Van Ton-Quinlivan: Welcome to WorkforceRx with Futuro Health, where future-focused leaders in education, workforce development, and health care explore new innovations and approaches. I’m your host, Van Ton-Quinlivan, CEO of Futuro Health.
The practice of impact investing — also known as socially responsible investing — has been in place in the U.S. for decades, creating a tool that individuals and companies use to advance issues they care about such as the environment or various social causes. But more recently, a subset of that field has focused on improving economic mobility and that’s where our focus turns today.
Here with me to help us understand more about impact investing is Tracy Palandjian, co-founder and CEO of Social Finance, a non-profit company which has leveraged over $225 million to help tens of thousands of people realize improved outcomes in education, economic mobility, health and housing. Tracy has worked for over a decade to reimagine the role of capital markets in enabling social progress, and she’s a contributor to a book released earlier this year by Social Finance and the Federal Reserve Banks of Atlanta and Philadelphia called “Workforce Realigned: How New Partnerships are Advancing Economic Mobility”. Thank you so much for joining us today, Tracy.
Tracy Palandjian: Wonderful to be with you, Van. I’m a huge fan.
Van: Let’s get started by helping you give us some context for this discussion. When did investors start focusing on economic mobility and related issues, and why?
Tracy: Such a great question, Van, and as you mentioned in your opening, the concept of impact investing and responsible investing have been around for decades. So, investors have been in the arena of social change for some time, and I think we all can say that our societal challenges are so vast and they require more than what philanthropy, more than what the government can give. Increasingly people are really asking the question, “What is the role of investors? What is the role of the capital markets in playing an active role in driving social change, social progress?”
So, over the years since the Rockefeller Foundation coined the term “impact investing”, we’re just seeing a massive proliferation of both assets under management, and also investment strategies across asset classes to achieve social change — whether it’s on the e-side, (environmental side), or s-side (social side), and in many arenas. We’re just really, really excited about the growth and innovation taking place.
The other parallel movement which I think is timely to talk about — speaking of hot terms, Van — is the parallel movement in sustainable capitalism. Everyone’s challenging Milton Friedman’s concept of the primacy of shareholder capitalism and increasingly the idea that we should consider the benefits of stakeholders in their role in reimagining our economic system. I think the pandemic has really accelerated our collective debate on how capital is being allocated, how capital is being intermediated, and what is the role of finance in serving society. It’s, I think, beyond what good business looks like, Van, but it’s also about what does good investing look like and what does good capital and good money look like.
So, it’s really in this exciting parallel movement of impact investing and sustainable capitalism that we are really looking at new tools to drive economic mobility to advance economic opportunity.
Van: Wow! It’s so good to have you on this podcast because this whole domain is so unfamiliar to many of us who are in the higher education or even in the workforce development realm. I’m so happy that you are on the frontier of really calling the question and calling the debates around sustainable capitalism, because we see such a divide and striation of the economy. This can’t be the best that we produce. So, thank you for your leadership in that. Let me go back to some fundamentals. Let’s unpack a few of these things. There’s philanthropy and there’s social impact investing. So, can you spell out for our listeners how does one manifest versus the other? Because I think most people are familiar with philanthropy.
Tracy: Exactly. So, think about the whole capital continuum in very strict financial terms. Philanthropy in financial terms is what we might say negative 100%, because you make a grant and you hope that this grant is going to achieve your social aims. And then you go all the way to the other end of the spectrum, which is the traditional investment world, which means that you are trying to maximize risk-adjusted market rate returns, yet there’s no consideration of social impact. These are the two ends of the spectrum, if you will.
Now, if you think about foundations and philanthropy, the U.S. has several hundred billion dollars of money being given away. I would say in institutional philanthropy, that collective balance sheet is probably north of a trillion. Compare these numbers to the true capital markets which are in the hundreds of trillions of dollars of Assets Under Management flow every day. So, you can see while philanthropy is massive, it is a very small drop when you compare it to the big capital markets flows.
