[ Morgan Simon ]

Morgan Simon, influencing over $150 Billion dollars to the impact investing sector

EPISODE #003

Rocco Forino:

Okay. I’m so happy to be here with Morgan Simon. She’s an author, speaker, activist, an investor responsible for influencing over 150 billion dollars in the social impact investing space. Morgan, welcome to the show.

Morgan Simon:

Thank you, so much.

Rocco Forino:

So, you wrote the book real impact, and from the get-go, you mention two important words, transformative and palliative. Can you tell us why these words are so important to impact investing?

Morgan Simon:

Sure. Impact investing, in general, is often defined as the practice of trying to put your money where your mouth is, right? To invest in something that reflects your social values, and that there’s all different types of solutions, and just because you invest in a sector or geography, right, agriculture in Africa, or renewable energy in the south, it can be done in a way that’s transparentive, meaning really addressing the underlying structural problems and fixing it for the long term, or what I would call palliative, which is word we’re used to knowing in the context of palliative care, right, which typically means making sure that someone is comfortable before they pass away, and essentially if we are simply decelerating climate change but not actually stopping it or just making it slightly less miserable to be poor I would say that’s a form of palliative care, right, and that we really want to do what we can as investors to be as transformative as possible to address the root causes and really make systemic change.

Rocco Forino:

Right. So transformative is more getting involved and making sure things actually change for the positive rather than just painting a picture of positive over what you’re potentially investing in. Is that about…

Morgan Simon:

Right, so for instance that there has been a number of solutions that are about how do we replace the payday loan industry, right, that so many people pay massively high interests rates just when they need some extra dollars to fulfill basic necessities, and you could certainly create a cheaper loan product, but you could also be really considering why is it that people can’t pay their utility bills at the end of the month, and it’s not that poor people are bad budgeters, they’re simply not paid enough, right, so how do we create enterprises that actually follow within wage scales so that everybody can get their needs met and not need to have a loan at whatever price towards the end of the month, so that’s what we’re looking at. Are we making it easier to be poor or are we actually stopping poverty, and I think that’s the opportunity that we have with impact investment while also fulfilling financial goals, right.

I think that’s the exciting piece for people who are new to impact investing. We’re used to thinking that if you want to make personal change you have to just give money away, but with impact investing you can make a financial return through an investment in a for-profit business, but a business that’s taking care of its employees, that’s watching out for the environment, that’s really trying to create a much brighter future.

Rocco Forino:

And so, the investors who are engaged in impact investing are they seeing…what type of returns would you say as a percentage relative to the stock market?

Morgan Simon:

So, what we have found in some fairly traditional institutions, right, someone like Deutsche Bank, or Harvard Business have done numerous studies showing that businesses that take care of their employees and the environment actually do better on the market, so for instance, a Harvard study had shown that over 18 years companies that had higher social and environmental value had doubled the market cap, so a really substantial difference, in terms of the value they’re creating and that’s in part because…particularly for people who are long-term horizon investors.

If you’re not looking to retire this next quarter you’re looking to retire in 20 years, well, that means if a company only has 10 years of oil reserve that’s a problem, right, that we really need to be looking out for sustainability not just from the frame of wanting to protect the earth, which certainly motivates some people, but also protecting our retirement, right, of knowing that we need to invest in things that are going to be around for those 20 years, and I believe that’s why we see these companies doing so much better, because they’re really preparing for a long-term reality.

Rocco Forino:

Right. And with that, how would you define impact investing, like what’s a good definition, because when you search the internet it’s like this repetitive mission statement where I don’t think a lot of people can actually visualize what it actually means.

Morgan Simon:

So, it’s why an investment that has the intention of making a social or environmental impact, that’s the definition that would be provided by the Rockefeller Foundation and kind of initially termed the coin impact investing…coined the term. Pardon me. And just to go back to the…when you look at the Merriam-Webster definition of impact to impinge upon especially forcefully leads back to the idea that that impact can be positive or negative. For an innocent intention, an expressed intention, but that is up to us being perfect human beings to make sure that we get it right, and that’s why sometimes it can be a bit skeptical or see some challenges when you have people on the fortieth floor of Wallstreet saying okay, we’re going to move into impact investing. We’ll figure out how to change the world without really having that investors and accountability to make sure we’re actually doing things that people want, so as much as there is a lot of good intentions around impact there’s also a lot of concern about impact washing.

What are the questions that you have to ask to make sure that the impact is real, and that’s part of why my book is called Real Impact, right? It’s the idea that yes, there’s real impact to be had but that we actually have to make sure that it’s real.

