"Green Finance" and "Social Impact" Bonds: Philanthropy Gets Innovative

Oct 15, 2012
Publisher: C-Suite Quarterly

The fallout from the global financial crisis of 2008-2009 remains very much with us, and the financial sector still sports a black eye that is taking a long time to heal. New regulations, notably the Dodd-Frank law, now add to the financial safeguards designed to prevent another financial meltdown. But even as these rules are implemented, it's vital that we not lose sight of the proven ability of financial innovation to improve our society and our world, or miss out on the encouraging emergence of new forms of financial innovations presently being pioneered. And some of the most exciting developments are those in the world of funding for philanthropy.

The fruits of financial innovation surround us, yet because of their ubiquity, they too often fade into the woodwork. Take home ownership: Even though the rate of home ownership in the United States has fallen from its peak, it is still high by both historic and global standards. The value of that is psychological as well as financial for tens of millions of people for whom having their own nest is a source of family stability, comfort, and pride. Yet without the widespread availability of mortgage financing, there would be far fewer homeowners in the U.S. Granted, for many people, renting shelter makes more sense than buying it, and in the recent credit boom, too many shaky home loans were made. But the chance to own a home is an accessible part of the American dream, whereas in many other countries not open to financial innovation, mortgages are simply not available. The prospect of owning their own house is beyond the reach of the vast majority of citizens.

Or look at the new American businesses -- indeed, entire industries -- that would not exist if the high yield bond market had not been expanded and standardized in the last generation. Against the backdrop of our present economic weakness and fierce global competitiveness, many economists believe that, had not the high yield credit market enabled the founding (and funding) of dynamic news business models, the U.S. economy would be considerably less competitive than it is today.

As president and CEO of the Milken Institute -- part of whose mission is to help unlock access to capital and help spur new financial innovation -- I'm privileged to have a ringside seat, to watch as new experiments in financial innovation take place. Some of the most exciting of these are designed to address social issues; here are a few examples. Energy efficient mortgages and "green" finance speed the adoption of energy-saving infrastructure. "Social impact" bonds create a mechanism for financial return for socially desirable improvements; in the United States, innovative philanthropies such as the Bill and Melinda Gates Foundation are pioneering the practice of using part of their endowed capital as seed money for such investments. And the white-hot area of crowd-funding is finding ways to match big dreamers with small investors, while protecting the latter from the risk of financial fraud.

Some of the new sprouts in the philanthropic landscape will bear spectacular fruit; some will wither on the vine. Like any sector marked by innovation, that's not only inevitable -- it's healthy.

Yale economist Robert Shiller, a noted expert on market excess, explores in his 2012 book, Finance and the Good Society, the paradox that "the very financial system that is the facilitator of some of our proudest achievements can also implode and create such a disaster." Shiller concludes that "finance, despite its flaws and excesses, is a force that potentially can help us create a better, more prosperous, and more equitable society." For philanthropy, that promise is being realized now.

Michael Klowden is president and CEO of The Milken Institute in Santa Monica, a nonprofit, nonpartisan think tank dedicated to harnessing the power of capital markets to solve urgent social and economic challenges while improving lives.