Rehana Nathoo On The Nuances Of Impact Investing In Relation To Modernised Market Models

Rehana Nathoo is the Founder and CEO of Spectrum Impact, a strategy firm that supports organisations looking to expand their impact investing footprint. Her work has been shaped by a decade-long learning journey in impact investing.

Rehana previously led the impact investing portfolio at the Case Foundation and worked with Bank of New York Mellon to create a pilot impact investment fund. She led grant-making for the impact investing program at the Rockefeller Foundation and started her career in project finance in East Africa with the UN Capital Development Fund. Rehana currently serves an adjunct professor at Georgetown’s School of Foreign Service on impact investing and global development.

Rehana discusses an Array of Market Models prevalent throughout her career, and the Importance of Individuals and Investors in the Field of Entrepreneurship For Change.

Highlights from the interview (listen to the podcast for full details)

[Anika Horn] - Rehana, thank you so much for joining us today. I'm really excited to have the chance to talk to you. I came across you on LinkedIn out of all places and was so struck that there is this amazing accomplished female with a bio that just reads like a lexicon of some of the most impactful organisations that I'm aware of in the United States. And you work in impact investing, which is fantastic! I couldn't pass up the opportunity to reach out and talk to you and pick your brains a little bit more about the work you do, the organisations you've been with, and what you're seeing in the sector of impact investing.

First off, could you tell us a little bit more about your background and what led you to working in this space of impact investing?

[Rehana Nathoo] - Yes, Happily. What an unbelievably kind introduction, so thank you! I'm standing on the shoulders of giants like so many of us are. I deeply appreciate that. I, like many people, found impact investing through sheer dumb luck and really great timing. I started my career working with the United Nations, particularly the United Nations Capital Development Fund, UNCDF. UNCDF's remit was to help prime local financial markets in a lot of the Global South in an attempt to build better relationships between customers that are poised for financing and domestic financial institutions that don't see local borrowers as creditworthy. And for me it was a very deep, very practical foray into the role of project finance in a development context - seeing what UNCDF did particularly with de-risking capital - so guarantees and credit enhancements - to try and make local borrowers more attractive to local institutions.

And so very early on, I got to see the role that capital could play through foundations and donors, but also big institutions (like the UN). Being able to see that was an eye-opener for me. It was a far cry from a traditional development theory, which is what I was trained in. And economics, which is traditional in its own right. And then from there, like I said, a lot of sheer dumb luck and a lot of really amazing people who were willing to train me. I spent some time leading the grant-making side of things for the impact investing portfolio at the Rockefeller Foundation. Then moving over to oversee fund construction and wealth management (in an impact context) at BNY Mellon, and then finally in-house at the Case Foundation running their impact investing program.

So, for me, my role in this space has mostly been around big systems change. I've really been attracted to the question(s), "How can we change the way that institutions talk about traditional finance? What are ways that we can re-purpose traditional finance for social goals? And how do large, relatively sticky bureaucratic organisations navigate a very difficult culture change that fundamentally sort of requires us all to talk about finance in a very different way?” So it's been an amazing journey and it's been a journey with a lot of really great organisations that have always kind of had their finger on the pulse with this kind of work. And for me, launching Spectrum Impact, which is an impact investing strategy consulting firm, really does the job of trying to use strategy as a lens through which impact investing strategies are built.

Through Spectrum, we’re trying to customise the way that organisations think about approaching impact - not the other way around. I think we found that it's a pretty important nuance because it reminds us all that there is a unique set of skills and capabilities that organisations have to solve problems and impact investing doesn't advocate for departing from those strengths. Done properly, you can actually leverage (those strengths) to be even more impactful in the way that you approach some of these big social problems. A very good friend of ours talks about us as if we're marriage counsellors, which we have been advised by legal counsel we should never put on a website anywhere - we are not licensed therapists! So that point is very well taken, but it's a really important reminder to me on a pretty consistent basis that there's a lot of work that can be done to help people figure out what path is right for them, as opposed to prescribing a one size fits all model.

Can you give us one or two examples of the type of organizations that you work with and what kind of work you do with them; maybe walk us through one or two practical examples?

Happily, it's a really great question. I would say that because strategy is the lens by which we problem solve, we do find that the range of clients that we are best suited to serve is actually quite narrow. Originally I think when you start a business, that is the most scary thing you could possibly say out loud to yourself that, "Oh gosh, the pool is pretty small." I will say as we're approaching our two-year anniversary, it's actually a source of great comfort for me. And I think the reason for that is for Spectrum's methodology to work, we really do need to connect the impact investing application to an organisation's specific strategy.