Impact investing is all the nuance in between. You probably are familiar with program-related investments that foundations make. Then you go to mission-related investments that strive to have market rates of return. Then you get into more intentional strategies and different asset classes — whether it’s private equity or public equity or fixed income — and then you get the negative screens that’s closer to the broader traditional investment strategies. And so, you basically have the whole continuum.
Van: So, Tracy, if I’m a personal investor with a bucket of money, I could just put it into stocks and bonds with no consideration for whether or not the companies that benefit from those investments are doing good, right? Basically, you are advocating that monies could be put to use in a way that is benefiting economic mobility because it adds to the pile of money that philanthropy would normally give, or public resources too, right?
Tracy: Exactly. In the world of economic mobility, think about the sources of capital to advance our collective goals in achieving economic mobility. You’ve got individual investors. You’ve got companies. You’ve got philanthropy. You’ve got the actual training providers. You’ve got the public sector, which by and large is the biggest player in this system. How do you think about who pays, who benefits, who takes the risk? I think you and your speakers have talked a lot about the limitations of our traditional higher ed system –how college may not be the ticket to deliver skills for people to get to the middle class — and increasingly we’re thinking about alternative pathways in the world of economic mobility to get people into these jobs with family-sustaining wages.
But what is the role of government in funding these pathways? What is the role of employers in funding these pathways? Increasingly, where we come to the equation is, how should investors come to the table to lessen the risk on the individual? Because the status quo — Van, you know this well — is that individuals take on all the risk, whether it’s a four-year degree program or short-term credential program. They borrow money. They go to the program or they go to school with no expectation that investment may payoff, right? We want to really rebalance this equation. Where should investors come in? What is the role of the training provider? Should they just be collecting tuition dollars based on enrollment and seat time? What is the role of the employer? And of course, with what’s going on in Washington, what is the role of the public sector and how do we make the best use of public money in enabling workers to thrive?
Van: One of these areas where you’re rebalancing the risk is a financial instrument called a Career Impact Bond.
Van: Normally, most students would take loans from their higher education institutions, and they’re on the hook for those loans regardless of what happens…whether they land successfully in the world of work or not. So, what is a Career Impact Bond?
Tracy: Van, you are probably familiar with the term Income Share Agreement which has been really a big debate out in the world these days. The way we look at the Career Impact Bond is a different way to make use of the ISA, if you will. So, an ISA is simply a consumer finance option. You can take on a loan, you can take on an ISA, or you can pay out of pocket when you want to get education and training. How you use the ISA — just like how you use the loan product — depends on the motivation behind the people who provide the capital. You can use a loan well, or you can use a loan in a very predatory way. Same for ISAs.
So, the thinking behind our team building the Career Impact Bond is to really build it as a tool for impact. It’s not just simply another financial product for consumers, but it’s actually a product built for impact. What do we mean by impact? First of all, this is not available to anyone. We have pretty strict eligibility criteria. We are focused on applying this tool for folks who are unemployed or underemployed, people who face significant barriers to education and training, people who’ve been in the criminal justice system, people who’ve used public benefits, people who’ve been on the Earned Income Tax Credit. We want to make sure that we’re targeting the application of this tool to the right population who need the support and the help.
Second of all, the terms in an ISA — which are, as you know, the percent share of your income, the duration of that obligation, whether there’s an income threshold before you start paying anything, and whether there’s also a cap on the ultimate amount of money that you pay — those four levers can be used in a very student-friendly way, or it could be used in a very egregious way. The way we are very committed to for the Career Impact Bond — which is all underpinned in a Student Bill of Rights which we have published and all our partners have signed on to it — we use these four levers in the most student-centric way as possible. For example, on high income threshold, unless you make X, you don’t pay anything at all. Very manageable percent shares. Often, this is a fixed amount that people would pay monthly. Very clean, understandable, and transparent durations.
