Investing For Impact — What We Have Learned To Date

Measuring Our Portfolio's Environmental, Social + Human Good, How It Drives Potential Profit + How to Invest in a Riskier World

For some time now, Meyer Family Enterprises (MFE) has been attracted to and involved in impact investing. We love the idea of making investments that are profitable and sustainable–and making a positive impact on people, our communities (locally and globally) and the environment. We are sharing this short case study with you to learn from our experience to date: calculating a baseline of how we are doing, evaluate what is–and is not–working, what needs to shift and how can we become better.

We also realize that there is an incredible community of like-minded investors out there doing some amazing things. So we thought it was important to share with you what we have learned to date so that we can collaborate more deeply and therefore can become more effective in each of our approaches.

How are you seeking to invest for positive impact? Do you wonder how your current portfolio is positioned to deliver both profit and good for the world? How can this be done under various scenarios in the coming years? We set out to answer those questions for ourselves with the hope that you might be willing to share your story with us as well. Thank you for your interest in hearing about our experience and learning to date.

Who is MFE? Mission and Vision of Our Family Office

Meyer Family Enterprises (MFE) is a family office based in Napa, California. MFE manages the assets and philanthropic activities of the Meyer family in a way that provides for the financial, educational, emotional, personal growth and health of the family and staff. MFE embraces the values of love, joy, respect, excellence, fun, humility, cooperation, and integrity in our decisions and interactions with others.

Investing for Impact: Why and How?

We invest for positive impact in the world – and have been since 2004. MFE invests in pioneering ventures that create positive human, social and environmental good, as well as profit.

  1. Natural Resource Efficiency
    • Renewable Energy
      • Hydrogen fuel cells
      • Solar and wind
      • Self-provided power
      • Energy transmission
      • Energy storage
    • Cradle-to-Cradle products
      • e.g.: IceStone
    • Corn-based packaging
  1. Sustainable Development
    • Innovative Education
      • e.g.: Bridge Schools
    • Financial opportunity
      • Micro-Credit
      • e.g.: KickStart
      • e.g.: Living Goods
  1. Community Development
    • Social Connection
      • e.g.: The HUB
      • e.g.: Age Song
      • Intentional Communities

NOTE: This table includes both themes and private company examples. MFE applies these themes to all of its investments: from public equities to real estate as well. For the companies we own or partner with, we provide leadership, mentoring, business management and oversight – as well as infrastructure, support, and project implementation. MFE partners with organizations and individual who embrace our values and philosophy.

Because of our innovative investment strategy and partnership approach, MFE has also been asked to advise other families and family-office professionals. In addition to private venture investing, MFE has invested tens of millions across all asset classes: cash, fixed income, real estate, equities based in the U.S. and globally, and private companies.

We see that the world of the upcoming decades — 2010s and 2020s — will require many new technologies and innovations to survive while thriving in a world where three things are occurring: solutions that optimize scarcity of natural resources; innovations in education and financial opportunity for all 7 billion citizens globally; and infrastructure for tighter relationships that spur collaborative partnerships in a more crowded world.

How Can We Measure the Environmental, Social and Human Impact of Our Portfolio?

How Meyer Family Enterprises measure the impact of their PortfolioMFE's current portfolio is diversified, across asset classes: a small allocation to cash; one-fifth in fixed income; a declining amount in equities, though increasing in “sustainability-focused” funds; one-quarter in hedge funds seeking to protect and increase capital; commercial and residential real-estate for income and diversification; and an increasing private investment portfolio. By 2020, we want 100% of assets to deliver positive impact.

To accomplish this 100% goal, we sought out experts and engaged our financial advisors and advisers in the field of “impact investing.” After a broad review of methodologies, approaches and advisers—and enhanced by the Opportunity Collaboration network's annual conference—MFE selected HIP Investor Inc. an investment advisor registered in CA, W A and lL. “HIP” is an acronym for “Human Impact + Profit.” Like MFE's outlook, HIP sees that sustainable, profitable growth for shareholders and stakeholders can come from solving human needs in five core areas: Health, Wealth, Earth, Equality and Trust.

