Purpose before Profit: The Rise of Impact Investing
Daniel StanderJanuary 23, 2018
I had the privilege of following Ben Brookes onto the Exceedance main stage in 2015. I can’t remember a word of my talk, but something Ben said while I was watching him from the green room has stayed with me ever since:
“Some, like Aubrey de Grey, believe that the first person to live to 1,000 has already been born.”
If that sounds to you like the claim of an oddball biogerontologist, you’re not alone. I for one remember scratching my head quizzically at the time.
All the same, it certainly got me thinking. If we’re going to live that long, we’re going to need something worthwhile to keep us busy. We’re all going to need to find a purpose; a focus for our energies.
First, it repositions longevity as about being younger for longer rather than older for longer. Second, it repositions behavioral shifts as reflecting the self-awareness of increased longevity rather than as a mysterious, Millennial effect specific to the year of one’s birth.
This repositioning has sparked fresh discussion around purpose. To what end do we spend our time — within and beyond the workplace? If, as the master quote collector Robert Byrne puts it, “the purpose of life is a life of purpose” then what’s the purpose of our time in the office?
Whether as a tactical ploy to attract and retain talent or as the genuine expression of a founder’s motivating vision, businesses increasingly want to be recognized for more than just generating profit. Yes, shareholders of course require a return. There is, nonetheless, a growing recognition that if wider society or the environment is paying a high price for business growth, maybe it is a price not worth paying.
Alongside the profit motive, therefore, is a need to “grow on purpose”; a need, as long-time friend to RMS, Chris Houston, puts it, to build a business that understands its “purpose-to-others”.
It is for this reason that my comments on the main stage of the summit this week will focus on building metric-based resilience to the potentially devastating impacts of natural disasters.
Impact Investing in Natural Disasters: Optimizing Resilience and Equity
If the impact investing community takes one thing from Abraham Maslow, it should be this: people have no chance of fulfilling their higher b-needs (social belonging, self-esteem, self-actualization) unless their d-needs (food, water, shelter, and economic security) are met.
Sadly, far too many people on this planet find themselves without this chance — and that number is exacerbated by the seemingly increasing frequency and intensity of natural disasters.
Reducing the frequency and severity of the consequences of natural catastrophes is arguably the most impactful way for socially-motivated capital to be deployed. But where should we focus our scarce dollars?
Do we understand — on a location-by-location basis — the probable cost of inaction? What interventions are most likely to yield the biggest economic impact — and can we confidently quantify that impact in the language of the markets?
And when should we make those investments — before disaster strikes or once disaster has created a fresh political impetus? Indeed, how can the economic, social, and political incentives be aligned in order to motivate capital and mitigate the effects of “NIMTOO”?
But why do we need “impact investing”? Surely dampening the impacts of disasters is the telos of the insurance industry? After all, insurers exist to pay claims — period. The industry’s raison d’être is to help people rebuild their lives after catastrophic events; to deliver on a promise made in the utmost good faith. Its actions in a policyholder’s hour of need arguably define an insurer’s existence.
Indeed, some go further, suggesting that the clarity of the insurance industry’s telos sets it apart from other sectors. Dr. Ana Gonzalez Palaez at the Cambridge Institute for Sustainability Leadership, for example, describes insurance not as an industry at all. Instead, she characterizes insurance as a social institution without which markets and civilization would not function.
Yet, despite this privileged status as part of the fabric of society, and despite the role of (re)insurers in worthwhile initiatives such as the Disaster Risk Facility at Lloyd’s and the Centre for Global Disaster Prevention pioneered by DFID, the mask occasionally slips and the preeminence of the industry’s profit motive is revealed.
Could it be that the emergence of the impact investing community is in some way a reaction to a void — real or perceived — left by the insurance industry? Or could it be that the impact community needs to embrace the insurance industry in order to combine risk transfer and risk reduction; in order to be the change it wishes to see in the world?
Quantifying the potential return on resilience is the key to the success of these instruments. It’s also central to the success of the impact investing and resilience movements more generally.
It is in this context that I find my career telos: designing and implementing the impact analytics that will redirect capital flows with purpose towards resilience-building investments. Thankfully there’s much work to be done — certainly enough to sustain at least my first career in this (hopefully) 100-year life.
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March 17, 2019
A postcard from Manila…
Situation: rapid, uncontrolled urbanization and limited enforcement of building codes.
Complication: unwieldy administrative procedures, limited funding, a lack of technical expertise and #NIMTOO.
