Kusi Hornberger
Kusi Hornberger is a Partner at Dalberg Advisors in Washington, DC. He is the Global Knowledge Lead and co-leads the Finance & Investment Practice. Kusi has worked on impact investing/blended finance, agriculture, global health, and financial services projects. He has worked at Global Partnerships, Bain & Company, and the International Finance Corporation. Kusi holds an MBA from INSEAD, a MPA from Harvard Kennedy School, and a Bachelor's degree from University of Pennsylvania.
“It's a positive change in impact, right? It's a positive change towards the intended goal that you're trying to achieve. So if it's social impact, the impact would be more children completing school, for example. It could also be defined in terms of the negative, like reducing illiteracy, but really, the impact is a positive change, as per the definition of your thesis. That's how I would define impact.”
— Kusi Hornberger
Interview transcript
It would be great if we could talk a little bit about your history. When I mentioned impact investment, he had no doubts and said, "There is one person you need to talk to." Then we talked more specifically about impact investment and your ideas about what's emerging and what direction the whole field is taking. Maybe we could start with a little bit of intro about your background and how you got to these means yourself?
Gosh, where do I start? Yeah, so I'm studying economics, specifically development economics. My first job experiences were in Africa. I spent about three years on the ground in Tanzania, and the last of which was working for an NGO called TechnoServe, where I was a business advisor for coffee farmers. I saw the power of private sector principles applied to low-income contexts and how they could empower people and improve livelihoods. It was not that micro, actually. I worked with a group of 7,000 farmers in total, and we helped turn their business into a viable one from something where they were selling to the government to creating a business exporting to big coffee importers like specialty coffee, Pizza, and Starbucks, etc. So that was like...
So, after your studies, did you immediately go to Tanzania? Did you already know that you wanted to work there before starting your studies? Are you not considering other options, or was it a discovery or a calling for you to work there?
Well, my parents were development workers before that. I mean, before, I don't know if that existed in the 60s. And so from an early age, I knew this question of why some societies are poor. One side is rich was a big one for me. And why do some people suffer while others don't? So values and morality questions are always big in my mind. When I studied economics, I started asking fundamental questions like what can be done to improve poor neighbourhoods and countries? Why are some neighbourhoods and countries so poor while others are rich? I always had an interest in development economics. I knew I wanted to be an academic, but there were things about academia that I didn't like. One of them was reading papers. I liked the insights from papers, but it was hard to decipher them. They were very cryptic, and it felt like a confusing world. So I wondered how I could be more practical and use rigorous insight. I decided I didn't want to be a hypocrite and talk about the developing world without first-hand experience. So I volunteered and worked as a computer science and math teacher in Tanzania. Then I found an NGO and started working on it. That was the start for me.
The big crystallisation was that the private sector can have a big role in development. I got really interested in the role of private sector development and who's involved in it in low-income countries. I found out that the World Bank is the biggest one. I read dozens of papers critiquing the World Bank and all the Bretton Woods institutions. There were heavy criticisms, but some of the economists that I most admired had consulted or worked there. So I decided to try to work there. I went to a master's program in development economics and then went into the World Bank. I spent six years there and quickly realised that I was most excited about investment. That's what the main thing they did was. I was actually in IFC. I learned how to find investments, meet the people, evaluate opportunities, do all the legal paperwork, and close transactions. I got real transaction experience on the job. Then, around that time, some literature started to emerge on impact investing. I thought it was cool and I was interested in it, but I was more in the development space. I still felt like a hypocrite because I hadn't actually worked in the private sector. So I went to work for a management consultancy called Bain and Company. It gave me the opportunity to work with Fortune 500 companies in South America.
