created out of a legal framework that really have nothing to do ultimately with the value that entrepreneurs and managers and investors and philanthropists are trying to create.
Rather than focus on the silo, you know like ‘Are you a social entrepreneur or a for profit entrepreneur? Are you a philanthropist or a social investor?,’ I think simply in terms of capital and organisations and leadership and these considerations that cross-cut silos.
Impact investing can be a polarising topic here in Australia. Why do you think people tend to either love it or loathe it?
Well, folks who built their career around non-profits or for-profits and an understanding that government should fund service provision for health, housing and all these things—they’ve spent as long building their career as I have building mine in an alternative track.
And at the same time you have financial advisors who have spent their whole career understanding modern portfolio theory, Monte Carlo scenarios, how do you manage capital to get as much money out as possible—and so I totally understand that people have invested their lives in the traditional way to think about what this conversation is and what the best practices are within investing and traditional business management.
But the fact of the matter is we have to build beyond those frameworks and recognise that no matter how much you care about poverty, we are not going to grant our way toward a more just system. There’s just not enough philanthropy in the world. Even Bill Gates has said he doesn’t have enough philanthropic capital to do what needs to be done in the world—which is why they have allocated $400mm into a targeted impact investment strategy.
So that’s one thought. Another thought is part of why impact investing has exploded in the last five years and that is you have a lot of people who simply just want to make money and they’re recognising that if you just want to make money, you cannot do that anymore without thinking about global climate change, pandemics, education of the workforce and a whole host of issues that traditional business people and investors have never felt that they should have to think about—and yet those same actors are recognizing that you must take such “off balance sheet” risks into account simply to be successful in today’s world and markets.
I’m not even talking about do good and do well. I mean, if you’re Pepsi-Cola and you’re in India and you’re not thinking about water as a fundamental threat to your business, you’re in trouble, right? And that’s just one example. Take any business model and, with the exception of technical investors who are day traders and simply trading on secondary markets, you will not be able to grow and advance your asset base without considering these off-balance sheet risks represented by these elements.
And across from those actors, you have a whole host of asset owners who are saying the purpose of capital is more than just to make more money.
I work primarily with UHNW families and it’s really interesting to see that when you get above a certain level of wealth, the issue is not ‘How do I make more money’, but rather the question of how best to preserve one’s capital and, secondly, ‘What is the fundamental purpose of capital.” As in, what is this all about?
When an entrepreneur or investor suddenly gets really wealthy they then have attorneys and advisors and all these other folks who say ‘Ok, now if you want to do good you should set up a foundation, and if you want to do well manage your money to optimise financial return.’ But when you sit down with the families and move the focus off the money and onto the family itself, what they often say is that it’s not so much about they’re wanting to make more money, they want to align who they are as people with what it is that they have and the legacy they want to leave to their children or create with their next generation.
So when you first meet with these families, are you helping them define what this value is for them?
Well, I guess it depends. For me personally, I think of value as whole and non-divisible and blended but how that manifests for different people can be in different ways. I work with six families now and they all are executing total portfolio management approaches and they each have incredibly different strategies through which they’re doing that because in one case it’s an 89 year old who launched his company and is now committed to creating change for low income children in the state of Colorado, as compared with an inheritor who seeks to manage her wealth on the basis of a 100-year time frame as compared with a woman in Asia who wants to try to affect how the Asian community thinks about the nature of sustainability. These are all really different goals and agendas and each of their answers are “right.” I’m not trying to sell people anything. I’m trying to help people reflect on the more fundamental questions regarding the purpose of capital.
Must be a fascinating job.
It’s a little weird.
Really, how so?
It’s just interesting because, I don’t know, there are times, I have to say, when I feel like it’s just not that hard. I sit on the investment committees for most of my families and I don’t have a dog in the fight regarding should they go into this fund or should they go into that fund, but as each of the financial advisors bring different opportunities to the family I’m able to say ‘Ok, well let’s think about this relative to what you’re trying to do and achieve – does this really fit with how you want your assets to be creating value in the world?’
That’s a very different conversation to the one they have with their family therapist or their financial advisor or their attorney, and yet at the end of the day, it’s the conversation that people want to have because this is fundamentally about the trajectory of their life and the core question of ‘What am I doing with my life?’