Rocco Forino:

Right. Would you say it’s like the Warren Buffett meets Mother Theresa of investing?

Morgan Simon:

I would even say Warren Buffett at one point was asked, while speaking at a business school, should he make a bunch of money and then give it away, or should you do some type of social business from the start and express your values in whatever you do, and to the crier of the idea of make the money now and give it away he said, well, that’s kind of like saving bacterial waste and that’s really not a good idea, so I think Warren Buffett in his heart of hearts have shown this concern of how do we really start to think about integrating our social values and having that Mother Theresa mindset, and then you also see his descendants like Howie Buffett really move deeply into impact investing.

Rocco Forino:

Nice. Yeah, that makes sense. So, you started four organizations. Could you tell us about your current project now?

Morgan Simon:

Sure. So, I’ve been doing impact investing for close to 20 years and it’s part of overtime really trying to also build the infrastructure of the industry, and my current firm Candide Group, we work with families, foundations, athletes, and cultural influencers who really want their money working for social justice, and we’ve done over 65 investors over the last six years in companies that fund in our portfolios are over half women and people of color as well, so a strong diversity emphasis, and that goes…it’s drawn deep into low-income housing, to fuller for long-time communities, to worker co-ops. The types of businesses that you can be really proud to tell your grandkids about.

Rocco Forino:

Oh, so what are some co-op investments that you’ve made inside the US? What are some good examples?

Morgan Simon:

So, there’s a fund called the Working World, out of New York, that supports co-ops all over the country. One of them is a factory called New Era in Chicago. It’s the only minority-owned manufacturing facility in the whole state and it sells environmentally sustainable windows, and this is the case where a firm has bought the window manufacturer and was going to shut it down even though the factory was profitable, it was that this family was struggling with their finances in other areas and were going to make these workers essentially pay for it, and instead the workers came back and said no, we’re going to buy the factory from you and we’re going to keep running it profitably, and that’s precisely what they’ve been doing, and that’s the sort of thing where we provided finance into the working world so it then provides financing and support to the co-op.

Rocco Forino:

Great. That’s an awesome example because you don’t really see lots of local community banks or investors helping to engage that type of investment for employees to take over the company.

Morgan Simon:

Right. You don’t, and I think that’s part of why for those who are excited about getting into the impact investing, it’s really critical to find an advisor who actually knows the field, who is going to have a line of sight into those operations and into those opportunities, because as they say in financial management, no one gets fired for buying general electric. That often those managers are not familiar with impact, they might say it’s a bad idea, but it’s often that they just don’t have the relevant expertise, but what’s great is that now within most traditional advisory firms you can always even just ask to be referred to the social impact department and see what they already have on the platform, and if you’re not impressed offer to be the person to do more.

Rocco Forino:

Right. Yeah, that was a great example. Did the employees of New Era reach out? How did they find you guys, or did you find them, because that’s…one of the reasons why I wrote my book is to help connect people who don’t know how to raise money with investors because they don’t know what they don’t know. How did the New Era employees…did they reach out to you or was it the other way around?

Morgan Simon:

In that case, they had connected with the fund, with the Working World, and that’s part of…as investors you can’t be everywhere and do everything, so there’s some deals that we do directly and other times that we work through funds, so other examples of direct deals we’ve done recently with utility-scale…we’re actually in the process. Utility-scale solar on the Navajo Nation with the majority native-owned entity is a project we’re really excited about, and I guess I would say that at this point I’ve been in market for so long that companies that have that social mission will often know to reach out to Candide Group, so that goes back to be successful in the field you really have to have the depth of connection to be in the pathway of these sorts of companies or, you’re right, they won’t know that you exist.

Rocco Forino:

Right. Nice. What would you say…

Morgan Simon:

And that’s also where…I’m sorry. I was going to say that investor networks like Tonic, like Investor Circle, can be really helpful as well in helping to bring together deals and help individual investors find new opportunities.

Rocco Forino:

That’s good to know. What would you say the number one rule for social justice activism is?

Morgan Simon:

Now, one phrase that partners in the Global South would often say is nothing about us, without us, and the idea that it’s very easy, whether in philanthropy or impact investing, for people to make presumptions about what other people in the world want. There’s a really simple example. We presume that any community would want a well if they don’t have access to a well, or running water in their house right, but sometimes in a village the women might say you know what, that two hours a day that I get to go walk and fetch the water is the one time that I get hang out with my friends and nobody bothers me and I would much rather do that, right, so it really depends case by case and making sure that if you’re going to do an intervention in the community you actually have talked to community members about what they do that’s fair and proper, and that is a step that investors often skip, right.