And so that means a certain size and type of organisation that thinks about strategy as a compass in the way that their work is executed. So typically, our clients fall into two buckets. The first is large organisations, corporations, or smaller for-profit entities that have a theory of change. They have a very clearly built strategy around what they want to do - either that's the market opportunity, customer-type served, business model type. And then from that they are thinking very candidly about how to shape a business line around impact investing. The second is an on balance sheet fund manager of some kind. In the first group we have a lot of really amazing for-profit start-ups that are emerging onto the scene that really are thinking about impact investing as a core business line.

The best example from our portfolio is a group out in New York called Ellevest. Ellevest is a digital financial advisor that's rethinking the way that women get to be part of the community of savers, investors and borrowers. And so rethinking what is traditionally an outdated male-centred algorithm around wealth management - taking life expectancy and earning potential and putting a spin on it for 50% of the population that is currently being left out of the market. We had the unbelievable good fortune of shaping their gender-lens investing narrative and thinking about what product offerings might be - authentically - which is part of Ellevest's culture, to really be super authentic and real about whether they are part of the community or not and what that looks like.

On the other side of the house, a good example of the work that we're doing right now is with the Equality Fund. The Equality fund is the Government of Canada's $300 million effort to build gender-lens investment principles and feminist principles into the work that they do. So that has a manifestation in the way they do foreign policy all the way to the work that I do with the Equality Fund, which is a gender lens investment product, or set of products. The Equality Fund is a good example because it is an example of what it looks like to seed an investment strategy of some kind. And then a firm like mine comes in and says, “Okay, you've allocated the assets, you're bought in on gender lens investing or impact investing, you're ready to go. Let us help you figure out the best way to execute that.” So, we've been working with the Equality Funds since October of 2018 on this project. Both of those are good examples of the ways that we find opportunities to engage at the organisational-level to really build an actual plan, a workable long-term plan around how these assets are deployed and to what end.

You've worked in the space of impact investing not only for a number of years, but also for different actors and organisations. What are some of the trends you've seen over the last five to ten years? What has changed? What are you excited about? What are you maybe even concerned about?

It's a particularly timely question and I appreciate you asking it because I do think that the last two years in the evolution of this space it feels like - not even a new chapter - but an entirely new novel. And there are so many ways that that is unbelievably inspiring. Then there are other ways that it's frightening. For me, over the course of my journey on a personal level, I was looking for the size and type of organisation that really had the ability to make impact investing a core business line in perpetuity.

And in starting at the UN, I thought that the INGO model might work. Moving over to Rockefeller, I had an opportunity to see the privately endowed model. Moving over to BNY Mellon it was the asset manager/ institutional investor. At Case it was the private family office. And I think two things have emerged across this bit of reflectivity over the last 10 years. The first is that there is no one size fits all solution to scaling impact investing. The market needs so much critical infrastructure-building that you could be a privately endowed foundation and make grants for the next 10 years and still have critically poised the market for success.

Or you could also be one of the largest asset servicers in the world and be making investments for the next 10 years and bring the market to scale. There's so many roles and responsibilities we still need to fill to be able to really scale impact investing. So, to answer your question about the sort of things I worry about. I think in the rush to declare that we are there, that we're ready, that impact investing is a sizeable comparable market, we have lost sight of the fact that a lot of what has created impact was concessionary grant-based, artificially stacked investments, right? That the inception of impact investing was about creating a market that wasn't there. And so, the unit economics - then - were not suggesting that impact investing was the future.

It would be, I think, a shame to be so excited about a sustainable market that we forget that critical risk-oriented market-building is always going to be necessary. And so, we need foundations, whether they're large like Rockefeller or tiny non-profits to continue to seed the market where traditional financial infrastructure is not doing that. And then I think the thing that I'm the most excited about is that every organisation that I've worked at has done an unbelievable job at working at, (and it’s hard work), is around measurement and transparency.

One of the most prevalent myths in the impact investing space that's a point of personal frustration for me is the myth that you can't measure some of these impacts.

And I think we have over 35 years of development practice and over 45 years of investment practice that demonstrate that we can measure.

It's hard, and part of the reason why it's hard is because it's not standardised. And so almost every organisation that I've worked at has had an instrumental role to play in building measurement frameworks that start off expensive and all of a sudden become affordable through their grant-making or through their de-risking. The future of measurement through the Impact Management Project (IMP) or through the IMM Framework at the GIIN or the work that B-Lab is doing - there's so much great work out there to get us all on the same page. That inspires me deeply.

