Impact Investing and The Arts:

A U.S.-Based Literature Scan and Notes for the Field By Taya Mueller, Researcher

Produced by California College of the Arts, Center for Art + Public Life, in partnership with the Center for Cultural Innovation, with support from the Surdna Foundation.

This document is a compilation of published knowledge regarding the intersection between impact investing—the emerging method of investing for philanthropic rather than financial returns—and the arts sector in the United States. The effort was sparked by a collaboration between California College of the Arts (commissioner of this scan) and the Center for Cultural Innovation (sponsor of this research). Center for Cultural Innovation (CCI) is a nonprofit that promotes knowledge sharing, networking and financial independence for individual artists and creative entrepreneurs by providing business training, grants, and incubation for innovative projects that create new program knowledge, tools and practices for artists in the field. With the support of the Surdna Foundation, CCI launched a multi-year initiative, Creative Industries Incentive Network, to seed experimental ways to spark creative economic development in the state of California. In 2015, CCI awarded a multi-year grant to CCA’s Center for Art and Public Life (CAPL) and the College’s Development office to investigate and pilot an untried effort to attract impact investments for the College’s creative entrepreneurs’ projects that hold the promise of having a positive social impact. Students in the IMPACT Social Entrepreneurship Awards program are at the core of this effort. The premise of this investigation is that art and design schools need to diversify their financial model beyond alumni and philanthropic donors, and that a possible new funding source might be impact investors, who may perceive CCA less as a place for professionalizing artists (the traditional perspective) and more as a portfolio of creative, social impact projects (a new perspective). The scan is presented in two parts: first, a presentation of extant literature on impact investing that addresses or includes arts and culture or creative industries. Impact investing is still new, and its relevance mostly relegated to social sectors with “hard” return on investments (ROI). Therefore, not surprisingly, this literature review is brief. Writings on the direct connections between impact investing and arts and culture are even more limited, but what was found is presented here to establish a baseline for further explorations of how impact investments can matter to the arts and creative entrepreneurs. Also included is literature on impact investing as a field, measurement and evaluation, and community development that are complementary to thinking about arts, culture, and designs’ relevancy to impact investments. Second, we share the questions that surfaced in the process of the research; they are meant to stimulate more and wider consideration of how impact investments can support the arts, which is essential to any social impact investment, as art provides meaning, sparks critical thinking, effects community cohesion, and drives change.

Published July, 2016

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Part 1: Literature Scan An annotation is provided as well as a relevant excerpt from each citation. The scan includes items wherein arts, culture, or design are specifically addressed in impact investing, as well as complementary publications on the topics of impact investing as a field, community development efforts, and measurements.

Berliner, P., & Spruill, V. (2013). Community Field Guide to Impact Investing: Reflections from the Field & Resources for Moving Forward. Mission Investors Exchange In August 2012, the Council on Foundations convened a group of leaders in the impact investing and community foundation fields to better understand the value of impact investing in a place-based context. The following excerpt from the proceedings demonstrates a new market appetite among community foundations for impact investing, particularly as it can support local, community-building efforts. The connection between impact investing and place-based efforts provides an opportunity for artists and the arts because of their significant role in creative placemaking, such as that supported by the National Endowment for the Arts. “There are many ways in which place-based strategy and program design must be adapted to suit the particulars of a community and of a community foundation. Each of us has gained clarity that impact investing has become a permanent part of our philanthropic toolkit, leveraging our foundations’ assets for the greater good of the communities we serve. There was a problem that needed to be solved: none of the guidebooks written on “PRIs” or “mission investing” adequately helped us to address the full range of legal, structural, governance, programmatic, or investment decisions associated with place-based impact investing by community foundations.” Buchanan, P., Glickman, J., & Buteau, E. (2015). Investing and Social Impact Practices of Private Foundations. The Center for Effective Philanthropy

In this 2015 survey of 230 CEOs of U.S.-based private foundations providing $10 million or more in annual giving, “arts/culture/humanities” was included as one of the 15 possible areas of impact investing. Many of these foundations expressed an interest in impact investing.. “Of the CEOs who responded to our survey, 41 percent, or 26 of 64 CEOs, say their foundation engages in impact investing. Almost as many CEOs report that their foundations either plan to engage in impact investing (six percent of CEOs) or are not sure of their plans for the future (33 percent). Only one in five CEOs report that their foundation does not plan to engage in impact investing.” Callanan, L. (2014). Community Development Investment Review. Federal Reserve Bank of San Francisco

This is a compilation of essays by arts leaders on the topic of community development. This publication on the role of the arts in community development was seminal in being supported by the San Francisco Federal Reserve, thereby signaling institutional support of the arts as a valid way of effecting positive community change. Contributor Deborah Cullinan, CEO of Yerba Buena Center for the Arts, offered: “Creativity exists in the community to solve problems. Artists don’t just solve specific problems. Artists represent our ability as a society to solve all our problems.”

