In Making Money Moral: How a New Wave of Visionaries Is Linking Purpose and Profit, authors Judith Rodin and Saadia Madsbjerg explore a rapidly growing movement of bold innovators unlocking private-sector investments in new ways to solve global problems. They are attempting to tackle environmental challenges, social issues, poverty, and inequality, among others, reimagining capitalism in the process.
Rodin is the former president of the University of Pennsylvania, and she was president of The Rockefeller Foundation from 2005 to 2017. Madsbjerg is a global leader in the field of sustainable and impact investing and is former managing director of The Rockefeller Foundation. Both recently sat down with Wharton School Press senior editor Brett LoGiurato to discuss their new book.
An edited transcript of the conversation appears below.
Brett LoGiurato: I wanted to start out by discussing the title of your book. Can you talk about the concept of making money more moral, and how capitalism is being reimagined by that concept?
Judith Rodin: Making money moral happens when the world of financial markets meets the world of impact. Then capitalism benefits stakeholders in addition to shareholders, including consumers and employees, suppliers, and especially, perhaps, the environment. Making money moral is transforming our view of capitalism. Because the returns yield double the benefits, driving both profitability and long-term growth by reducing social and environmental risks, and by creating value for society.
LoGiurato: You both were pioneers in the field of impact investing from its infancy. How has impact investing evolved into what you discuss in the book as sustainable and impact investing?
Saadia Madsbjerg: Sustainable and impact investing over the years has moved from a small, informal market that was very much based on personal trust, to a professional market that now deals in the trillions. It has been amazing to watch this growth and evolution and to have been part of it, as well.
There are two monumental shifts that we would point toward that have happened over the last decade. The first has to do with the shift from private to public markets. In the early days, the opportunities, the investment opportunities, have very much focused on the private markets, with innovative private equity funds that were available to investors. That has now changed. We see opportunities throughout the private as well as public markets, with the proliferation of innovations and new products across all asset classes.
“Making money moral happens when the world of financial markets meets the world of impact.”–Judith Rodin
The second has to do with the expansion of the investor base. It has shifted from a niche group of investors to now the investment giants that are in the industry. In the early days, it was very much development finance institutions, high net worth individuals, and foundations that were driving the charge and making these investments. Now, we see investment giants [like the ones we]included in many of the stories of the book, such as TPG, Wellington Management, Nuveen, Amundi, State Street Global Advisors, that are really championing the investments.
LoGiurato: The key protagonists in the book are the problem solvers, and the money managers. Can you explain these two groups and how they must come together to make the concepts work?
Madsbjerg: As the book highlights, sustainable and impact investing is about much more than just finance. It is about collaboration. Collaboration between the world of finance and the world of impact. The money managers, as we have defined them in the group, consist of asset managers and intermediaries that are working hard to satisfy the great demand that they see from their institutional investor clients and individual investors for products and funds that would allow them to make these investments.
The problem solvers, we define as a broader group. These include the for-profit entities like entrepreneurs and businesses that are working hard to develop solutions, services, and business models that can deliver impact as well as profitability. And it also includes nonprofits. So the NGOs, the philanthropies, the public agencies that are working hard to solve societal issues and challenges.
They both bring a unique set of expertise and resources to the collaboration. From the money managers, you have deep expertise in finance, as well as their financial resources. And where the economics line up, the problem-solvers actually offered the places and the businesses and the programs where the money managers can invest. And in places where the money managers lack the expertise or the understanding of social and environmental issues, they help bridge that knowledge gap and can help build the products, the markets, and the infrastructure that is needed to put the capital to good use.
LoGiurato: You provide a similar hypothetical in the book. Let’s say an investor wants to focus on gender diversity and on improving life for women and girls. How can the investor use some of the tools that you talk about in the book to do that?
Rodin: An investor who wants to focus on gender diversity, or improving life for women and girls, has a very wide array of options in both the public and private markets. One option would be a gender lens exchange-traded fund, an ETF, which invests in large global public companies that demonstrate effectiveness. Effectiveness, for example, in promoting workforce gender diversity. One is WOMN, which tracks companies’ performance using the Morningstar Women’s Empowerment Index. Their fund manager actually donates the management fees to the YWCA, which is terrific. Another might be Angel Funds, using a gender lens in evaluating investments. For example, focusing only on early-stage companies that have women founders.
Private equity and venture capital funds also offer opportunities. For example, through investments in companies that are developing products and services that specifically focus on women. For example, critical health products. We talk about Portfolia as an innovative venture fund in this category, because it also focuses specifically on women as investors as well. And finally, an investor who likes fixed income can choose government-issued social bonds. For example, there are ones that focus on education for girls in the developing world.
“Sustainable and impact investing is about much more than just finance. It is about collaboration.”–Saadia Madsbjerg
LoGiurato: The book is ripe with examples of sustainable and impact investing in action. Take us through one that you find particularly encouraging or inspiring.
Rodin: Think of the people we’re currently celebrating, perhaps for the first time. The essential workers. Teachers, nurses, police officers, service workers. These folks typically have to spend more than half their income on rent, and meeting other needs for their families feels like a constant struggle. To solve this problem, an investor named Bobby Turner joined forces with former basketball great Magic Johnson. They created a series of funds, social REITs — that is, Real Estate Investment Trusts — that underwrote attractive, affordable, and environmentally sustainable housing for these types of renters, while generating excellent financial returns for investors. Importantly, the stress reduced for these essential workers was evident and measurable.