We’re busy people. Ability to kind of have time on the ground, so for instance at Candide Group we make sure that we do an in-person visit to any company or fund that we invest in, and that’s both to not just ignore them, but we feel like if we haven’t really gotten to talk to the people then there’s just no way to know if we’re doing the smart investing or not.

Rocco Forino:

Yeah, it makes sense, because it’s almost like creating a product or service without actually seeing if the customer that you are targeting would actually use it, so that’s good research.

Morgan Simon:

Exactly. I was going to say that one of the stories that I told in the book, right, was that entrepreneur when I asked how they tested their solution, which was a solar stove for consumers in the global south they noted that had gone down to Mexico to test it but no one on their team spoke Spanish, so it was this question of okay, you say you’re doing product testing but if you can’t even understand what people are telling you about it how is that possibly valid, so it really takes a thoughtfulness and discipline to make sure that you really are getting that user feedback and not making assumptions for people, and then the final piece is that too often we’re just treating people as consumers and not as the protagonist, and I think this is another really critical point that part of why we have such incredible inequality is this divide between who are the owners, and the entrepreneurs, and the consumers, and the more that we can create opportunities for broader ownership the more that we can really level the playing field, so that’s something that we also look for a lot in our investors.

Rocco Forino:

Nice. That’s great. Now, I’m not sure if I know how to pronounce this correctly but Swarthmore. How do you pronounce that particular…

Morgan Simon:

Now, if you’re from California like me you say Swarthmore. If you’re from Pennsylvania you say Swathmore.

Rocco Forino:

Swathmore. Okay, so I’m…

Morgan Simon:

There a lot of people who say Swathmore, yeah.

Rocco Forino:

So a student Swarthmore College what was the lightbulb moment that went off in your mind where you connected the ability to leverage the school’s billion-dollar endowment to fight social injustices, and how easy or hard was it to convince the VP of finance to make it a reality?

Morgan Simon:

So, I was an activist from the time I was literally in middle school and started running tutoring programs in Los Angeles, and I did a lot of work with homeless and formerly homeless children and started to really see how so many problems facing families were really just an extension of the economy, whether it was difficult to getting a job, or having to do with immigration status, with the challenges in securing affordable housing, right. It all kind of centered back on economy, and when I went to college that got me really excited to look at what are the ways that I could think about my relatives economic privilege.

Not that I was from a high network background, but the fact that I was going to be a billionaire for the first and probably only time in my life, in terms of being connected to this institution. How could I really use that as an opportunity for social change, and I joined the schools committee on investor responsibility that was really the entrée point to the investment field, and was lucky to have, in the administration, people who were really supportive of the idea of students taking strong action, so we filed the first shareholder resolution since the apartheid era asking Lockheed Martin to add sexual limitation to its nondiscrimination clause, and after presenting at the meeting they ultimately did decide to change that policy, and was kind of part of the wave that we saw of companies making these changes on their own, leading up to national legislation, so really part of that long-term social change effort, and for me it was really this opportunity to see that as an individual you could have power over a corporation and that you could come together to really make a difference, so that very much inspired me, and then inspired hundreds, thousands of students across the country that came together in the responsible endowment coalition, which at its height was over 100 campuses across the country looking at the 400 million that colleges and universities manage nationally.

So, just to end that point, I think we often as individuals if we…you might have 10 dollars, or 100, or 10 million, or 100 million in your bank account. We tend to always feel like it’s not enough and that we don’t have economic power, and what I’ve learned is that we’re all connected to money somehow, right. I call it being an accidental billionaire, that maybe it’s your retirement plan, maybe you’re a teacher that’s part of a much larger retirement plan. Maybe you’re an alumnus of a university, but that if you kind of do the math you’ll find that you’re connected to numerous billion-dollar institutions, and then it just becomes the question of how can you leverage those connections to do something positive for the world?

Rocco Forino:

Right. Now, was it easy or was it hard to convince the VP of finance to actually go after a corporation, because I would see someone from a university just not taking it serious like they don’t want to make waves. Did you get that?

Morgan Simon:

Actually, it was quite easy, and I’ll tell you why. One is that we made sure to pick an issue where the social and the environmental consequences…pardon me. The social and financial consequences are so closely aligned, right, so the VP finance, their primary responsibility is to make sure that the school is solvent, right, and managing its funds well, and the things that companies were funding, given that it was more or less 10% of the US population is projected to be LGBTQ that if you as a company have a policy that basically tells those people that they should feel unwelcome you’re shutting out 10% of your applicant pool, right, for whatever reason that you might do it, right, but that is a poor business decision, right, for whatever criteria.