Some ISAs out there have extension periods. So, while they’ll say there are only 48 months of payment, Van, for any month during the 48-month period that you don’t pay, they tack on an extended month, right? When we say it’s a four-year repayment period, we mean it. It’s four years and 48 months with no extension periods. Then finally, very friendly caps. If they’re wildly successful, they will not overpay too much because at the end of the day, it’s like pooling lots of people — some people who might not get the economic opportunities that they want, and some people who are wildly successful. By pooling everyone, hopefully everyone will benefit from the arrangement.
Van: I’m just wondering if you could describe the social impact work that you do, but maybe from a lens of the individual, like the lens of a student that may be benefiting?
Tracy: We were so lucky that a reporter at the New York Times wanted to cover the Career Impact Bond and he wanted to focus on a graduate at ADTC, the American Diesel Training Center. If you have the actual newspaper, the picture of Billy Barber covers two-thirds of the front page of the business section. It’s like this beautiful picture of a young man working under a hood of a diesel truck. It’s just a beautiful and palpable image. So, Billy Barber, before he enrolled in the program, was a cable TV installer making around $30,000 a year. He had always been interested in cars and automotive, but he just simply couldn’t afford a program like ADTC, which cost $10,000.
One day he saw a Facebook ad, which was our Career Impact Bond opportunity, and found out that he could enroll in ADTC at no upfront cost to him. The catch is, if he gets a job that earns over an income threshold, he would pay $150 a month. He picked up the phone, called ADTC, and enrolled in the five-week training program. He is now graduated, and he is making $60,000 as a diesel technician — so a little bit more than 2X and got a signing bonus — and is completely poised to continue to rise and have senior technician positions and management positions. So, it’s just extraordinary.
Van: Tracy, once you put on all those constraints in terms of eligibility, do the investors actually get their money back? Because many of us who have been working in this field know that there’s going to be sort of a write-off. Not everybody makes it through.
Tracy: Exactly. But let me tell you another thing that makes the economics even harder. We are not just focused on funding the training cost. We are also very focused on making sure that we provide the important wraparound supports that these workers and learners require. It’s having an emergency aid fund to help meet food, child care, and transportation needs. It’s about having extra caseworker support. It’s about having more job coaching support. In a couple of our financings, we actually have a partial living stipend because the population that we’re focused on helping needs more than tuition help, right? Life happens and they need more support than that.
When I talked about the spectrum of money from negative 100% money — which we call the wonderful category of grants — all the way to market rate returns types of investments, we’re sitting in what we call typically PRIs, Program-Related Investments, that we raised from foundations, and what we call recoverable grants, which is money that we raised from individuals with donor-advised funds.
It’s been a very successful strategy raising money from folks like these that I just mentioned because first and foremost, they care about the social impact and financial return. While it’s very important to recover their principal, their risk is uncompensated. So, for the $50 million UP Fund that we’ve raised — which is a fund comprised of around 10 or so Career Impact Bonds across different industries, sectors and geographies — we are basically saying that people will get a low single-digit return over the fund life. So, people are not getting rich, but compared to making grants they’re getting their money back and then they can redeploy it for future impact.
Van: That makes sense in terms of the source of money. That makes a lot of sense. For example, if someone has their money in a community foundation, those would naturally be sources of funds that would invest in your programs.
Tracy: Absolutely. We have many donors and community foundation donor-advised funds participate through the recoverable grant vehicle invest in the UP Fund. It’s so interesting, Van. It goes back to your first question about impact investing. Now that we’re in the second true decade of impact investing since the term was coined, we are really seeing that this debate about getting market rates of return and getting concessionary return — that’s a term that people love to use — the question is really being flipped on its head: are you actually achieving the impact, the intentionality, the measurability of that impact that you set out to achieve? So, you are increasingly seeing that the market is bifurcating toward what we call impact-first investments versus finance-first investments. At Social Finance, what we always say is that we may be willing to compromise a little bit on the return, but what we’re not willing to compromise on is the impact that we want to achieve.
Van: Tracy, you already have quite a few projects going on with states. So, is that using public funds, or is that using philanthropic or community foundation type of funds?
