During the Fall 2017 semester, a team of six Wharton Social Impact Initiative (WSII) undergraduate and graduate student Fellows from Penn and Wharton explored WSII’s Wharton Impact Research & Evaluation Database (WIRED). The WIRED database is a first-of-its-kind data asset containing descriptive, financial, and/or legal information from over 100 impact investing private equity funds and over 600 transactions. It is part of ongoing research at WSII, led by Wharton professors Dr. David Musto and Dr. Christopher Geczy in collaboration with Dr. Jessica Jeffers of University of Chicago and Professor Anne Tucker of Georgia State University.
For eight weeks, the team of Fellows worked in the WSII office alongside our Director of Impact Investing Research, Harry Douglas. Below is a reflection of their semester of work, which included researching various funds and companies, and their thoughts on the future state of impact investing.
You spent the semester exploring impact investing across various types of private equity funds, examining their strategies and performance. What is a takeaway you would share with newcomers to the field?
Brooke: It’s estimated that $4 trillion per year is needed to meet the UN’s Sustainable Development Goals (SDGs), and government spending and philanthropy alone are unlikely to meet this need. There’s more than merely room for capital markets, there’s a need for impact investing to help meet the SDGs. Whether the focus is creating jobs in rural United States or providing microfinance loans to women in Africa, there are already more organizations focusing on impact than I imagined.
Aaron: I never really thought of business as a solution to global challenges. However, after reading through legal documents, and learning more about impact investing through research about funds and portfolio companies, it seems that business can play a huge role in ameliorating global challenges, including preserving the environment, ensuring sustainable production of goods, and assisting with financing for small businesses. This seems to especially be true in developing countries.
Rachel: Along those lines, while this semester hasn’t changed my views about how businesses can help solve global challenges, it has given me a broader perspective as to why they should. Businesses are the ones with the capital to address social issues, and while they may not necessarily want to expend the resources to solve a challenge that does not affect them directly, many businesses are making positive changes to their financials and to society through their involvement in impact investing.
What strategies did you see funds pursue to create impact? What did you notice as you reviewed the funds’ legal and investor documents?
Justine: From a legal perspective, many impact investment documents seem similar to traditional, non-impact investment documents. In fact, the portfolio company investment term sheets I reviewed did not mention impact at all. I felt that this supports the idea that impact investment can and will expand, as the methodology between impact and regular investments can be very similar.
Fred: But the businesses that could play the biggest role in solving global challenges are the ones that are most intentional about doing so. This intentionality usually includes actively searching for and selecting an impact committee or a similar board aligned with mission. It also usually entails including terms regarding a dedication to impact in their articles of incorporation, term sheets, fund equity venture agreements, and/or shareholder agreements.
Impact funds span return expectations and commitment to impact, with some funds targeting market rate returns and others taking an impact-first type of approach. Intentionality is important. But should we quantify impact? If so, how should we think about impact measurement?
Justine: We should measure impact, but with the understanding that impact is often very difficult to quantify. It may be enough to invest in portfolio companies that have an impact mission and then ensure they follow through with that mission. Scaling an impactful business model will likely have a net positive impact on their chosen industries and communities.
Kartik: Measuring impact is the only way of seeing whether we’ve made a change, but we must control for other outside variables. Luckily, there are already resources to help measure impact. For example, there is the B Corp database, a substantial list of companies with measureable impact.
Fred: I think that we should measure impact. For example, one could look at measuring the effect of a fund and its efforts on an impoverished population within a specific geographical area.
What do you believe is the future of impact investing? Where does it go next?
Aaron: It has been well documented that millennials are increasingly socially conscious investors and consumers. I think more awareness in the United States would be helpful to expand the practice of impact investing, and its overall effect on solving global challenges.
Rachel: With the advent of more innovative financial tools, impact investing is sustainable. For instance, social impact bonds are there for those who want to help solve a societal challenge whilst making positive financial returns. Moving forward, other financial tools are needed in addition to private equity and social impact bonds, which may not align with the goals of some investors.
Fred: In time as the impact investing phenomenon grows, an increasing amount of brainpower will be required to maintain businesses’ dedication to the cause. And for that reason alone, efforts to retain a strong impact investing commitment will likely require more resources, time, and dedication than a single committee of a few people will be able to provide.
What should other students with an interest in impact investing know?