A lot of my work was focused on helping OECD country companies operate in South America or enter and operate and succeed. It was classic strategy and pressure washing. It gave me a little bit of a focus in agriculture. I got to know what high-performing agriculture looks like. Then I wanted to advise the private sector and promote private sector development. I went to work for a small family office called Global Partnerships based in Seattle. I became their Director of Strategy and Research and then their Vice President of Strategy and Research. That was really my real education in impact investing. I saw the whole soup to nuts, from working with families, managing the board, to identifying and managing investor relations, raising capital, storytelling and communications, measuring impact, and deploying capital. Then I came to Dahlberg. I leave a co-leader finance investment practice. I try to dedicate myself to the work and broaden my horizon. I didn't do much blended finance work before, but now I do a lot of work in blended finance and innovative finance. Now, I've really gotten the chance to do a lot of different types of finance and investment-related work, not just transactions and agribusiness and health. That's my story.
If we were to thank you and move forward based on your experience and path, how would you define impact investment today? It seems that you have seen the merging of impact and investment since before it was codified, as investment may have always been about impact. So, how would you define it today and what is the current practice?
Yeah, this is a nuanced question. But the simple answer is that there are two distinguishing factors that differentiate impact investing from other strategies. I would call it a strategy, not a sector. In fact, investment is an approach to investing, not an industry unto itself, even though people often classify it as such. The two distinguishing features are:
You have a clear intention about how you're going to create a positive social or environmental impact. This means that you have come up with a theory of change and a clear investment thesis about how your investments contribute to that theory of change. You have an intended goal that is impact-oriented.
You not only have an intended impact intention, but you also have a way to measure your performance against that intention. This is the second criterion that differentiates impact investing from other strategies.
People often compare impact investing to ESG. ESG is a negative screen that looks at companies and evaluates their environmental, labor, and governance practices. Impact investing, on the other hand, is a positive intent that asks what you want to achieve.
Another differentiating factor is that most people consider impact investing to be primarily a private markets investment strategy. This means that it's mostly direct investments or opportunities managed by people who have capital into non-listed debt, equities, and other instruments. ESG has been primarily a public markets strategy, where you evaluate investment opportunities based on public information.
These are the defining characteristics of impact investing, but it's not perfect. There are some exceptions to these generalizations, and the industry is evolving.
And, please forgive my very naive questions, but how do you measure the impact? What are your criteria for measuring it?
So, this is becoming increasingly more rigorous and standardised. However, the biggest critique from traditional investors of impact investing is that it's not comparable. There are no standard metrics. In traditional investing, there are some standard metrics, like your price equity ratio, your ROIC (return on invested capital), and your net present value. Even though there are a bunch of different accounting terms, they exist in impact. We do have impact accounting. However, the number of indicators is much broader still, and there are standard setters. There's something called Iris plus Impact Reporting.
Investment standards are something Iris plus has created, basically, indicators where they bring together people and say, "Okay, we agree on this measure," and they classify it. So, the things can be like the number of women supported or the number of carbon emissions reduced or things like that. The reality is that there is not yet, and I would argue, nor should there be a single metric. It's hard to boil down because strategies and intent will be different. Somebody may have a thesis that's more about gender, somebody may have a thesis that's more about livelihoods, somebody may have a thesis that's more about carbon emissions, somebody may have something that's more about resilience.
That being said, I think that's a little bit of an excuse. We have to get to scale. In the book, my book title is Scaling Impact. We can't leave it that way. The truth is that information in its truest form is disaggregated. A lot of different metrics make sense. But we have to have a way for people to understand it and compare it. If you really want larger amounts of capital, or the only need to productize and have things to invest in, things like impact weighted accounts, where basically you would take your financial statement and you would weigh the performance against its impact performance. So, you'd say, "Okay, if you're, let's say, your balance sheet, you have assets, liabilities, and equity, right? And you say your assets, well actually, we're going to weigh those assets based on their environmental contribution, we're going to weigh those liabilities based on how you're treating your labor." And so, it incorporates impact considerations into your financial performance. Some would call that impact weighted accounts. And that's getting a lot of momentum.
There are other industry standards that are coming up, like the Impact Measurement Project, that are trying to create ways that don't force different themes to have the same metric, but instead try to figure out other ways to create a common language. Like classification systems, almost like credit ratings, right? Like credit ratings, they're completely different sectors, different activities, but you can still get like, you could be triple A, you could be a municipality that's triple A rated, you could be a manufacturing plant that's triple A rated, you could be a farm that could be triple A rated. The same sort of logic you could do with impact. So, I think the reality, and then the last thing I'll mention is, and I've written about all this stuff, is that if you look at the financial accounting industry and the way it was born, it was born the same way. The mess when it started, right? There were hundreds of indicators, no one reported their information the same way. And that transparency about company performance was hard to decipher. The movement of things like IFRS and GAAP accounting principles is really a modern-day movement. It's only in the last 30 or 40 years.