For us individuals, maybe even social entrepreneurs who are driven to make an impact, are there ways for smaller organisations to get involved in impact investing?

It's always the part of work that you don't get to touch on, that you get the most excited by. I love this question because I don't often get to work directly with entrepreneurs or individuals. And so, I am a bench-warmer out watching all of this happen and it's truly inspiring. I would say at the individual level, I have been blown away by the number of products that have been designed for non-accredited investors, particularly in North America. You have things like CNote which allows you to keep your checks and savings assets in community development financial institutions (CFDIs) in neighbourhoods that you care deeply about. Or you have things like Robinhood or Epic that look at the role that you can play as an individual investor to invest in the community. Or there are things like Ellevest or formerly Swell, which no longer is around, other digital advisors and robo-advisors that have exclusively impact oriented or socially responsible investment digital portfolios.

The role that the individual gets to play, I think, is more powerful now than ever before. But I also think that sometimes in the desire for us all to be investors, which obviously I personally believe - that every single one of us can and should be - we forget that there are other strengths that we have. It is pretty impressive to me that it feels like no other time in our cultural history did 144 characters have a huge impact on corporate culture. And the use of video allows us to hold all of these corporate institutions much more accountable than ever before. So, there's definitely a play for investment dollars, but I would also say there's a social consciousness that's particularly timely. Every individual has the ability to make that voice known and sort of get in touch with a corporate entity that they're not happy with and why that may not be the case.

Then I think for the entrepreneurs, I’m constantly reminded in my work as someone who supports the supply side who mostly works on investor on-boarding and education, this is all for naught if there aren't places to put the money. The entrepreneurs continue to be a critical part of the ecosystem. I am totally inspired by the amount of entrepreneur-level support that's happening in the impact sector. We have some long and impressive legacies like Village Capital and things like Techstars that have moved into the space. We have unbelievable programs out there that are looking at entrepreneurial support in a really thoughtful way. We've got lots of organisations out there that think about accelerators and incubators as sources for pipeline funding. And so, entrepreneurs get access to investors they didn't get to before.

I also think that in a culture of a lot of concern around impact washing, which is right, I think that we need to have our guard up on this. LP’s and investors themselves are starting to think a little bit more thoughtfully about evaluating social enterprises in a way that serves their business model. It used to sort of be, if your term sheet looked good and you were generating the returns and having impact as a side objective, great, you fit the impact investing mandate at a small operating foundation.

Now if you're not measuring those social impacts and if you're not being very clear and explicit and intentional that that's how you evaluate success, you're not even getting through the door.

I'm hoping, perhaps naively, that the balance of power shifting a little bit to be a much more equal between LPs, GPs and then the entrepreneurs that they invest in.

Fantastic. Thank you so much! You already mentioned a number of organisations who are key players who might be good resources. Could you list again for us just a few organisations that do a good job in impact investing and, or an educating of opinions around the topic of impact investing?

Absolutely. I think I would be remiss not to shout out the GIIN once again. So, this is the Global Impact Investing Network. And they essentially serve as our membership association body - our industry association body. And over the course of their inception they have done an unbelievable job making resources available to the public. It's one of the few organisations out there I think that doesn't just generate knowledge and expertise from members but ensures that they are sending out - to the masses - lots of information on impact investing.

The GIIN has both high level definitions as well as sector specific guides. They really dug in on some thematic sectors, social impact sectors, and also created sort of resources for certain types of organisations - like a foundation versus a family office. They’ve got some of the most compelling information we have out there. I think that there are a set of books that have come out in the last little while, some of them a little bit older, that I actually think continue to hold the line on appropriate impact investing education. So, The Impact Investor which is by Cathy Clark, Jed Emerson and Ben Thornley is on Amazon, I believe - I still have a copy sitting on my bookshelf. It does a really good job of talking about how to use collaborative capitalism at a leadership level to really institutionalise impact.

There also is The Power of Impact Investing, which was written by Judith Rodin and Margot Brandenburg, former Rockefeller colleagues, that is a very short, very digestible primer that's case-study driven. So, here's what impact investing can actually do for the masses. ImpactAlpha, one of the best news industry publications that we have that I'm quite a fan of, does a good job of trying to bring impact investing news to your inbox every single day. And then Spectrum also has a couple of free guides available on our website that we just wrote and published for free. One on how to build an impact investing strategy and one on how to build impact investing products. And I think that the desire there, across all of these organisations is that there's really no sense sometimes in monetising these things because the more informative that we all get, the better this whole market is. I've barely scratched the surface. There's so many great thought leaders out there that are pushing out this information. But those are a few sources I think to get started.