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Cheek, D., Collins, M., & Harris, C. (2013). America’s Creative Economy: A Study of Recent Conceptions, Definitions, and Approaches to Measurement Across the USA. The Creative Economy Coalition (CEC)

This research project profiles and analyzes how the creative economy is currently being defined, segmented, and quantified in the U.S. The results suggest that creative economy indicators hold the promise of being used as ROI indicators of arts’ impact. “As organizations charged with responsibility for serving the creative economy in their respective regions came together starting in 2010 to discuss common issues, challenges and opportunities, they increasingly found it difficult to share a common language around both definition and measurement. This research project was designed to profile and analyze how the creative economy is currently being defined, segmented and quantified throughout the United States of America. We assessed what we can learn from aggregating creative economy profiles, and whether there is the possibility of producing a ‘core’ national profile definition and accompanying data descriptors.” Clark, C., Emerson, J., & Thornley, B. (2013). Impact Investing 2.0. Pacific Community Ventures

The authors’ conclusion emphasizes the need to focus not only on finances but also on creating value. Although their report did not include cultural producers, arts organizations, or creative entrepreneurs, this emphasis on “value” paves the way for the arts to become a part of the impact investment movement. “There is an evolving myth that financial skills alone are the key to successful impact investing, but our research shows that impact funds managed by those with financial discipline combined with skills from the public, nonprofit, and related sectors (e.g. development finance) were best positioned both to generate financial returns and create social/ environmental value.” Clark, C., Emerson, J., & Thornley, B. (2014). Mission-Driven Returns (SSIR). Stanford Social Innovation Review

The authors’ multi-year project focused on factors that drive high performance in successful philanthropic impact investing. Their findings are significant for the numerous private foundations that include arts and culture in their grantmaking portfolios. Among those foundations adopting mission-driven investment practices, how can they include the arts, so that arts and culture financing does not lag behind other sectors that, so far, have been more successful at receiving mission-driven and impact investing dollars? “Convention dictates that investors manage a corpus to maximize risk-adjusted financial returns, in the hopes it will underwrite philanthropic giving for social impact into perpetuity. By seeking to deliver a blended financial and social return, impact investing forces two culturally distinct practices be simultaneously pursued: money management and grantmaking. At the urging of numerous provocateurs and pioneers many foundations are exploring the intersection of these two worlds and have begun to slowly change their practices; they are embracing mission-related investing, even while acknowledging strong financial performance is essential to financial sustainability.”

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Drexler, M., & Noble, A. (2013). From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors. World Economic Forum Investors Industries This comprehensive assessment does not include arts and culture, specifically, but draws many familiar and relevant parallels regarding limited consensus around definitions, what asset classes are most relevant, how the ecosystem is structured, what constraints are common, and what promises are ultimately delivered. “Impact Investing is a multi-stakeholder issue. It engages governments as impact investments offer opportunities for more efficient delivery of public services. It engages civil society, from the non-profits that design and implement projects to individual recipients of social programmes. And it involves businesses, ranging from entrepreneurs and lawyers to consultants and investors. Clearly, for impact investing to reach its potential, it must be considered from the perspective of all stakeholders.” El Idrissi, A., & Saltuk, Y. (2014). Spotlight on the Market: The Impact Investor Survey. J.P. Morgan Global Social Finance “Arts and culture” was included in this 2014 survey as part of the “Other” sector of investment categories, along with forestry, land conservation, sustainable agriculture, and manufacturing, which share our sector’s difficulties in establishing meaningful and standardized metrics. “As the impact investment market develops, several industry initiatives are also progressing in their efforts to establish standardized metrics for impact measurement. […] Respondent organizations also reported spending 15% of their time on impact measurement, versus 10% reported last year (at the median). While these responses reflect the value of impact measurement, one respondent commented on the challenges that remain:[…] ‘It is important to define and measure impact but it needs to be balanced with the practical realities of how challenging it is to measure impact authentically.’” Emerson, J. (2014) Impact Investing 2.0: The Way Forward – Insight from 12 Outstanding Funds. Pacific Community Ventures The twelve funds profiled in this 2014 study work in far-ranging sectors, from microfinance to sustainable property. Their diverse—but equally successful—approaches to social impact offer relevant insights for all sectors. “The firm’s investment strategy is quite simple: identify promising SMEs [Small & Medium-Sized Enterprises] struggling to break through to their next stage of development and invest in and surround those investments with the type of intensive technical assistance and support necessary to provide them the greatest chances of success.” Goldman, P., et al. (2014). Private Capital / Public Good: How Smart Federal Policy Can Galvanize Impact Investing--and Why It’s Urgent. United States National Advisory Board on Impact Investing The Advisory Board that commissioned this report developed from the 2013 G8 discussions to explore the potential of impact investing to accelerate economic growth and address pressing social issues. This is their call to action for greater partnership between government and the private sector in supporting impact investing. “For all the media coverage impact investing has earned recently, it is not a new concept. It has deep historical roots. Impact investing was built in partnership among investors, foundations, and the US government over the course of decades. Today, impact investors finance undertakings from early childhood education to global economic development, from preventive health care services to village-based solar microgrids. We are at an inflection point in the impact investing movement. New energy has enlivened the space. [...] For all its promise, the movement is not yet living up to its potential—which many believe to be 10 or even 20 times its current size. For impact investing to reach massive scale—bringing private capital to bear on our greatest problems—it will require a more intentional and proactive partnership between government and the private sector.” 4