So basically, as a financial steward, as a fiduciary for the school he was very much behind the idea of we should absolutely make sure that companies are doing the best by their shareholders, and let’s add to that the fact that we’re a mission-based institution and that we believe deeply in the safety, and security, and rights of people regardless of their sexual orientation, that both of those wound up being very deeply aligned, so from that perspective they were really happy to do it, and we flew out to San Diego together to present to the board of Lockheed Martin.

Rocco Forino:

Nice. And then you filed a shareholder resolution?

Morgan Simon:

That’s correct. So basically, if you own stock in a company over 2,000 shares for at least a year then you can file a statement with the company basically saying we don’t like what you’re doing about x, or we want you to change x behavior as long as it doesn’t fall within what they call ordinary business practices, and then all of the shareholders come together to vote, and it’s a non-binding vote but it is the strongest statement that investors can make, and it can be deeply embarrassing for companies because you’re essentially notifying all of their shareholders that this company has a problem, so often, there’s a time period between when you file requisition when it comes to a vote. Companies will try to negotiate with you to essentially make the resolution go away before they have to send it out, and that becomes an opportunity to really make some tangible change within companies.

Rocco Forino:

So, that’s an important lever.

Morgan Simon:

Absolutely.

Rocco Forino:

Nice. Well. There was a section in your book that I personally connected with, and that was a story about you visiting a friend…or an entrepreneur in downtown LA who raised about half a million from friends and family, and part of the driving force behind writing my book is to help close the enormous gap that exists between wealthy investors and entrepreneurs who have limited access to startup capital. Could you explain your experiences working in the United States, what struggles you have witnessed from entrepreneurs with limited access to investor capital?

Morgan Simon:

Sure. So, I believe this is correct, that less two percent of venture capital has gone to black or Latino people in the US, and under 10% to women and that means that there is a massive lack of funding for certain populations, and there’s often a presumption that even to get a company to the point where it could be venture funded is that you’re supposed to have this round that they call friends and family, which is really quite laughable, because for some of us…and the story that I told in the book was that I took one of my mentees who was Latina, grew up in downtown LA, both parents extremely hard working and scraping to get by in the US. That when I took her to see this entrepreneur who was able to very casually say oh, I raised 500,000 from friends and family.

I know that if he walked up and down her block these people love her death, but she would maybe be able to collect 50 dollars, right. The idea that your friends and family would be able to get you enough money to start a company is pretty preposterous, right, and it sort of makes entrepreneurship more of a privilege than a birthright, and we often talk about that talent is equally distributed by zip code but opportunity is not, and that’s why we need to be thinking more about how do we get people that first risk capital that they need to even get to the place where a venture capitalist would consider them.

Rocco Forino:

Right. Yeah, so part of my book…or actually most of it is teaching men and woman from opportunity zones, or the most distressed cities in the United States, what they can do to prepare themselves to raise money, to participate in the opportunity zone economy now, and when I was growing up…I grew up in an opportunity zone and that was my first business in 1999, was a tech-related company. My town had an information technology zone, which stated that they were going to invest in a tech company or draw on tech companies to the city, so I put together a team of myself and a couple of Harvard graduates and a couple of coders from India. Well. Despite me only raising about 20,000 dollars I still needed another 100, and despite we had the best business plan, we had a really good team, still couldn’t raise 100,000 bucks, and that was my experience in trying to start a business in the opportunity zone or distress type of city, and it’s just…there’s just…one, there’s not a lot of support, especially if you don’t know anybody who’s had a successful business, and if the opportunity zone doesn’t have a good ecosystem set up you’re really going to start spinning your wheels and get frustrated, so that’s how I connected with that particular story because I was like yeah, I was in the same situation.

I probably couldn’t raise 100,000 dollars back then and I did it, but it was hard, and the…

Morgan Simon:

Exactly.

Rocco Forino:

The point of the story is there’s…now we have this program where they’re looking to get people to invest in the opportunity zone, but we actually need deal flow to be able to invest in entrepreneurs, so they need to know how to raise capital.

Moving on.

Morgan Simon:

Absolutely.

Rocco Forino:

Go ahead.

