Investing in More Effective Problem-Solving
It was a year ago today that the Federal Reserve Bank of San Francisco and Nonprofit Finance Fund co-hosted an event in New York City to launch a new book, What Matters: Investing in Results to Build Strong, Vibrant Communities. Much has happened around outcomes-based funding in the year since this launch and it is worthwhile and important to review the event content with the hope of maintaining progress for outcomes-based funding mechanisms in the future. This blog post is a reflection on the key take-aways from the event and shares The Investment Integration Project’s (TIIP’s) reflections on how long-term institutional investors might incorporate ideas from the book into their adoption of systems-level considerations.
In our first moments of life, we are born with bright eyes: vibrant, passionate, and eager. It was this simple, yet resonant observation made by UC Berkeley Professor Emeritus of Epidemiology and Community Health, Leonard Syme, who identified brightness of the eyes as a powerful indicator of a child’s future health and longevity. He also found that as challenges and hardship permeated daily life, the expression of that stress—and its internal consequences— was evidenced in these children’s eyes.
Invest in Results, a joint project between the Federal Reserve Bank of San Francisco (FRBSF) and Nonprofit Finance Fund, is dedicated to unraveling complex societal ills—just as Leonard Syme deconstructed health to be a product of genetics, medicine, and systemic social and economic factors—in order to build more effective outcomes-based solutions. The case for reorienting many societal systems in which we have comfortably and unconsciously functioned within for so long is among this book’s many offerings.
From healthcare, to grant funding, to criminal justice reform, the varied articles in this book are bound together by a common demand for outcome-based, rather than output-based, solutions. An output-based strategy is focused on activities undertaken, such as having a homeless shelter receive funding based on the number of people staying there. Conversely, an outcome-based approach looks at the effect of the service provided—for example, giving funding to homeless shelters based on their ability to successfully help patrons attain the skills to be successful and independent in society. Evaluating and solving challenges with an exclusive focus on outputs can be limiting and prevent funders from generating a long-term impact, whereas an outcomes-based perspective enables solution creation within the context of the larger system.
Many of today’s prevailing methods of financial measurement and assessment do not enable social justice organizations to deliver outcomes effectively. Often restricted by short-termism, siloed operations, inflexible allocations, and a prescriptive social environment, their ability to target the root causes of social inequity is greatly inhibited. Philanthropy and investment must innovate to find ways to use existing funding to facilitate system-enhancing outcomes so that these organizations can generate effective and long-term results.
Fortunately, the investment community is taking steps towards achieving the shift from outputs to outcomes. Investors are beginning to accept the possibility that this investment approach may mean the return period is harder to predict than under an output-oriented scheme. In addition, our research at TIIP shows how institutional investors are adopting ways to invest that look beyond the returns of their portfolios today to consider tomorrow’s impact on the health of the interconnected societal, environmental, and financial systems in which they operate.
Through the incorporation of investment policies and practices like belief statements and security selection, we found examples of investors’ intentional confrontation of system-level challenges such as maintaining a sustainable environment or stabilizing social structures. In this research, we identified ten types of system-level strategies that they have adopted: solutions-investing, additionality, diversity of approach, evaluation, geographic locality, interconnectedness, polity, self-organization, standards setting, and utility.
For example, Bridges Fund Management, an impact investment fund manager, uses additionality—which we equate with targeted investment in the under-served—as an intentional step towards system-level thinking. Bridges Fund Management seeks investments in under-served communities that create jobs, improve skills, and promote healthcare. The impact investment firm Threshold Group (which is now a part of Tiedemann Advisors) uses geographic locality to enhance social and environmental systems on a regional level by coordinating investments across a network of local organizations that are committed to responsible economies, equitable communities and a sustainable environment.
Although system-level investing may not yet be widely adopted, it will be relevant in the evolution that finance appears to be taking. System-level considerations, in our view at TIIP, parallel closely with outcome-based thinking and represent a shift away from output-based strategies. Such considerations will be pivotal to how investors can leverage their capacity to intentionally enhance global systems and help achieve the transition called for in What Matters.
Investors increasingly see the implications of these outcomes, particularly in regard to the functionality of the systems on which they depend. In doing so they are able to better grasp the larger positive impact of such outcomes-oriented programs, the long-term benefits they generate, and the additional value they accrue. Ultimately, this perspective will be important for thoughtful, wealth-generating decision making and financial stewardship, and it will serve as a step to reaching that “bright-eyed” outcome.
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Mackenzie Clark is a Research Associate at The Investment Integration Project (TIIP), and graduate of Columbia University’s Master of Science in Sustainability Management degree program. TIIP’s research, tools, and database help institutional investors integrate systems-level considerations into their portfolio decision making. http://tiiproject.com