Greene, S. (2014). A Short Guide to Impact Investing. Case Foundation While the author does not reflect on arts and culture, specifically, his suggested framework of “fixed income, absolute returns, private equity/venture, public equity, and real assets” for evaluating impact investment options is broadly applicable. “Assessments are often not actionable enough for many investors, with too much information in some areas, but not enough to gauge key performance indicators. Investors and companies alike are calling for simpler standards and more targeted metrics.” Hawkes, J. (2001). The Fourth Pillar of Sustainability: Culture’s Essential Role in Public Planning. Cultural Development Network The author’s argument for why arts and culture are essential to public planning are the same arguments for why impact investments must include the arts in order to create meaningful change. “The way a society governs itself cannot be fully democratic without there being clear avenues for the expression of community values, and unless these expressions directly affect the directions society takes. These processes are culture at work. Cultural vitality is as essential to a healthy and sustainable society as social equity, environmental responsibility and economic viability. In order for public planning to be more effective, its methodology should include an integrated framework of cultural evaluation along similar lines to those being developed for social, environmental and economic impact assessment.” Jackson, E. (2012) Accelerating Impact: Achievements, Challenges and What’s Next in Building the Impact Investing Industry. The Rockefeller Foundation This 2012 report includes a profile of RSF Social Finance as one of six “impact-first” (vs. “financialfirst”) investors. RSF is a US-based nonprofit financial services organization that has made over $230 million in loans and over $100 million in grants to American social enterprises addressing key issues in food and agriculture, education, ecological stewardship and—importantly for this compilation effort—the arts. This is a call-to-arms for those involved in early explorations of impact investing for the arts. “The major initiatives must navigate a course between what the market is currently demanding and what it needs in the long run. Early adopters, who are generally the most committed to impact performance measurement, are often the players least in need of it. Yet the players who would most benefit from industry performance standards are likely to require greater persuasion to adopt them.” Morgan Stanley Institute for Sustainable Investing (2015). Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies. Morgan Stanley Institute for Sustainable Investing This report demonstrates that impact investments are performing at a higher profitability level than previously assumed. The bar, therefore, is high for what retail investors will be seeking if adding arts and culture to the existing mix of impact investment funds. This report is applicable across sectors in addressing—and refuting—perceived barriers to impact investment. “Traditional investors have been hesitant to hop on the impact investing bandwagon, concerned that it comes with side effects — slow returns, minimal returns, and high risk. Yet, this new report, which surveys over 10,000 equity mutual funds (over the last 7 years) makes the argument that sustainable investing funds have actually met or exceeded the median returns of traditional equity funds. [...] Moreover, these funds had lower volatility. In fact, 72 percent of the companies surveyed with a sustainability mindset offered higher profitability.”