Tracy: Great question. I mentioned the $50 million UP Fund. That is 100% powered by impact investment capital. In addition to the UP Fund, we’re also applying the Career Impact Bond in the public policy setting. So, we’re working with around half a dozen states now where these funds — we call them Pay It Forward Funds, PIFF — where the fund is actually anchored with public money. It could be a state’s workforce budget. It could be ARPA money from the feds. It could be a combination of public money and the governor trying to get state-based industries and CEOs to match the public commitment.
But the whole idea is that we would anchor a pot of money centrally — typically led by state government and sometimes by county government — where that money will train workers that are important to the industries that are important to the state. New Jersey was one of the first state partners to explore such a concept. Governor Phil Murphy knows that healthcare, IT, and offshore wind are industries of the future for the state. So how do you build a Pay It Forward Fund vehicle to support these economic development priorities for the state? And how are you going to train workers to fulfill those sectors that will need a diverse and talented pipeline of workers over time? Instead of the successful workers paying back investors, their repayments go back into the fund to benefit future workers. So, their repayments pay forward, if you will.
Van: Without this financial instrument, the state then would normally just do grants or underwrite those individuals without expecting a dollar back and so, with this financial instrument, there may be the chance of getting some of those dollars back in order to get the next person through.
Tracy: Exactly right. There are two features about the Pay It Forward Fund that are really attractive to governors. One is exactly what you say: it’s the sustainability feature of the Pay It Forward Fund. Right now, grants are onetime use. You help one person and you need new money to help the next person. Here, maybe the person returns 50 cents on the dollar. At least there’s some recyclability to that funding. The second feature is the outcomes orientation that our public officials love about this tool. It’s all about outcomes — that the person gets a job and keeps that job over time — because anytime someone repays into the fund, that means the person got a great job and kept that job over time.
Van: By the way, Tracy, do you have a fund that’s specific to healthcare that we can learn from?
Tracy: We would love to build a healthcare-specific fund with you, Van. We are definitely focused on healthcare jobs with these Pay It Forward Funds. In fact, there’s one upcoming healthcare deal in the UP Fund. We all know that there’s a massive labor shortage in the healthcare system, the allied health workforce — nurses up and down the ladder — and we haven’t really cracked the code and would love to think through it with you given your expertise in the area. As you know, the implementation agencies are typically community colleges and it’s just been a place where we haven’t quite figured out exactly how to apply the Career Impact Bond to work. We would love to find ways to think about how we can support your work and your goals.
Van: Well, I would love that.
Tracy: The only other thing I might want to riff a little bit on, Van, is this new recent momentum around the G7 Impact Investing Taskforce. So, my co-founder Ronnie Cohen has been just so intentional at driving this establishment of the G7 Impact Investing Taskforce, which has been around for some time now back in 2013 and that will be resuscitated in 2021 when the UK has the G7 presidency. This recent meeting up at COP26 was just extraordinary in the sense that impact measurement and definition is really kind of like the holy grail to really make this movement even gain more ground, and just some of the new announcements coming out of Glasgow were just extraordinary. The establishment of a new entity called the ISSB, the International Sustainability Standards Board, is going to really be the fuel that this movement needs.
Van: So ISSB, for those of us who are not every day thinking about financial reports — again, it’s a new world for many listening to this podcast — state for us, why does it matter? Doesn’t it reshape how financing flows and, therefore, what is valued?
Tracy: First of all, the ISSB is obviously focused on company reporting and how companies report their information just like when you open a 10-K filing from a company right now to look at their financials. Obviously, it’s very different from what we were talking about earlier vis-à-vis workforce training, but without the harmonization framework on impact measurement, the field can’t take off. Think about how investors treat traditional investments. There are two axes called risk and return. On the return side, it’s very much a standard metric. A basis point of return is a basis point of return. There’s no debate. Same for measuring risk, and in volatility and data. We know how to measure risk. What we hope to do in the impact investment movement is bring a third axis to the risk-return debate, which is the axis of impact.
