Wharton’s Katherine Klein speaks with Lisa Hall from Georgetown University’s Beeck Center about a new framework for making investments in distressed communities more equitable.

The world of finance is often viewed as an unfair place. Only a few prosper while countless others live in dire circumstances. That imbalance has led the Beeck Center for Social Impact and Innovation at Georgetown University to develop a framework of guidelines for fund managers to help make it more equitable. The idea is “to have an economy that benefits not just a very few, but where prosperity is shared across the entire set of stakeholders, across many different groups of people,” according to Lisa Hall, fair finance lead and fellow-in-residence at the Beeck Center.

The Beeck Center designed the OZ Reporting Framework originally for the Opportunity Zones – a program under the 2017 Tax Cuts and Jobs Act that provides tax benefits for investments into distressed communities. The Center partnered with the U.S. Impact Investing Alliance and the Federal Reserve Bank of New York to create the framework.

Hall discussed the OZ Reporting Framework with Katherine Klein, Wharton vice dean for social impact, during a recent episode of the Dollars and Change podcast. (The podcast is produced by the Wharton Social Impact Initiative. Listen to additional episodes here.)

Klein, who is also a Wharton management professor, noted the emergence of “a tremendous interest in business-driven, finance-driven social impact these days.” She referred to the announcement last month of a commitment to combating climate change by Larry Fink, CEO of BlackRock, the world’s largest asset manager. She also cited a statement last August from the CEO group Business Roundtable, in which it said the purpose of the corporation is not just to make money for shareholders, but for all stakeholders, including customers, employees, suppliers and communities.

The term “fair finance” was coined at the Beeck Center “to really describe what it means to have shared prosperity using the tools of the financial market,” said Hall, who had earlier worked in impact investing as CEO and president of Calvert Foundation, a social investment fund in Washington, D.C. (renamed as Calvert Impact Capital). “And how do you achieve shared prosperity, rather than prosperity for just a few? By leveraging finance.”

The Opportunity Zones serve as the first test bed for the Beeck Center’s framework.  The Opportunity Zones tax break aims to incentivize investors who have capital gains from sales of real estate, stocks, or other assets that would typically attract taxes. If investors reinvest those capital gains in the low-income communities that make up the Opportunity Zones, they will pay reduced capital gains taxes, Hall explained. “The tax incentive has the potential to drive billions of dollars of capital into underserved, low-income communities that have been overlooked,” she noted.

Why Fair Finance Is Desirable

During the Dollars and Change interview, Klein raised the question of whether the term “fair finance” is an oxymoron.

“Finance is not neutral, and markets, in fact, are not perfect,” and they do not always behave in a rational manner, Hall noted. “The systems and incentives that undergird our financial marketplace are not fair at their very heart because they’re operated by people. As human beings, we bring bias to our thinking and our behavior.” However, “by focusing on fair finance, we want to focus on the systems and the incentives to make them fairer for everyone,” she said.

Naysayers who believe that the world of finance will never be fair could be persuaded with both a business case and a moral case, Hall said. The business imperative in impact investing is that it is good for a business to focus on externalities, such as the benefits to people and the planet, she explained. Beyond that, “there is a moral case to be made around what is fair and what is right beyond the business imperative,” she said, adding that “it is also good for business.”

For instance, in discussions on governance and the representation of women on corporate boards, one needs to recognize that women make up 51 percent of the world population, Hall said. “It’s just the fair and right thing that women would be equally represented in governance structures for all types of businesses and nonprofits, as well.” Klein noted that research evidence showed that no clear and strong business case exists for having either men or women on boards. “Gender basically doesn’t matter,” she said. “But there is a moral case.”

“How do you achieve shared prosperity, rather than prosperity for just a few? By leveraging finance.” –Lisa Hall

Guiding Principles, Tools, and Strategies

Klein turned the conversation to the tools and strategies that could be employed to “increase the fairness of finance” and the lessons learned from other programs that have tried to address inequality.

According to Hall, it is important to think about guiding principles before developing strategies to achieve fairness. The first principle emphasized by the OZ Reporting Framework is “community engagement” — weighing the benefits of an investment and the role that residents could play in the design of suitable initiatives, Hall said.

The second principle in the Beeck Center framework is “equity.” Here, the effort is to examine how current residents and people who already work in Opportunity Zones can benefit “from an ownership interest [in a project] both figuratively and literally,” Hall explained. That principle is followed by “transparency,” whereby investors should hold themselves accountable “with processes and practices that remain fair and clear,” according to the framework’s website.

Critically, the Beeck Center is also working to measure the social and environmental outcomes of investments in the Opportunity Zones. Additionally, it is attempting to understand the “externalities at play” in those communities. The framework enables stakeholders to link their work to practices in Opportunity Zones across the country.

Walking the Talk

More than 400 stakeholders, who include investors, have adopted these basic principles, said Hall. One example she pointed to is a collaboration between Texas-based Woodforest National Bank and The Boulos Company, a Maine-based real estate services firm, to create a $20 million real estate investment fund to invest in Opportunity Zones across Woodforest National Bank’s 17-state footprint.

“There’s a tremendous interest in business-driven, finance-driven social impact these days.” –Katherine Klein

The fund will be managed by a joint venture between Boulos and Coastal Enterprises, a community development financial institution (CDFI) that focuses on rural investing. (CDFIs are certified and funded by the CDFI Fund in the treasury department.) The three partners would use the reporting framework developed by the Beeck Center to measure and manage the impact in their targeted communities. Investors in such projects have “a business imperative to integrate business models and impact models,” Hall said.

The Fair Finance Initiative at the Beeck Center has a broader focus that goes beyond the Opportunity Zones and covers several programs. One is a program on diverse asset managers called “Creating Equitable Capital Markets,” which studies the disparities in capital allocation to firms led by women or people of color. The program, which is funded by the New York-based Surdna Foundation, aims to study not just the disparities, but also the reasons behind them, and the “systems change” that is required to help remove them, Hall said.

Studies of the outcomes of government programs or impact investing have provided insights into which strategies work best and which fall short. The field of education is a prime example of refinements in measuring the gains. “We’ve seen over the years a shift from measuring outputs to measuring real outcomes,” Hall noted.

“In education, for a long time, people were counting outputs [such as] how many students were in a classroom, or how many people received a specific curriculum,” she explained. “Over time, what we’ve come to understand from our failures and where we’ve succeeded is that what really matters is: Did they learn something? When we started measuring outcomes, we found that, in fact, people were not learning in the classroom.” Those findings have influenced how educational training is developed and delivered around the world, she said.

This story was originally published by Knowledge@Wharton on February 25, 2020.

Posted: March 4, 2020

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