HIP companies innovate to answer five human needs

Source: HIP (Human Impact + Profit) Investor, Inc.; and its book “The HIP Investor: Make Bigger Profits by Building a Better World” (John Wiley & Sons, 2010)

The HIP Methodology Applied to Investing Overall-and MFE's Portfolio

The HIP (Human Impact + Profit) approach analyzes, rates and ranks how companies fundamentally create value financially. First, top line revenue is generated from Products and Services that solve human needs; HIP examines these impacts and cash flows. Next, HlP quantifies the firm's sustainability Operating Metrics in its operations and supply chain, which directly contribute to its net positive–or negative–impacts on customers, employees, suppliers, and society overall. Then, HlP evaluates five areas of Management Practices – evaluating the quality of decisions, accountability, and vision. Leaders integrate a sustainable, positive-impact approach into strategy, operations and everyday decisions – and it has correlated with driving higher impact and financial success. Firms with a higher Human Impact score across these three categories have tended to deliver both Profit and shareholder value. Thus, as we seek higher impact in our investing, MFE sought to answer the question: “How HIP Is Our Portfolio?”

How HIP Is Our Private-Venture Portfolio?

Since early 2000, Meyer Family Enterprises has invested in ventures led by bright entrepreneurs that seek to deliver environmental, social and human good How HIP is our Private-Venture Portfolio? — which can ultimately drive higher profitability and valuations. MFE asked its private-venture portfolio firms to complete the HIP Scorecard in all three areas: Products, Operating Metrics, and Management Practices. Each firm took 1 to 2 hours to complete the scorecard, depending on how well they tracked the simplified Carbon Footprint Calculator found at www.carbonfootprint.com

Nearly all private-venture firms backed by MFE and rated by HIP, scored in the top-right quadrant of the HIP Scorecard, showing their leadership in Management Practices that embed net positive human, social and eco-impact – or “doing good” – into its core business. This systematic approach also resulted in quantifiable successes in human, social and environmental performance. While private-company profitability is private, as are their valuations, MFE has found that business success and sustainability results are tied closely together. The weighted-average HIP score for the responding MFE private portfolio (as of June 10,2010) is 62%. We expect this score to rise over time, and seek to improve it to 72% or higher this year, and target 100% by 2020.

How HIP Is Our Public Portfolio?

Three main categories comprise MFE's public investments: Fixed income, mainly municipal bonds; mutual funds, exchange-traded funds (ETFs) and separately-managed accounts (SMAs) that in general are transparent about positions in companies; and hedge funds, many of which are semi-transparent (or not at all) about what they invest in (even in quarter-end statements).

MFE seeks its entire portfolio to be 100% HIP by 2020, and needed to understand the baseline scores today. HIP Investor analyzed and rated each fund of our public portfolio, and the following results are as of June 10, 2010. Municipal bonds led in both Human Impact (87 of 100, as our specific investment supported schools and hospitals, a high social good) and Profit (performing well and tax-efficiently in the downturn). While clean-tech and energy-efficient companies contribute positive environmental good on average, our overall mutual funds and ETFs were closer to the S&P-100 weighted average for 2008 of about 45% Human Impact. The mutual funds/ETFs experienced lower but still positive Profit, compared to the other asset groups. The most challenging investments to rate were hedge funds. HIP improvised and created a Fund Management Practices scorecard – to interpret the fund's and manager's transparency on investment strategy, tactics, leverage, liquidity, lock-ups, auditability of expenses and reasonable-ness of fees. The Human Impact score for these non-or semi-transparent hedge funds is estimated around 20%, with positive, strong performance on Profit for the time period.

NOTE: Profit figures are annualized from Performance Start Date (ranging from 2005 to 2008), are calculated as of 12/31/2009, and shown net of all fees paid.

HIP Performance of MFE Public Portfolio

How HIP Is Our Real Estate?

Our family office also owns and manages income-producing real-estate, covering residential and commercial properties, as well as vineyards. MFE seeks out opportunities to increase performance through sustainability. An initial HlP analysis of local properties confirmed issues known but not yet solved due to several structural changes required-or that needed further analysis of the projected return on investment.

Overall, a Baseline of 2010 Performance – Positioned for Improvement in 2011 and Beyond

Our MFE family office now has a baseline of our Human Impact + Profit performance. We are excited to finally know with more certainty what we have intuited and felt inside ourselves.

Private: A private-investment portfolio HIP Score of 62% (as of June 10, 2010) shows that early-stage companies are leading the way on positive environmental, social and human impact results. While potential valuation premiums may not be visible until the next financing,we are enthused to help our portfolio seek even higher impact, by sharing the best practices in being HIP among all of them.