Now, you think about what is the unit of impact? How is it different from an environmental climate perspective versus a health perspective, versus an education perspective, versus a workforce perspective? How do you compare across these very, very different areas of impact yet harmonize it in a way that can be comparable across companies? That is what the effort has been all about, and there have been so many amazing, brilliant people leading this effort on the accounting side, on the financial side. It’s like an alphabet soup, Van. There have been so many wonderful efforts, and it seems like this emerging entity and the ISSB is a really exciting step in the right direction for the field.
Van: It’s been a very, very long time since I was in the energy utility world, but what I remembered was the company I was with tried to do the right thing with regard to climate change and the environment, but it’s a little bit more expensive than not doing so, right?
Van: And it disadvantaged a company financially compared to its competitors who may disregard many of the environmental practices or green practices.
Tracy: Exactly right. So how you price those externalities and reflect it in today’s financial statements is very much the hope of this world. But I would want to make sure that your listeners will know that these efforts are really driven by philanthropy and we can’t underestimate the power of grant dollars to get these movements going.
Van: How did you even get into this field of work?
Tracy: I feel so lucky to have almost accidentally stumbled upon this. My journey to Social Finance, which is now more than a dozen years ago, was definitely not linear and very accidental. I feel very fortunate to have lots of opportunities in my life. I didn’t grow up in this country, Van. I grew up in Hong Kong and my entire family still lives in that part of the world. But I came to the United States for school and decided to become an American and make a life in this country and just have had the fortune of working in great companies in management consulting and asset management. Then around 15 years ago, I started more intentionally to focus on thinking about why do I go to work every day, what are my values, and moved into the world of social change, but in the private sector where, at that time, I was working at a consulting firm called Parthenon, and I created and led our nonprofit practice.
And then one thing led to another. Social Finance in the UK — which was founded by Ronald Cohen and David Blood and others — they were a client of ours at Parthenon. So, I helped Social Finance UK on the other side of the fence, if you will. Social Finance in the UK launched the world’s first social impact bond. American policymakers were calling them and saying, “We want this innovation stateside.” Ronnie, David Blood, and I decided that we needed to find an American to start Social Finance in the U.S. and the two gentlemen asked me if I would do this, and I said, “Nothing in my life has prepared me to be an entrepreneur.” I had never started anything in my life at that point. I had always worked in large institutions, and it was really scary, Van, to take the leap to be an entrepreneur. Needless to say, I decided to do it and I just feel so lucky that I did 12 years ago because it’s just been really, really hard work, but been such a rewarding journey.
Van: It’s so good for us all that you’re an accidental entrepreneur. Nearly everything that companies do today is being seen through the lens of how it affects diversity, equity and inclusion, and I can see it in the work that you do.
Tracy: Absolutely. First of all, we’re so committed to diversity, equity, and inclusion. DEI underpins our mission at Social Finance. For us, it’s all about unlocking access for those who have been locked out of economic opportunity, and expanding access to great training programs like General Assembly, like the American Diesel Training Center. These are great training programs that can evolve people into pathways of economic opportunity and go up that economic escalator. For example, if you look at the racial composition of some of these Career Impact Bonds in the ADTC context, first of all, we have a100% graduation rate and a 93% job placement rate, which is extraordinary. In the national diesel technician workforce, it’s predominantly white men. Twenty-five percent of our graduates in the ADTC program are black compared to the national industry of 7%. So, that’s one example.
The second example is our Career Impact Bond with a coding boot camp called General Assembly. The percentage of black students is actually four times General Assembly’s general student body. The general student body is around 7% or 8% black, and then our Career Impact Bond population is around 35% black. So, you can see how finance has really locked out a lot of people from these opportunities. When you unlock that and say, “Hey, you can enroll at no upfront cost,” that just makes a big difference. So that’s our general DEI journey.
Van: Well, Tracy, I just want to thank you so much for sharing the work that you’re doing and congratulate you on your leadership in this field. I’m Van Ton-Quinlivan with Futuro Health. Thanks for checking out this episode of WorkforceRx. I hope you will join us again as we continue to explore how to create a future focused workforce in America.