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From Milton Friedman to Larry Fink—The Rise of Impact Investing

By: Fran Seegull 31 May 2018

Editor’s Note: The below post is part of our Alumni for Impact series, which features alumni who are making a difference in the social sector, specifically in K-12 education, impact investing, nonprofit supportive services and social entrepreneurship. Fran Seegull (MBA 1998), Executive Director of the U.S. Impact Investing Alliance, describes in the below post how the rise of impact investing coincided with her personal career journey.

Twenty years ago, I graduated from Harvard Business School (HBS) taken by an idea that financial capital markets and for-profit business models could create positive social and environmental impact. Ten years later, the term “impact investing” was coined to define a movement that would see investors weigh those impacts alongside financial returns. Just as my personal anniversary aligns with this shared milestone, my career has paralleled two decades of evolution in finance and investment management.

Before coming to HBS, I was a program officer at a family foundation in Los Angeles. We were innovative in our grantmaking approach, giving out 5% of our assets each year as mandated by law. But over time, I started to wonder: What was the other 95% doing? How was the endowment invested, and was it advancing the foundation’s mission?

This inquiry led me from philanthropy to business school. At the time, HBS was focused almost exclusively on the primacy of shareholder value—the incumbent paradigm.  As Milton Friedman wrote in 1970: "There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” In my view, that thinking was fundamentally flawed by its failure to address the negative externalities of many profit-seeking behaviors. 

We see these externalities every day, whether it’s growing income inequality, pollution in our air, or even a wasteful package at the store.  Ultimately, we all bear the burden of these costs. As customers and employees, as residents and stakeholders, we see the toll on our planet and our society. But these costs weren’t and aren’t being accounted for by the corporations incurring them.

My time at HBS spurred me to consider the nature of value – financial value, but also social, economic and environmental value. I wrote a paper for Professor Josh Lerner’s Venture Capital/Private Equity class titled, “The Philanthropy-Venture Capital Investment Spectrum & the Trade-Off Between Social and Financial Returns.” It brought me to two conclusions:

  1. Accumulating wealth by any means followed by a turn to philanthropy in search of impact is not an efficient way to create overall value for society; and
  2. There are investment opportunities that create both strong financial and impact returns without requiring a tradeoff.

These statements formed the blueprint for my career, and as “impact investing” has grown into a movement, we see a shift—from a focus on maximizing shareholder value to one maximizing stakeholder value. This evolution carried my career forward, from working at impact enterprises, to deploying impact venture capital and eventually investing in such firms and funds. I have dedicated my professional career to this work.

In late 2016, I became the inaugural Executive Director of the U.S. Impact Investing Alliance, a field building organization with a vision to transform finance by placing measurable social and environmental impact alongside risk and return in every investment decision. The Alliance is committed to raising awareness of impact investing in the United States, fostering deployment of impact capital across asset classes globally and working with stakeholders, including government, to help build the impact investing ecosystem.

This ecosystem is growing rapidly. U.S. capital invested with impact totaled $8.7 trillion in 2016, or about one in every five dollars. Around the world, close to $23 trillion is invested with an impact lens, mostly in the public markets with environment, social and governance (ESG) screens. And in 2017, investors reported $114 billion worth of private market impact investments, pursuing “deep impact” through direct investments in enterprises and funds.

The early leaders in this movement include high-net-worth families, foundations, pension funds and insurance companies. Soon, we expect retail investors to join in, as $30 trillion in wealth over the next 30 years will transfer to women and millennials (two groups deeply motivated to invest in accordance with values).

Mainstream financial players have taken notice, including wealth platforms like BAML, Goldman Sachs and Morgan Stanley and asset managers like Bain Capital, JANA Partners and TPG. 

Larry Fink, CEO of the world’s largest asset manager, Blackrock, wrote to company CEOs at the beginning of the year saying that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” From Milton Friedman to Larry Fink, the paradigm is shifting.

At the Alliance, we say that “the future of investing is impact investing.” In the 20 years since I left HBS, we have come so far. I am confident our next milestone will bring us closer to that future.