Public: Our public portfolio's HIP Score is 45% (as of June 10, 2010), though including some clean-tech and "sustainable" ETFs, is still close to the S&P100 average for 2008 of 45%. This spurs us to seek out mutual funds, ETFs, SMAs and hedge funds that can be more HIP – delivering even higher health, wealth, earth, equality, and trust. While many of these may not yet exist, we want to allocate funds to those that are – and help stimulate the creation of those that don't yet exist, especially in international markets. In addition, we are strongly considering divesting any hedge funds that don't live up to high transparency and liquidity standards – to mitigate future risk and encourage more visibility.

Real Estate: Our real-estate portfolio improvements will require some planning and careful consideration of payback, which may be enhanced by government tax incentives.

Overall, we are delighted to know our baseline, and now seek to improve it by 10 percentage points before year-end 2010, and seek to boost our overall HIP score to 100% by 2020.

2020 Goal: Protecting Our Principal and Seeking Both High Impact and Positive Returns

Typically conventional investors view "doing well" (i.e. making money) and "doing good" (i.e. having a position social and environmental impact) as tradeoff's when making investment decisions. However, we see them as moving in concert with each other. Veterans of Goldman Sachs as well as forward-thinking investors and investment managers increasingly embrace this view. The field of "impact investing" is emerging strongly, and evidenced by leaders like Leslie Christian (Portfolio 21 mutual fund), AI Gore and David Blood (Generation lnv. Mgt), and Paul Hawken (Highwater Capital). Some funds are for everyday investors; others for accredited.

Yet the risks of the next decade may cause even more volatility than experienced in the declines of nearly every asset class of investments in 2008. Despite new financial regulations, the overhang of excessive credit and debt looms as a drag on future growth. Natural resources, from energy to water to clean air, are becoming scarcer, as well as more expensive to source. Booming populations in high-growth economies like China, India and Brazil may seek a Western standard of living, which is not energy-or resource-efficient for the planet. Radical transparency is pushing even more information to be disclosed that was previously seen as proprietary or secret.

FOUR SCENARIOS OF THE FUTURE as researched by IFTF.org

Growth 
 
Growth:
Heavy investment in technological innovation to avert looming disasters

Constraint 
 
Constraint:
De-emphasis on the material. Strong policy, social mission

Collapse 
 
Collapse:
Multiple local and regional collapses deplete resources; migration triggers conflict

Transformation 
 
Transformation:
Rapid innovation and adaptation to extreme environments

Source: Institute for the Future. Used with permission.

Scenarios to Consider in the Coming Decade

In protecting the principal of our portfolio, as well as positioning for both high impact and positive returns, MFE feels it is prudent to evaluate potential scenarios in-depth to fully understand the possible risks that can translate into massive disruptions of historical expectations – and the potential for an equally impressive transformation should business and society leaders choose to embrace the new world of opportunities.

MFE sees the third and fourth scenario – "collapse" and "transformation" – as reasonable (even likely) assumptions given the trends of the world today and likely to occur in the 2010s and beyond. Thus, we are actively evaluating our current portfolio and future shifts in how we allocate to diversify across all asset classes – including commodities, which have not been included to date. In addition, MFE is considering multiple options: traditional financial approaches (like hedging may take on a role); encouraging new funds that embrace these transformation (e.g. an international sustainability equity fund); and potential al rapid-response trading strategies to stay on top of quickly evolving (or devolving) market situations around the globe.

Lessons Learned: Know Your Impact, See the Potential, Prepare for the Future

We have learned much in a short time while evaluating our current portfolio for its impact. Our baseline for how HIP we are has led to several in sights:

  1. Our implementation of our stated mission and values is being reflected in our private portfolio, and can grow even further.
     
  2. Our public portfolio needs adjusting to achieve our mission and goals for high human impact and profit.
     
  3. Our portfolio can be positioned to mitigate emerging risks and volatility – and designed to
    seek potential rewards from the possible roller coaster of transformations and collapses.

Continuing the Conversation with a Community of Like-Minded Investors

What is your world view? Do you see similar risk factors in your portfolio? Are you seeking a like-minded group of investors who want to protect their principal? If you are interested in impact, how do you link it to an overall portfolio of profit?

If you want to explore these issues, please contact MFE as we are open to building a community of investors who have a perspective on the future, seek to protect against upcoming risks, and stimulate the financial markets to provide investments for high human impact and profit.

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Disclosure: Past performance is not indicative of future results.
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