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Morley, E., & Winkler, M. (2014). Assessing a Set of Indicators for Creative Placemaking: Reflections From the Field. Community Development Investment Review A 2014 survey of creative placemaking efforts summarizes the challenges of and need to develop indicators measuring impacts on local, regional, and national levels in multi-dimensional ways. This study was a series of case studies of creative placemaking efforts. “Identifying indicators that measure the impact of creative placemaking is difficult because creative placemaking efforts often have multiple and varying goals, such as increasing employment, reducing crime, and attracting or retaining residents. Community context also affects the appropriateness of particular indicators. For example, crime rates may not be considered particularly useful as indicators for communities that generally have little crime. Thus, multiple indicators are needed. In addition, considerable debate exists among arts researchers and practitioners about which indicators are best aligned with and able to measure benefits of creative placemaking efforts. Despite these challenges, managers and funders of creative placemaking initiatives are interested in identifying and using indicators to help determine whether outcomes of interest are moving in the desired direction.” Muller, C. (2015). Impact Investing: From Cutting Edge to Crucial Tool. Arabella Advisors A 2015 overview of the current state of impact investing reveals tremendous business interests in impact investing, thus offering an opportune moment for arts and culture to be part of providing meaningful social impacts. “According to the 2014 Deloitte Millennial survey, nearly 30 percent believe business’s number one priority should be to improve society. [...] Banks, corporations, and even pension funds are seeking ways to invest with different partners so that their investments yield social as well as financial returns. [...] Investors see these as potential tools to engage multiple stakeholders from different sectors to leverage government and private resources to generate social impact along with financial returns. [...] Performance data—actual returns— represent perhaps the field’s most important piece of missing information. For more funders and investors to routinely engage in impact investing, they will need to see a more complete track record, generated through better systems for tracking and broader reporting of both financial and social returns.” Peterson, G. (2015). Arts and Impact Investing. Alliance Magazine The author describes that arts and culture has been, and must continue to be, essential in influencing any kind of social change. “An Ashmolean Museum curator told programme participants the story of paisley, describing how Nur Jahan, queen of Mughal India during the 17th century, influenced commerce, fashion and social change across centuries through her courage, artistry and investment. [...] Increasingly, funders and investors are [also] realizing that arts and impact investing bridges finance, policy and social change. Thinking out of the box opens the door to exciting possibilities for the field.”

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Sheppard, S. (2014). Measuring the Economic and Social Impacts of Cultural Organizations. Community Development Investment Review The author provides a roadmap for the kinds of indicators that should be in place to measuring the impact of interventions on a community’s wellbeing. These evaluations are relevant to any social sector, but particularly so for arts and culture investments that promise community change. “Evaluation of the impacts on quality of life and the social structure of communities is […] difficult, and three approaches that have been used can potentially measure these impacts. Changes in the value of residential property, changes in survey responses concerning subjective wellbeing, and analysis of local social networks all show promise in this regard. As community development practitioners continue in their efforts to understand the impacts of these organizations, it is essential to choose some approaches that can be applied repeatedly over time. Establishing a baseline of these measures that characterize a community, and then tracking the changes as new organizations open or expand will provide the best approach for measuring the full range of benefits that cultural organizations can bring to our neighborhoods and cities.” Sullivan, P. (2014). Investing to Make a Difference Is Gaining Ground. The New York Times An overview of the growth and evolution of the general impact investing field. “According to the Forum for Sustainable and Responsible Investment, some $3.74 trillion, or 11 percent, of total United States assets under management were placed in sustainable investments in 2012. This was a fivefold increase from 1995.” Trapp, R. (2015). The Creative Social Enterprise: An Impact Investment. Grantmakers in The Arts This 2015 article is significant for being the first to make a robust connection between impact investing and the arts. The article builds off of the author’s 2015 masters thesis titled “Creative Impact Ventures: A Business Plan for A New Social Enterprise.” In the article, he explores the intersection of the creative industries and impact investing, and makes a case for shifting the perception of how value is created in the creative sector. “The sector could potentially offer more resilient, inclusive, and environmentally viable paths to economic recovery and gross domestic product (GDP) growth. [...] The major actors that invest for social impact do not consider the creative industries a target sector for these types of investments. Many have taken the lead from the GIIN’s Global Impact Investing Rating System (GIIRS) and its companion Impact Reporting Investment Standard (IRIS), which provide a catalog of generally accepted performance metrics that leading impact investors can use to measure social, environmental, and financial success, to evaluate deals, and to grow the credibility of the impact investing industry. The sectors listed on the IRIS tool website are agriculture, education, energy, environment, financial services, microfinance, micro insurance, health, housing/community development, land conservation, water, and other. The WEF developed its own list of eight key sectors from the IRIS model, selecting agriculture, education, energy, environment, financial services, health, housing, and water. Because arts and culture and the creative industries are noticeably absent from each of these lists, a national and international petitioning effort is needed to encourage investing gatekeepers to include the creative industries as a viable social impact subsector.”