Brooke: I’d recommend getting to know the industry – do research about impact investing in general, the cycle of investments, firms focused on impact, portfolio companies, etc. Secondly, I’d recommend engaging with individuals involved in the industry. Fortunately at Wharton there are groups like WSII that focus on impact investing. Lastly, learn the hard skills that would be beneficial for a career (or work at any level) in impact investing – accounting, finance, analytical skills, etc.
Rachel: And get involved with the Wharton Social Impact Initiative!
Kartik: The Fellowship was a great way of gaining some hands on exposure to impact investment, and definitely helped expand my understanding of the field. By looking through the private equity funds’ investments, I’ve been able to see the breadth in the scope of impact investment – with a variety of sectors, geographies and impact missions represented.
WSII is hiring additional Fellows for the Spring 2018 semester to continue impact investing research, among other positions. Click here to learn more about the positions and submit your application.
Meet the team
Aaron is a third-year student at the University of Pennsylvania Law School. He is a member of the Penn Law Chapter of American Inn of Court, and is editor for the University of Pennsylvania Journal of Constitutional Law. Through Penn Law’s Entrepreneurship Legal Clinic, Aaron advises small businesses and non-profit organizations. At Penn Law, he has been involved with intramural mock trial and the intramural basketball league, and he is a student member of the Philadelphia Bar Association. Aaron’s pro bono work includes work with the Philadelphia Bar Association’s Civil Gideon Task Force and he is a board member of the Penn Law Chapter of Louis D. Brandeis Center for Human Rights. He graduated magna cum laude from Drexel University in 2013 with a degree in Economics, and he also played on the club baseball team.
Brooke Thrasher is currently working as an accounting analyst at the Wharton Social Impact Initiative. Brooke previously worked as a consultant, advising businesses around the transformation of finance activities and associated processes. Brooke graduated with an undergraduate and Master’s degree in Accounting from the University of Georgia’s Terry College of Business. She is a Certified Public Accountant. During college, Brooke led a nonprofit that builds community between the homeless and non-homeless population of Athens, Georgia. Brooke hopes to use her business experience and interest in low income populations to achieve social impact.
Fred is a current third-year law student and Silverman-Rodin Scholar at the University of Pennsylvania’s Law School. Fred is also a current Executive Editor of the School’s Journal of Law and Social Change. Fred graduated in 2015 from Morehouse College as a Political Science Major, Mathematics Minor, and member of the College’s Pre-Law Society. Fred also served as a Presidential Ambassador, as a part of the College’s team of student representatives. He recently held positions as a Law Clerk in the Office of the Maryland Attorney General and as a Summer Associate at the Law Firm of Troutman Sanders, LLP. During his first year at Penn Law, Fred served as an advocate for Philadelphia Legal Assistance, and during his second year, he was a part of a team that taught legal basics to special needs children in a Center City high school.
Justine Chiu is a third-year law student at the University of Pennsylvania Law School. She is originally from northern New Jersey, and graduated from Princeton University in 2012, having majored in Ecology and Evolutionary Biology. Justine previously worked in government and nonprofit roles before going to law school and plans to practice corporate law at Simpson Thacher & Bartlett in New York after graduation. Justine hopes to be able to work with companies and funds that engage in impact investing as a corporate attorney. In her spare time, Justine enjoys rock climbing and singing in the law school’s a cappella group.
Kartik is an exchange student to Wharton and the College of Arts and Sciences from the University of Sydney, where he majors in Finance and Econometrics. Kartik is passionate about environmental sustainability and financial equality, having worked across environmental campaigns and led a Youth Discount Card project for his local Council in Australia. His work as a Teaching Assistant in Finance, Economics and Statistics led him to volunteer as a student activist on the Undergraduate Advisory Board and Student Representative Council at The University of Sydney, to help raise student academic issues to relevant administration. Kartik has previously interned in Investment Banking at Morgan Stanley, Real Estate Strategy Consulting at Emerge Capital Partners and Risk at Citibank.
Rachel Shern Mae Leong
Rachel is a sophomore at Wharton planning to pursue concentrations in actuarial science, finance and business analytics. She is from Malaysia, and although she is a city girl, she loves camping and hiking. She spends much of her downtime exploring the United States and when not feeling that adventurous, she can be found with her friends on campus in JMHH 380. At Penn, she hopes to learn more about social impact investing and about how she can help make it more commonplace.