Morgan Simon of Transform Finance

Investing

Transform Finance: Bridging the Worlds of Finance and Social Justice

Anne Field | November 20, 2017

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Impact investment has the potential to transform economies and societies, say its advocates. But the growing field is littered with examples of good intentions gone wrong—often the result of a “top-down” approach.

How can impact investors avoid unintended consequences and ensure that their investments are aligned with the goals and needs of the people and communities they seek to support?

With impact investing on its way to becoming a trillion dollar market, it’s not a trivial question. And it’s one that has preoccupied Morgan Simon, an impact investing pioneer who helped create the Responsible Endowment Coalition as a college student and went on to be the founding CEO of Toniic, a network of impact investors.

In 2014, Simon (pictured above at SOCAP16), cofounded the nonprofit Transform Finance to address the misalignments she was seeing in the impact investing field and to hold investors to a higher standard. The Transform Finance Investor Network includes foundations, investment funds and family offices focused on what she calls “a social justice approach”—addressing issues of economic and racial inequality around the world.

Through the Transform Finance Institute for Social Justice, Simon and her team provide training to mission-driven organizations that covers everything from developing equitable employment practices to pitching opportunities. Most important, says Simon, is learning about revenue-generating strategies and how to “hold investors accountable.”

Next month, the Institute will hold a three-day training session in New York City for social justice leaders and entrepreneurs.

“Investors need to have a deeper connection to the community in which we’re going to work to even know what impact we want to go after,” says Simon, who is also the author of the recently published book, Real Impact: The New Economics of Social Change (Perseus Books, 2017).

“Investors want to invest, but don’t always know what’s really needed,” she says.

The network, open only to accredited investors, has 60 participants who “regularly engage,” says Simon, and $2 billion in assets investors are interested in deploying. There are regular monthly call-in meetings, plus other gatherings throughout the year.

The Transform Finance philosophy is based upon three guiding principles.

Projects are primarily designed, governed and, where feasible, owned by communities. That means getting communities involved in defining what they really need so that “they are not just producers or consumers, but protagonists in their own picture,” says Simon.

Investments add more value than they extract. In other words, the targeted community is the primary beneficiary, something that’s not always the case. Simon points to microfinance. Funders typically charge an interest rate of 200% or so. While that’s much less than the 1,000% a local money lender might demand, it’s still onerous for a struggling farmer (or anyone). “You can still get a reasonable rate of return with an interest rate that’s fairer to these borrowers,” says Simon.

The financial relationship fairly balances risks and returns among all stakeholders. Simon points to Nestlé’s recent move to take a majority stake in Blue Bottle Beer, a purveyor of artisanal coffee as a case in point. “That product is built on the backs of thousands of global coffee farmers, who received no financial gain in that transaction,” says Simon. “Yet they still must take on new risk, such as selling to a new customer.”

As for the Institute, it targets nonprofits trying to create revenue-generating ventures, among other organizations. Simon points to a group fighting for a higher minimum wage for restaurant workers that opened some of its own establishments both to make money and provide better-paying work. “We’re bridging the worlds of finance and social justice,” says Simon.

Anne Field is a New York-based journalist who writes about social enterprise and impact investing. A version of this article originally appeared on her Not Only For Profit blog on Forbes.com.

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