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US Department of Commerce, Bureau of Economic Analysis (2015). Spending on Arts and Cultural Production Continues to Increase. US Department of Commerce 2015 Federal numbers on the continued rise of spending on, employment by, and output of U.S. arts and cultural production (ACP) industries. “This year’s report finds the arts and culture sector representing 4.32 percent of the GDP – a higher percentage than transportation and construction – at $698.7 billion. These numbers are the result of the BEA refining and improving their methodology to create this new baseline that will be updated annually.” Waits, M. (2014). Five Roles for Arts, Culture, and Design in Economic Development. Community Development Investment Review This 2014 essay makes a strong case for why arts, culture, and design should be included as part of an “all-hands” approach to economic development. “The benefit of an all-hands-on-deck approach to confronting economic challenges and opportunities becomes readily apparent when considering the case of arts, culture, and design. Not traditionally present in the domain of economic development, this trio has many potential benefits for boosting the economy. They touch the economy at crucial leverage points, including innovation, entrepreneurship, employment, and revitalization. An arts, culture, and design strategy is not the only requirement for promoting prosperity. However, coupled with other strategies, the three can provide a competitive edge for cities and states.” Yu, E. (2015). Impact Investing’s Newest Champion--the Millennial. The Huffington Post Millennials will soon comprise the majority of the active workforce, as the oldest have just turned 36 in 2016. This article reviews their emerging enthusiasm for impact investing as a strategy, and underscores that the effort to channel impact investing dollars to arts and culture-based impacts should be around for a long time. “Given that Millennials have come to define themselves as a generation driven by purpose and passion it seems like a fait accompli that they would also choose to direct their private capital, and that of the organizations with which they work, in order to generate measurable social good and financial returns. For champions of impact investing, the next generation represents an unprecedented opportunity to galvanize perceptions and to catalyze how investors look at long-term risks and returns.”

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Part 2: Key Questions and Considerations As a result of this research, we summarize the key questions and concepts that rose to the top of our thinking:

• How might arts organizations leverage corporate scorecard methods to attract new funding from investment sources? How might arts enterprises (whether incorporated as a collective or as a 501(c)3) adopt terms and practices more familiar in investment fields, such as performance, transparency, liquidity, predictability of cash flows, quality, and the like to describe their work and impacts? Adopting such terminology will be more relevant to certain types of arts enterprises (such as organizations and projects trying to achieve a social impact, such as in arts education or community development), so a related question is the characteristics of arts enterprises that would be most relevant for impact investments. • What other sectors provide models for defining and measuring qualitative data? It is unlikely that the arts can generate the equivalent of wind or carbon credits as a universally accepted unit of measuring value, but there may be opportunities for creative entrepreneurs’ projects to be grouped as part of a socially focused investment portfolio or bond that promises tangible social returns. One may turn to finding parallels between the mapping and tracking needs of the education sector and the art, design, and culture sectors. • What is private philanthropy’s role in bridging resources between impact investors and the arts? Is it time to build a more robust bridge between traditional foundation grantmaking and emergent investment practices? • If both practitioners and investors are unsure how to best measure diligence, is there an opportunity to partner in research and discovery to fill the knowledge gap mutually? In what ways can the art/design/culture sector serve as expert advisors to supplement knowledge gaps for potential partners? Can we make the case that art/design/culture has deep and robust assessment systems already in place, and that this is not an area of actual “new” risk? • What is the federal role in the process? Might there need to be updated regulations that encourage investments in efforts, like the arts, that are hard to quantify but essential to meaningful social change? • The 501(c)3 sector generally excels at storytelling. How might this be leveraged to capture investors’ imaginations and help them understand the link between cultivating creativity and directly fulfilling their own corporate missions? • How might the development of impact investments in arts, culture, and design support those who have been underserved in traditional finance and the traditional field of fine arts? In what ways can we strengthen the appeal for innovative investments in the arts as a tool for social change and as a support of basic human development? • How can impact investments in arts, culture, or design reflect the service-oriented values of Millenials? How do Millennials perceive the value of the arts in general, and specifically as an investment? Is it possible that casemaking can be made differently to this ascendant workforce?

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