Sounds like a privileged conversation to have.
It’s fun. It’s just interesting because, you know, I will never be asked to be the head of the Rockefeller Foundation or any of these traditional kind of things.
Because it just doesn’t work! People confuse their organisational agendas with the change agenda.
Think about philanthropy. Here in the US you get a tax advantage when you set up a foundation which can be in the neighbourhood of a 40 per cent tax write off, so people create foundations and then they manage 95 per cent of the assets of the foundation simply to make more money.
In the States, most foundations take their 5 per cent pay out (which is viewed by the IRS as a minimum, but which most foundations take as a ceiling) and, remember, you’re allowed to take your administrative costs out of that as well, so I can pay all of my staff costs, all of my operating costs so actually maybe 3 or 4 per cent of the money that the donor originally put for ‘social good’ actually goes to that purpose.
What business would you invest in if they said to you for every dollar you invest, we’re going to take 3 per cent of that capital, 3 cents, and use it to actually execute our business model—it just makes no sense, right?
And yet we do that because most of the people who run foundations have never created wealth, they’ve never run businesses, God forbid that they should be the ones that lose money on their watch so they then turn to their investment committees and they say ‘Ok, just don’t lose us money, make as much money as you can—we want to do good and the more grant making we can do, the more good we can do but we’re only going to use 3 per cent of our capital to ‘do good’.
Do you think the Divest-Invest movement has helped raise consciousness around this issue?
I don’t know. Here’s the thing: my wife and I, we’re not UHNW or anything but we do what we can with what we have and we basically manage our money on a 100 per cent impact orientation and so we look across our portfolio and ask what’s the competitive financial return we want to have and how do we understand the nature of impact in each of these asset classes. And when the whole Divest-Invest thing came up I called our advisor and said, we’d like to sign the Divest Invest pledge but we’re concerned that we’ll have to rebalance our portfolio or do some kind of, like, unnatural acts with capital in order to do this. [Much mutual laughter]
And her response to us was, ‘Well, because you’re doing sustainable investing and impact, you’re already kind of diversified out of a lot of these divestment opportunities, so you could sign it now.’
I think it’s great if Divest-Invest raises the conversation about how we think about what it is we’re investing in. I think it’s especially good that it’s raised the discussion around ‘know what you own’. Like, when you go to bed tonight, who is your capital sleeping with? You know, it’s kind of like the way I think about it…
At the end of the day, capital is not neutral. Capital does things.
In the end, it’s kind of like the nature of life—it’s not for me to tell somebody how they should live their life. In a dialogue with other people I can certainly talk to them about ‘Do you understand why you are living the life you’re living and is that really what you want to have your energy and your life force and everything else be about?’
Sounds like a bit of your spiritual healer heritage in there.
You know, it’s kind of funny. It used to be that a lot of my work was around the ‘how’. Like, how do we do this, how do we think about that, how do you structure funds?
But, increasingly, I find the families I’m working with don’t use me to ask them to think about the execution part as much as they use me to help them reflect on the rational and the ‘why’.
And I think the field in Australia is a little different, but in the States and in Europe you have a whole slew of advisors now who can help you work on the execution, and the “church” has not yet evolved, if you will, and so I think a lot of the families I work with use me as a sounding board for the why and the more fundamental kind of things in addition to the strategy or tactical conversations. I don’t have a firm, I’m not part of a big thing—I’m just kind of curious about these questions and the exploration.
How important is leadership in this space? Does it matter if the movement is led by philanthropy or government or another sectoral leader?
I don’t know…I go back and forth on this. First off, I don’t inherently trust leaders. Anybody who says that they know exactly how to do this is full of themselves.
I think one whole thing that’s worth calling out is that this is evolving but it’s not evolving because it’s impact investing, it’s evolving because traditional finance doesn’t know how to account for off balance sheet risk represented by climate change. There’s a host of aspects to this that very smart investors don’t get and don’t understand and that’s ok.