Building on this success, Turner and his colleagues then developed an exciting, actually more integrated approach, where they create the companies that provide affordable housing, often with health care and child care on-site. Then they bring investors to those companies and manage them, with a strong track record of consistent market returns, and very significant social impact. Turner told us that he now has 20 years of analytical proof to refute the notion that an investment can’t do good and do well at the same time. We agree.
LoGiurato: A lot of examples from the book are related to sustainability and the environment. How can these new financial instruments you talk about in the book help solve pressing global issues like climate change, on both a targeted and broad scale?
Madsbjerg: Climate change has truly paved the way for sustainable and impact investments to become part of the broader capital markets, and not just be a niche way of investing. We’ve seen so many exciting innovations that have channeled capital towards places that have allowed us to better protect the environment, but also support the transition towards a more renewable future. And there are many powerful examples that we can find in the industry.
To mention a few — green bonds, which is a fixed income product, is perhaps the most celebrated one of them. It is one that has mobilized a lot of capital and continues to do so for a range of different climate-related projects. There’s a lot of focus on investing in infrastructure these days, not just here in the U.S., but globally. And these bonds provide a pathway for many investors to put their money behind projects like sustainable infrastructure transportation.
“It’s really important to note that most sustainable and impact investments have either held their own or outperformed during the pandemic.”–Judith Rodin
So as we think about what the future of transportation looks like and how we can reduce greenhouse gas emissions and reduce our dependency on fossil fuel, using green bonds to raise money for projects like rapid transit — whether rails or buses — is a great opportunity.
There’s a lot of exciting innovation that’s been happening in the VP sector as well. One to mention is Breakthrough Energy Ventures, which is built on the traditional VC model but is innovative in the sense of how they work with the companies, and the time horizon that they have. It’s an investor-led model that is driving capital to companies or entrepreneurs that are trying to come up with innovative technologies such as new battery technologies, or solutions for how to capture and then reuse carbon from the air.
The last one to mention, which I also think is so fascinating because of the opportunities it provides investors — not just institutional, but individual investors — is renewable energy investment trusts. These are investment trusts that are traded on large stock exchanges, where the underlying assets are renewable infrastructure projects like operational wind farms or solar farms, giving everybody the opportunity to buy and sell shares in these assets, just like they do in public companies.
LoGiurato: You started writing this book in early 2020. The world has changed quite a bit since. How will COVID-19 impact the landscape moving forward?
Rodin: First, it’s really important to note that most sustainable and impact investments have either held their own or outperformed during the pandemic. Morningstar reported that ESG funds set a record pace for launches in 2020, and received record levels of in-flows, more than $70 billion globally.
In the book, we argue that going forward, all three elements of ESG — environment, social, and governance — will undergo a transformation, both in the rigor and also in the breadth of each metric. For E, certainly the pandemic has raised awareness that there is extraordinary interconnectedness among the economy, human health, the climate, and natural ecosystems. And this has led many investors to conclude that environmental metrics have to go beyond greenhouse gas emissions, looking at other environmental elements, such as biodiversity, and natural resources like water.
For S, the pandemic has already prompted investors to apply much greater scrutiny to the way that companies protect the health, welfare, and safety of their workers. Also their suppliers and their contractors. From now on, they will surely analyze who permits working from home, who gets paid sick leave and other health benefits, for example.
“We need to make sure that there are robust tools and reliable data that can drive confidence in the impact that’s coming from these investments, not just in the financial returns.” –Saadia Madsbjerg
For G, we’re already seeing that investors are focusing on whether corporate CEOs are taking leadership roles not only for their companies, but on very important issues that are facing society. We also argue in the book that a new element will be evaluated and rated going forward, because of COVID and because of future impending crises. And that is resilience, which is rapidly making its way into conversations in board rooms and among investors, very, very importantly.
LoGiurato: What do you see as the biggest challenge to sustainable impact investing as we look toward the future?
Madsbjerg: Sustainable and impact investing has grown from a small niche market to one that now deals in the trillions. There are strong projections for future continued growth as well, which is great news. The challenge is also to ensure that it’s not just growth, but growth with integrity. What that means is, we need to make sure that there are robust tools and reliable data that can drive confidence in the impact that’s coming from these investments, not just in the financial returns.
It also means making sure that there is transparency, to weed out what is called “impact washing” — funds, products, that are labeled as being sustainable and impact investment products, but in reality are not. That also means that we need to have a more stable regulatory environment that infuses confidence in the market, and not confusion.
LoGiurato: As we’ve heard, there are a ton of lessons and takeaways in the book. But if you had to pick one lesson you hope readers take with them, what would that be?
Rodin: This is a book that describes and evaluates three important takeaways. The what, by explaining all aspects of this exponentially growing financial market which now has over $30 trillion of assets under management. The why, by explaining why all categories of investors from every asset class have jumped in. And the how, by explaining how to make it work most effectively, whether you’re an asset owner, a money manager, or a problem-solver seeking capital.
The reader will come away with a better understanding of investing that yields both purpose and profit, getting a road map full of rich data and examples for maximizing success and avoiding pitfalls.