Morgan Simon:

They need to know how to raise capital, but it’s a two-sided market. It’s also that investors have to learn how to look at businesses differently, right, so whether that’s different ways of evaluating creditworthiness, or experience, right, that you don’t have to have an Ivy degree to be a really phenomenal entrepreneur. I recently was talking to a friend from a low-income community who landed a job at Goldman and in the compliance department, right, which is very specific resolutions and you would presume you’d have to come from a fancy school and background to do that work, but this friend of mine is absolutely obsessed with motorcycles, and the person who hired him said when I heard you talk about motorcycles and that you clearly knew…memorized in and out every spec, every number, every letter I knew you could do the same for efficacy compliance, and it’s really thinking about what are the comparable skills that a person can have, right, and how do you learn to evaluate that differently and give people real chances.

Rocco Forino:

Good point. In your book, Gary Field states that we have a global problem in that jobs create…jobs that are created are precisely what are keeping people poor. What do both surveys and those who create low-paying jobs don’t fully understand? What should be the correct key performance indicator?

Morgan Simon:

Sure. This goes back to…it’s one thing to create a job, and that we often think about that as a positive force of society, but most working people…most poor people are working, so it’s not just an issue of people not working hard enough it’s that they can be working even two, three jobs and still be poor, right, so it’s really thinking about if it’s impact investors we want to create real opportunity for people we need to think harder about what a quality means, right. That it’s not just minimum wage it’s living wage, that it’s providing health insurance, and retirement, that there’s opportunities for advancement, right, that there’s all these different pieces that, by the way, aren’t just about helping people’s lives, which is a great thing to do. It’s also about having better workers, right, of having people who are loyal to you, who are going to stick around longer, that don’t need to be trained.

There’s one study that’s one of my favorites is that not only will employees steal less but they collude less to steal, right. When you think of why even so much theft happens in things like grocery stores is that people don’t feel invested in the places that they work, but when people feel like they are being invested in they are going to have that loyalty, right, and we really should foster that.

Rocco Forino:

Yeah. No, you definitely see that, especially with Starbucks, Costco, Home Depot. I think those particular publicly traded companies are heavily invested in their employees and actually look out for them, so yeah that makes sense.

How can people interested in social impact investing build profitable investment funds without actually extracting too much cash out of the community? How do you balance that?

Morgan Simon:

One of the principles that we try to follow with finance is the idea very simply that you want to leave more value in a community than you take back out, because if we’re supposed to be impact investors, right, then whoever we’re calling the beneficiary should, in fact, be the primary beneficiary, so that’s often a mathematical equation, right. That’s really looking at what’s the rate of return that that community is receiving versus live rate of return, and I’ll note that that doesn’t mean that I can take a submarket return, right. I just want to make sure that everybody in the transaction is being treated fairly, and it goes back to that example about the payday loan and then the interest rate. It’s not just about making something better than the really terrible alternatitives, it’s how do you actually figure out what is fundamentally fair and structure an investment coming from that place.

Rocco Forino:

Now, do you have any examples, even in the US, of any social investment organization that has been successful with not taking out as much out of the community?

Morgan Simon:

So, even going back to that example in Chicago, the New Era co-operative, which I also profiled pretty sensibly in the book, that that is under a non-attractive finance structure where the company has to profit before they pay back investors, and that was a way of making sure that if the investor is advising them to buy certain infrastructure or equipment that they have to be equally invested in its success, right, and not just putting all of the risks down onto the company and the owners, so through that sort of blended structure you really kind of align the incentive that the investors want to make sure that the company is as productive as possible verse what you see in, for instance, private equity firms like Toys R Us, right, where they’re really just extracting as much value out of a company as they can until they literally sucked it dry, right, and the impact that that had on thousands of employees across the country.

So, I think there’s a better way to really create long-term sustainable investing return and create value for families.

Rocco Forino:

Okay, because in the long run that’s only a…it’s only simpleminded and it only makes very few private equity firms rich, and pretty much bankrupts a lot of other people, right?

Morgan Simon:

Absolutely, and I mean what’s really amazing when you look at whether the market crashes in 2008, or the fact that over the last decade take out the top three firms and venture capital returns go to zero. That sometimes when people critique impact investment of saying well, there’s no way you could make as much money as traditional investing. Well. Guess what? People aren’t making that much money in traditional investing, so it kind of points to this idea that something’s not working in that system, and I guess what is it? You can make any error once but once you do it twice, you’re a fool, right. What’s that expression?

Rocco Forino:

Fool me once.

Morgan Simon:

The definition of insanity is doing the same thing and expecting a different outcome. I feel like that’s what we’re constantly doing in the stock market.

Rocco Forino:

Right. Yeah. No, that makes sense, because even wi