Chairman Mao said that a leader is someone who finds a parade and goes and stands in front of it. I don’t look to individual leaders, I look to what’s happening in our communities—our community of philanthropists, our community of investors, our communities of asset owners. The explosion in the level of activity and interest in this conversation gives me real confidence that in 10 or 20 years we will know even more regarding how to do this.
At the same time, I find the explosion of interest unsettling.
You look at the interest in social impact bonds (SIBs) for example. Here’s the one thing that we know the least about, in terms of how to execute well on, and yet everybody’s talking about it.
I’m really glad people who are interested in SIBs are starting a conversation around how we think about connecting capital with performance, but in the States 20 years ago we had something called performance-based contracting that the government would do. They would give you a percentage of the contract up front—maybe 30 per cent to begin the work—and if you actually delivered the impact you said you were going to then you got the balance of the contract on the middle or back end, much like a social impact bond—based upon your actual performance.
At that time, you didn’t have to pay intermediaries hundreds of thousands of dollars to structure these complicated vehicles that you could then invest in. So, you know, I’m just curious. I want to see how this all rolls out. If this is the on ramp people need to get onto the impact highway, then I’m totally good with that, but no, I’m not going to get all excited about SIBs personally until we really see more regarding how they do or do not work—and in the meantime, there are literally scores of other impact strategies and products investors should be pursuing with larger percentages of their portfolio.
A lot of people consider you a leader in the field, but given your personal distaste for leaders, how do you feel about that?
I don’t know—it’s odd. I’m 56 and I’ve been working on this for 20 some years, but there are people in the States who’ve been working on this for 30 years in different ways.
I think part of the reason why people view me as a leader is because I stand up and call bullsh*t in a way people who are more fully invested in a career, or an organisation, or a political agenda are less free to do. And so you end up at the front of the line when everybody else pushes you forward, right? [Laughs]
In some ways, sure, when I was working with REDF in the 90s we created what I think was the first formal methodology to track social return on investment, and we released that and other people kind of picked that up and ran with it and reinvented it and have done different things with it, so that’s great.
In the early 90s, when I was running my first philanthropic initiative, I remember being reprimanded by one of my foundation colleagues for not having “an objective distance” from my grantees. Her point was that I should look at the field and pick the organisations that were doing the best work and fund them and at the end of a year or two I should get the reports and then evaluate whether or not they did well and what they told me they were going to do. I was kind of like, ‘Well, wait a minute, if I really believe in what these folks are doing, wouldn’t I want to put as much money as I could into them, and wouldn’t I want to meet with them on a monthly basis to see how it’s going, and if they’re having problems wouldn’t I want to use my networks to try and help them be better and do more?’ At the time that type of relationship was viewed by a good number of foundation people as inappropriate, because we were supposed to make grants—we weren’t supposed to be engaged.
A lot of that became venture philanthropy and I wrote about that in ’96 in my first book and so I guess, we were a leader in that but it wasn’t like there was an ambition to lead—it’s more like there was a vacuum and I moved to fill it with others. In that way, I guess maybe I’ve led by default as opposed to by design.
The one thing where I think I have led, is in trying to help people understand that the point is not their silo. I really don’t care about social entrepreneurship, CSR, social investing, impact investing, strategic philanthropy. It’s not about labels, it’s about creating change. It’s about creating impact. It’s about optimising value with the resources you have, however they’re constructed. Where you stand depends on where you sit.
You know, don’t defend your organisation or your turf or your ideology—defend what it is we’re all trying to build. Hold yourself accountable to the ultimate outcome of what it is we’re all trying to be about. Maybe your organisation is really good, or maybe it isn’t, but don’t confuse the means with the end.
So, if you’re a business person, it’s not good enough that you pay taxes and create jobs because maybe you’re not paying enough taxes and maybe you’re creating crummy jobs. And if you’re a nonprofit and you serve a lot of people, maybe you’re serving them in a really bad way. Maybe they’re actually ending up worse off because of your intervention!
At the end of the day, I don’t want to be known for creating a program that serves a lot of people or for being provocative or for making people laugh at conferences. I want to be known for having changed how we fundamentally think about the nature of the value of our lives.
Part 2 of our interview with Jed Emerson will be published in our November issue: online Thursday 5 Nov.
Photo by Theo Stroomer