We're currently in the process of creating a common language and making an impact as well. We've come a long way since I started 10 years ago; it's light years ahead. People used to just invent stuff and do whatever felt good, but now you can't just do that. If you want serious capital, LPs will ask for more detailed information because their standards have increased and they demand more rigor. We're in the process of improving our impact measurements, but it's light years ahead of where it used to be.
It's really interesting to hear that even the criteria for measuring success and impact in investment can spark discussion and involve those who may be affected or benefit from such impact. It's an insightful observation in itself. As you mentioned, progress is being made towards developing a common language and framework to work within and understand one another.
To delve even further, how would you define impact? Does social impact encompass all areas? Impact is a term that is widely used, so how would you define it in the context of impact investment and suggest a terminology or help create a common language?
Yeah, so it's a good one to get almost philosophical. But for me, we're all rethinking the macro level, so it's fine.
It's a positive change in impact, right? It's a positive change towards the intended goal that you're trying to achieve. So if it's social impact, the impact would be more children completing school, for example. It could also be defined in terms of the negative, like reducing illiteracy, but really, the impact is a positive change, as per the definition of your thesis. That's how I would define impact.
So it's about an intentionality to create a positive impact that can measure it. Yeah, exactly. Simple, easy.
Right. And when you really think it through, you start to realize that this is what everything should be. The processes we go through don't always force us to consider these things. I've also written about impact investing reaching its full potential, which includes some of the ideas I just shared with you. For me, value creation means creating positive change, improving people's lives, and improving society as a whole. If we think in financial terms, value should go back to that. It's not just about making money, it's about creating value for society. If we think this through, shouldn't all investments be impact investments?
Yeah, I have so many questions. To continue your statement, when we explain what impact investment is, it seems obvious that it should be the primary mindset. In your view, as someone who probably sits on the other side, what is the opportunity cost of not making impact investments? As a designer coming from a sustainability perspective, not a finance perspective, I think of new ways to solve problems, old and new. I consider private companies, corporations, family offices, and other forms of wealth that must decide how to allocate resources for future actions and strategies. What prevents them from embracing impact investments at levels that still allow them to reap financial benefits? In other words, why don't people do it, and what is the cost of not doing it?
Yeah, the opportunity cost is the suboptimal allocation of capital and the inability to reach collective goals, such as Sustainable Development Goals, right? The short answer is that at the beginning, there might have been the right intentions, but over time, the way the financial sector and investment ecosystem have developed, as they respond to existing regulations and practices, means that decisions are not being designed to intentionally consider social and environmental considerations. From the get-go, the focus is on valuation and making money. How does this increase returns for my company, right? It's your fiduciary duty, in fact, for a publicly listed company to maximise profits. If the board is not maximising profits, with some regulations in place, then you're breaking the law, right?
The standard practice right now, particularly in public markets, is to constantly look for where to place your capital with the highest return on investment. The opportunity cost of that is that you're not considering the impact on some of the key things that we care about as a society. It's the next coal mine, instead of creating clean energy or transitioning people away from things that are damaging the earth to things that are regenerating. That's the opportunity cost. What's holding people back? I think it's partially the education system. If I had to boil it all down, I think the dominant paradigm taught in economics and business schools, at least in the West, is built on a logic of free markets that was built on the intellectual foundation of people like Milton Friedman. So it's free markets above all costs, right? Everything else is secondary. What I'm ultimately arguing is that it's not the only thing that matters. Free markets are great, but we also have to consider whether we're truly incorporating all the externalities, all of those free market decisions, and the suboptimal inefficiencies that exist in the world. If we suddenly were able to incorporate all those externalities, like carbon emissions, for example, or what happens in terms of increased violence when people don't have access to jobs or don't have fair wages, and if we had a free market that incorporated all those externalities, we would be beautifully aligned. But the reality is that we're not there. We don't incorporate the true costs, and we don't have perfectly free markets. Therefore, the status quo paradigm that's mostly taught is problematic in terms of the outcomes it leads to. I think what I'm most excited about, and what I hope the book will contribute to, is that there's a new way of thinking. Maybe it's not new, but there is a whole new group of business-savvy, investment-savvy elites who are trying to reconsider what exactly we're doing here. What is this?
