Building a Financial Sector that Serves People and the Planet
We believe financial markets can reduce—rather than exacerbate—poverty, inequality, and environmental degradation.
Toward these ends, we:
- Advocate for financial institutions to quantitatively optimize social and environmental impact alongside financial risk and return, providing a blueprint through our "Efficient Impact Frontier."
- Create a thriving, sustainable, and transparent financial market to serve needy agricultural businesses through the Council on Smallholder Agricultural Finance.
Efficient Impact Frontier
We believe that combining the rigor of financial markets with values of social justice, equality of opportunity, and environmental health is not only possible—it's vital.
Like the mainstream financial sector, Root Capital manages financial risk and return. But we integrate social and environmental impact into the standard risk-return framework in a way that is both quantitative and holistic. We have found a way to integrate people and the natural environment into the formulas we use to make financial decisions. And we are getting the word out to inspire others to do the same.
We published our approach in a feature article in the Winter 2017 Stanford Social Innovation Review, titled “Toward the Efficient Impact Frontier.” Since then, Root Capital staff members have presented the approach at dozens of conferences, industry groups, financial institutions, nonprofits, and schools. The article has been incorporated into syllabi in graduate programs in business and policy, including at Harvard and Yale. We have also developed a participatory simulation that allows participants to step into the shoes of an impact investor, and build their own portfolio of loans based on data about those loans’ impact, financial risk, and financial return.
Efficient Impact Frontier Participatory Simulation
Our participatory portfolio construction simulation provides students and practitioners an opportunity to put the idea of the efficient impact frontier into practice. We have led the simulation at over a dozen foundations, funds, schools, and conferences, and are now making the exercise available for wider use.
Participants have the opportunity to build their own impact investing portfolio by choosing from a set of 200 actual Root Capital loans. We provide detailed data about the expected financial risks, returns, and impacts of each loan; instructions for how to choose from that set of loans to build a portfolio; and an Excel tool that auto-calculates the expected risk, return, and impact of that portfolio. At the end of the exercise participants have an opportunity to find out whether their chosen portfolio falls on the 'efficient impact frontier.' Participants will leave with an understanding of how investors can manage the risk, return, and impact of their investment portfolios, in a way that is fully integrated, holistic, and quantitative.
There are two versions of the simulation: a Harvard Business School case study for use in the classroom, and a professional version for use within industry organizations and at conferences. Both take 90 - 120 minutes. People and organizations that would like to organize a simulation session on their own are welcome to use these materials to do so.
Classroom version: Students complete the simulation exercise independently as homework and discuss their results during class. For this version, a Harvard Business School case study is available. An accompanying teaching note will be available for instructors in time for the Fall 2018 semester.
Standalone version: Participants complete the simulation exercise in small groups on laptops during a self-contained event that includes an introduction, the simulation exercise, discussion, and conclusion.
- Resources for participants: This zip file includes the Excel file participants will use, as well as instructions and a glossary of terms.
- Resources for facilitators: These include facilitator instructions and the facilitator version of the Excel file. These files are available by request to avoid disseminating the simulation answers to participants, and to track usage. For access, please send us an email including your name, organizational affiliation, and email address, and we will send you the link to the facilitator materials.
Online videos of past ‘efficient impact frontier’ presentations:
- Efficient Impact Frontier presentation: “Challenging Perspectives on Impact Investing” (minute 7:25 to 27:20), Stanford Center on Philanthropy and Civil Society, December 1, 2016.
- Efficient Impact Frontier Webinar (minute 0:00 – 20:00), Aspen Network of Development Entrepreneurs Sector Update, February 2017.
Our experts are available for presentations, workshops, and consulting on the approach. Please contact us to learn more.
Council on Smallholder Agricultural Finance
The Council on Smallholder Agricultural Finance (CSAF) is an alliance of social lending institutions focused on agricultural businesses that lack sufficient access to capital in developing countries. CSAF members exchange learning, identify best practices, and develop industry standards across three areas:
- Market growth to meet a greater share of the vast financing need of the world’s 450 million smallholder farmers. In 2016, CSAF members and affiliates provided $682 million in loans to 775 small and medium-sized businesses across 65 countries.
- Responsible lending principles promoting market growth that contributes to positive impact on agricultural businesses, the smallholder farmers they aggregate, and long-term sustainability of the sector. Council members have drafted a set of Responsible Lending Principles for impact-first agricultural lenders.
- Social and environmental impact for farm households, their communities, and the ecosystems on which we all depend. Council members have identified a set of five impact metrics that they collect and share on an annual basis. These metrics will form the basis for deeper impact analysis in the future.