Corporate America is Struggling to Balance Profits and Purpose. Impact-Driven Innovation is the Solution.
-By David Weinstein, Founder & CEO of Freshwater Advisors
Corporate America is emerging from an identity crisis. The era of maximizing shareholder value, promoted by Milton Friedman and perfected by GE’s Jack Welch, ended with the 08/09 financial crisis. A replacement model of capitalism that successfully balances profits and purpose has yet to gain traction. Why?
Corporate social responsibility (CSR) programs usually concentrate resources and power with company executives. This top-down approach is good for PR but overlooks employees, customers, and community members in their areas of operation. The result is that the people hit hardest by issues like climate change, job automation, and racial justice are excluded from solving these problems themselves. The would-be saviors waste resources and accomplish too little.
Wouldn’t it make more sense to fuel economic transformation from the ground up?
Capitalism needs a bottom-up approach whereby local entrepreneurs and innovators are empowered to solve their community’s problems. The hallmark of this approach is Impact-Driven Innovation (IDI). It calls for corporations to invest cash, talent, and credibility in entrepreneurs who can advance social causes, mentor new innovators, and create hubs of economic vitality in under-resourced communities. IDI reconciles profits and purpose to make capitalism work towards common goods.
What IDI Looks Like
On July 15, Exelon Corporation, the largest provider of carbon-free energy in the U.S., announced a $20 million IDI fund called the Climate Change Investment Initiative (2c2i). It will invest in up to ten cleantech startups per year for ten years. My team at Freshwater Advisors are proud to be scouting the hundreds of startups that apply for the fund. 2c2i is a capital-efficient way to spark bottom-up solutions to climate change.
For context, Exelon operates from six hubs: Atlantic City, Baltimore, Chicago, Philadelphia, Washington, D.C., and Wilmington. Its roots in the energy business date back to the early 20th century. Having evolved through multiple energy transitions, Exelon knows that carbon-free energy is the way forward.
One company can only do so much about sustainability. So, via 2c2i, the nonprofit Exelon Foundation invests in cleantech startups that are either based in or committed to doing projects in its six hubs, where local governments have set ambitious energy and climate change targets. These startups are chosen for their ability to tackle climate change mitigation — the transition off burning fossil fuels — or climate change resiliency — protecting communities against climate-induced threats.
For example, Chicago-based NETenergy, part of the first 2c2i cohort, develops a hybrid storage-air conditioner technology that reduces the energy demand and costs of cooling. It’s a mitigation-resiliency double whammy made for low-income communities that suffer most from extreme heat. Similarly, Brooklyn-based RadiatorLabs produces a smart retrofit for steam-powered radiators that solves uneven heating in apartment buildings and reduces their greenhouse gas emissions by 25 percent on average.
Through 2c2i, Exelon not only funds these startups but provides teams of Exelon employees who offer industry expertise, regulatory guidance, and standard business services. Exelon puts its brand reputation behind these startups, adding priceless exposure and credibility.
Although NETenergy and RadiatorLabs both have strong odds of becoming profitable and scaling, 2c2i, unlike a traditional venture fund, can prioritize impact over profits. It also can and does prioritize overlooked startups with minority and women owners who struggle to access capital.
Impact-Driven Innovation versus Alternatives
Why put this capital into startups? Why not just spend money on carbon offsets, ESG funds, or climate change nonprofits?
The difference is that IDI produces virtuous cycles. For instance, Greenprint Partners, part of the first 2c2i cohort, aims to reduce flooding in Philadelphia. If local business owners avoid damage and disruption thanks to their technology, the city becomes more attractive to businesses compared to those that regularly flood. These businesses offer skilled jobs and internships, which prevent brain drain and fuel new ventures, which preserve the local tax base, which fund education, and so on.
With IDI, corporations quantify not just the size of the investment, but its social impact. Investments in climate change startups have far more potential to mitigate emissions and improve resiliency than investments in generic ESG funds stacked with tech stocks. And whereas nonprofits require annual donations, well-run startups become self-sustaining.
That is not to diminish the importance of nonprofit capital and grants. Amy Francetic, co-founder of a new climate tech fund, Buoyant Ventures, offers a balanced perspective on that subject.
“Having built both a nonprofit and raised a venture fund, I know firsthand that cleantech innovation requires both types of capital,” said Francetic. “But the cleantech innovation of today is built upon the fundamental breakthroughs of the past few decades which have made clean energy more economical that polluting sources. Thus, we are seeing a resurgence of venture capital because so many good companies are now able to produce compelling venture returns.”
In a sense, IDI blends the nonprofit and venture approaches, paralleling the traditional venture industry. IDI recognizes that capitalism is a tool not just for those who wish to create value and wealth, but also for those who strive to reconcile profits and purpose.
Considerations and Challenges for Impact-Driven Innovation
IDI can fuel private-sector solutions to corporate causes ranging from food security, education, and racial justice to mental health, financial literacy and inclusion, veteran affairs, and others. Local entrepreneurs are better equipped to solve their challenges then outsiders posing as saviors.
However, when corporations build ground up, there are risks and challenges to accept. Startup failure rates are extremely high. In addition, the markets and media have a double standard for impact ventures. After cleantech venture investments peaked in 2011, they went into sharp decline. Reports from the Brookings Institution and MIT questioned whether the VC model could ever work in cleantech. Critics especially loved to cite venture-backed Solyndra, which received $535 million in federal loan guarantees yet still went bankrupt.
Even so, the moral imperative to innovate clean technologies never went away. Cleantech is bouncing back. As the investor and entrepreneur David Mytton found, a record number of cleantech companies raised funding in 2019. The risks of investing in cleantech far outweigh the risks of not investing in any effort to combat climate change.
Political cycles, too, change the playing field on impact startups. The Trump administration’s withdrawal from the Paris Agreement obviously doesn’t serve cleantech startups that help municipalities comply with emissions targets. But because IDI funds commit long-term — 10 years in Exelon’s case — they outlast political cycles. Indeed, IDI helps corporations resist outside pressures and stand by their values.
No More Virtue Signaling and Greenwashing
Corporate leaders have made bold statements about their responsibility to stakeholders. It’s time they walk the talk. As Exelon Chief Sustainability Officer Chris Gould put it, “At Exelon, our record on sustainability, customer service, and community engagement speaks for itself, but we’re always striving to do more and do better. Being a leader is a responsibility, and we’re committed to both continuous improvement of ourselves and empowering others.”
The 08/09 financial crisis and now the COVID-19 pandemic remind us what happens when wealth, power, and civic responsibility are concentrated in too few board rooms. The challenges that confront not just businesses, but all of human civilization, demand no-nonsense action from corporations.
Impact-Driven Innovation is an opportunity for business leaders to stand by their values, take action, and help us all thrive together on this tiny planet. But it is risky. There’s no guarantee that it works, and critics will be eager to pounce.
Still, President Teddy Roosevelt said that “it is not the critic who counts.” He urged us to be in the “arena,” to strive after a worthy cause and “at least fail while daring greatly.” Let’s dare greatly, one company, one community, and one entrepreneurial vision at a time.