Maybe it's not new, but now the context and conditions are quite different. It's similar to sustainability. Years ago, we knew that we were damaging the planet, even though we didn't have the data or knowledge to make policy decisions. I agree with your point about impact investments. It's interesting to see how our naive understanding of the field has evolved with increased awareness and education. Many organisations still make decisions based on traditional paradigms because it's what they know and feel comfortable with, even though there are risks involved. However, there is a need for massive action to increase awareness and encourage change. Your last comment about optimism is also relevant, especially in the context of Patagonia's efforts to transform the organisation into a platform that uses profits to invest in the planet. How do you see yourself contributing to this action?
Then, I guess, the bigger piece of news was when? What is Yeves? What is it? Do you know how to pronounce his last name? I don't know. She met Chima. No, I think those were the bigger ones. First of all, Patagonia has always been a frontier in sustainability considerations, right? I always purchase their products. One of the major reasons I did was because they were good products, but also because if I ever had a problem, that product would just go back to the store and they would replace it, right? They recycled their materials or it wasn't like the classic wear and then gave it to Goodwill. This was like giving it back to Patagonia. They're going to recycle it, right? So a purchase was a lifetime purchase. That was my original reason for doing that. I loved all their branding and their connection with the outdoors, and that they hired people who were environmentalists first and then taught them business, versus being business to the environment or like. So, I think what they've done in terms of business practice has been great. But what Yeves did last year was announced to say like…
In August of last year, 95% of his fortune was donated. Whatever way is the right next step, we need more. This is like the next generation of philanthropy, similar to the Giving Pledge. My one critique is that he's not actually suffering. Even with that 5% or whatever it is, he still has enough that his kids will never have to worry about money. That's great, what a dream. He's an incredible father and a pioneer who provides for his family. I love it. But he didn't really sacrifice anything. He's just showing the excess of our existing capitalist system. The fact that he doesn't need 95% of the wealth he's created for himself is a problem, demonstrating the incredible amount of inequality that's been created. So, I applaud him on one side, but on the other side, it's a demonstration of a much bigger societal problem. That's my reaction to Patagonia and your decision.
Yeah, but I hope that is what I mean. I don't know if I have a problem with the fact that he hasn't suffered. But, as you said, it is like a new leadership role or a new role model for other companies in our organization to follow and build some confidence in avoiding that opportunity cost. We can see that other companies are doing it.
But I mean, like, I guess the point is altruistic, but really, is it? That's my point, right? It's...
Yeah, but I'm with you. And, you know, my take is more like they've always been geniuses, and the communication and branding mean they've always done fantastic work in communication and branding. So this is also an extraordinary new addition to that because that may be for them. It may have also been a really easy action to take, but definitely the empowerment of the brand and so probably, yeah, so...
But it is what I love. Also, it's a rebuke of the foundation model, right? Like, I'm a big fan of what is it like spin-down foundations rather than foundations that try to perpetuate themselves? Yeah, a lot of the old guard of foundation and philanthropy in the United States are basically the same thing. They're like businesses that made a ton of money, give it to their family, and then with the strategy of preserving, with 95% 5%, you know, giving away, but there's a saying, bucking and saying like, "No, I'm not gonna, I'm not gonna this is not meant to be preserved. This is meant to fix." Right? So I generally like that as well.
Which one are you referring to? Do you know one of his best friends, Doug Peterson? Yeah, have you heard that story? No? It's a great book as well. Basically, it's about him and his wife who didn't have as much wealth as you do. However, he was the founder of Northface and another company, I think it's Zara or one of these fast fashion brands for women. He used his money for conservation in Argentina and Chile, buying big swaths of land. He gave his money back by conserving, saying that his contribution would be fighting through conservation. He created huge national parks. I find that very inspirational.