Result: an alarming rise of building vulnerability in hazard-prone communities putting millions of low-income people at extreme risk.
While many local government officials recognize this problem, progress is painfully slow. Housing vulnerability continues to rise. What to do?
The Issue of Our Age?
According to my favorite bricklayer, Dr. Elizabeth Hausler, housing vulnerability is the defining issue of our age. By 2030, three billion people will live in substandard homes. That’s one third of the world’s population.
Just ask Santiago Uribe Rocha, the first Chief Resilience Officer employed in a non-OECD country. In Colombia over the past 20 years, more than ten million people have moved to major cities like his, Medellín. The lack of affordable housing has led many of these low-income families to settle on the outskirts, often building haphazardly with poor quality material.
According to CENAC (Centro de Estudios de la Construcción y el Desarrollo Urbano y Regional), three out of every five new homes built in Colombia today are of “informal origin”. In other words, 60 percent live in homes that are built without any legal procedures or formal design process.
Despite acknowledging the issue, city governments often lack the means to effectively deal with increasingly vulnerable housing stock. Cumbersome bureaucracies complicate matters. In some neighborhoods, city officials require over six months to approve the retrofit of a single home.
The result: hundreds of thousands of low-income families remain significantly at risk of death, injury and destitution in an earthquake.
Change Is Building
RMS has been working closely with Build Change since 2013. By sharing research, expertise and resources, we’ve been supporting the non-profit’s preventive programs in Latin America, the Caribbean, Nepal and, most recently, Southeast Asia.
The partnership, focused on promoting the benefits of retrofitting homes for low-income families living in informal neighborhoods, is closely aligned with RMS’ overarching, societal purpose. After all, for the last 30 years, RMS’ mission has remained the same: to make communities more resilient through a deeper understanding of the impacts of extremes.
With RMS’ support, Build Change has been able to develop the basis for successful retrofit projects. Shared value abounds…
The local governments have been convinced to effect and enforce changes to urban planning and building ordinances.
The local construction industry has been upskilled and employed.
The local insurers are finding new opportunities to offer affordable policies.
The local residents now have disaster-resilient homes and insurance coverage.
Quantifying Resilience; Increasing Institutional Urgency
Catastrophe risk models have been vital to this process. By combining science, technology, engineering and data to simulate the potential impacts of future disasters, RMS modeling puts a number on the potential impacts of “informal” housing. Moreover, the models can be used to evaluate how risk might reduce if mitigating measures are put in place.
A virtuous circle often results: quantifying the value of building practices drives funding; funding helps protect more communities; more communities protected demonstrates the value of resilient building practices; more funding follows.
For example, in 2016 RMS quantified the cost-effectiveness of a proposal for a scaled retrofit program in Bogotá, Colombia. Preliminary analysis showed that over 120,000 deaths and US$2.8 billion could be avoided in a 1-in-200-year event by retrofitting homes in the five neighborhoods studied.
RMS and Build Change also demonstrated that the project would deliver an attractive return on investment. Analysis showed that the retrofits could be completed using existing local skills, with minimal training, and for less than half the price of demolishing to rebuild.
In this case, the modeled output did not just increase the institutional urgency to deal with the problem of vulnerable housing. The analytics also contributed to the wider acceptance in Colombia of retrofitting as a viable solution.
In approximately five years of formal partnership, RMS and Build Change have collaborated to greatly improve the safety of seismically-vulnerable communities. By combining our risk modeling expertise and institutional support with Build Change’s technical knowledge and grass roots approach, we’ve not only demonstrated that retrofitting in vulnerable neighborhoods is possible. We’ve also shown it’s a cost-effective way to save lives and livelihoods.
As a result, the Government of Colombia recently made the retrofitting of 600,000 homes an urgent, national priority.
Of course, our work in Latin America is by no means done. And collaborations with Build Change continue in Haiti and Nepal as well.
Immediate attention, however, has shifted to the Philippines. It’s too early to judge the outcomes. But with 69 million low-income people living in 15.6 million vulnerable homes today, the potential to make a difference is huge.
By quantifying that potential, we hope to develop a compelling business case to address what is arguably the issue of our age. By putting a number on the resilience dividend, we hope to attract the #ResilienceFinance needed to make some of the world’s most densely populate cities significantly safer.…
Almost one and a half million people have died in natural disasters over the past 20 years. This is a waste of life; a waste of potential.
Natural disasters also have a massive economic impact. Our models suggest natural catastrophes cost the world’s poorest countries almost US$30 billion a year on average. Hard-won development gains are regularly wiped out — and it is the poor and the vulnerable who are most impacted.
In case anyone had forgotten the crippling impacts of natural disasters, 2017 served a painful reminder. Hurricanes Irma and Maria left vulnerable people in the Caribbean devastated. Somalia, Ethiopia and Kenya struggled with drought. Floods and landslides wrecked lives and livelihoods in Sri Lanka and Bangladesh. And then there was Hurricane Harvey which, along with the California wildfires, made 2017 the costliest on record in the United States.
Whenever and wherever catastrophe strikes, our thoughts are with those so profoundly affected.
We did not, however, need last summer’s tropical cyclones to understand that something is not working. We did not need Irma and Maria to learn that investments in resilience reduce losses from natural disasters. And we did not need the events of 2017 to know that incentives are too often insufficient to drive action in the most vulnerable regions.
These truths are at heart of the Centre for Global Disaster Protection. Innovation is required to solve such complex humanitarian, political and economic problems. The impacts of recent disasters — and the need to finance reconstruction — have heightened the innovation imperative. They provide an opportunity to deploy financial instruments which catalyze investments in resilience; financial instruments which enable vulnerable communities to recover faster.
RMS too knows that it is possible to stop manufacturing natural disasters. And RMS knows that financial mechanisms could in theory securitize — and therefore incentivize — the potential “resilience dividends” from investments in disaster risk reduction. After all, RMS has been intimately involved in some of the best-known thought-leadership in this space.
Yet equally well understood is the fact that financial structures which incentivize resilience are difficult to implement in practice — in developed and in developing countries. There is no shortage of challenges.
To move from theory to practice; to redirect capital at the required scale, ideas need to be fleshed out, structures need to be robustly designed and cash flows need to be tested. Any new financial mechanisms must pass muster with all stakeholders, lest the intended benefits evaporate.
Since 1988, RMS’ mission has remained constant: to make communities and economies more resilient to shocks through a deeper understanding of catastrophes. Now, with the Centre’s help, experts from the finance, humanitarian and development communities have for the first time come together to refine financial instruments, address practical challenges and provide the interdisciplinary buy-in which mobilizes action.
In this collaborative environment, innovation has happened. The recent launch of a new report on Financial Instruments for Resilient Infrastructure is a product of that innovation.
RMS was commissioned by the U.K. Government’s Department for International Development to run the Centre for Global Disaster Protection’s first “Innovation Lab.” With support from Vivid Economics, re:focus partners and Lloyd’s of London two reports have been published — a 100-page technical report and a 50-page innovation report. Both are freely available here.
The four new financial mechanisms examined in the report can help monetize the resilience dividend, thereby incentivizing both resilient building practices and risk financing. The outcome: less physical damage, fewer lives lost and faster economic recovery whenever nature proves too much.
More is needed, of course. Policymakers and donors have a crucial role to play, not least in sponsoring pilots, funding the quantification of resilience, promoting risk-based pricing, supporting risk finance and advocating duties of care around life, livelihood and shelter.
Thankfully the significant public benefits of resilience justify the investment. And now we have four new financial instruments for donors and the market to pilot in real-world situations.…
Daniel has spent 20 years bringing new ideas to the risk industry. He has responsibility for driving innovative, strategic solutions across RMS’ entire client base. He is also the Global Head of RMS’ Public Sector Group, leading RMS’ relationships at all levels of government.
Daniel has worked closely with public and private entities around the world, advising them on a variety of complex risks, including natural hazards, environmental stresses, malicious attacks and pandemic outbreaks. Deeply committed to education, his work is motivated by a desire to make communities and economies more resilient to acute shocks.
Prior to RMS, Daniel managed the group strategy and development function at an 80,000-employee, £10 billion global healthcare group, serving 30 million customers in over 190 countries. He also has considerable start-up experience, having been a founding team member of an award-winning, SaaS company.
The driving force behind 'Resilience', he received a City of Miami Proclamation recognizing his commitment to delivering urban resilience in the face of sea-level rise and extreme flooding. Daniel has served on the management boards of several charities in areas as varied as education, disability, interfaith social cohesion, grassroots sport and the arts.
Daniel graduated from Oxford, double-first with Honours. He also studied for a Masters at the Humboldt in Berlin and is a graduate of the Center of Creative Leadership.