Yeah. And I think they're starting to realise now that he was connected to it, but he didn't know. When we think about impact investment, it's a kind of thing that's hard to put into words, but try to follow me in this speculation and brainstorming. Our goal is to intervene with design and creativity to create new vehicles and find new ways to use technology. We believe there is immense untapped potential for impact investments, not just in terms of finance, but in terms of generating positive change that is measurable. This potential exists for everyone, from school teachers to corporations.
If you had a magic wand, who do you think should be capable of doing impact investment that is not currently doing it? I don't know if you can grasp some of this.
Yeah, I mean, yeah, I'll answer. It's quite simple, really. Impact investing accounts for less than 1% of all investments' AUM, even in the trillions. Even if you consider it a $2 trillion strategy or market, it still accounts for less than 1% of all investments with an impact. Right? Investments are measured globally. So that's the answer to the news you just gave me.
So the answer to your question is: who needs to act? Everyone. Pension funds, insurance companies, endowments, sovereign funds, private equity funds, venture capital funds, development finance institutions, donors, foundations, family offices, and everyone who's not currently making 5% plus. Their strategy needs to be increasing, right? There are a whole bunch that are doing this, but those are such small and niche groups. We need to tip the balance. If I had to focus on one category in particular, it would be the institutional investors. This is what I've been working on with Henrik: how do we force them to force the markets? They're the ones putting the money in, so ultimately, that's the top of the stack. It's your pension fund. If you have a pension in Denmark, it's the school you went to if they have an endowment. If you have an insurance policy, it's the money that they hold for you. These guys are holding trillions and trillions of dollars.
For legal reasons, the only country I think that really changed the regulations is France. I think France is actually somebody shared a pass. I think it's like 5 or 10% of all pension money has to go towards ESG funds, right? And part of it is there are no products and impacts, right? So that's the point I was making before. We need to have more products. Second, we need to be able to nudge these big guys and capital to push into creating markets by saying we're going to demand this. You have to show us your impact strategy. What are you measuring? What are you reporting on? And make that counterbalance, at least a little bit, be part of the conversation when they allocate their capital. Because right now, those blocks of money have one goal, which is to protect the capital for the owners of the capital. And that is in line with the spirit of impact investing, if you ask me. But the way it is executed is mostly a financial strategy.
If we need to go beyond the institutions or organisations that we are already familiar with, as you mentioned, and look for ones that are not necessarily associated with investment in financial terms, who do you think should be considered as impact investors or enablers? Is it the public or private sector?
I mean, the reality is, I believe the government. Government has a role in society. This is what the government does, right? They put regulations, they tax, and they provide public services. And if we, as a society, believe that certain things are not working and externalities are not being properly priced, then it's our role to elect or vote, if you live in a democracy, and push governments to make sure that those economic externalities are being considered. So ultimately, who pushes the pension funds and institutional money? It's mostly the government, right? In France, it's like that, and it starts in Europe. It's part of the conversation, probably in every finance committee and across most of Europe, at least in OECD countries. I think in the US, we've seen the opposite happening. Because there has been a very smart strategy executed by the Republican Party, they've labelled this genre as "woke capitalists" for almost a year and a half. There's a backlash where they're pushing laws and regulations to not allow pensions and institutional money to invest in anything that's ESG or impact-related, because they're saying it's not complying with the law. In places like Florida and Texas, they have state legislation that forbids the sovereign funds of those states, the pensions, to be able to use their money in that way. So there's a battle, a court battle. In the US, we're going the other way, but in Europe, and France is in the front, it's going more towards aggression. So ultimately, the government has a role here. And, you know, for good.
If you had a magic wand and could look at the emerging or already established new technologies, what do you think they should do? What kind of help or impact do you wish they could provide for your work?
The first thing to consider is lowering the cost of living. Technology increases productivity and lowers transaction costs. If I had said, "There's another problem that Henrik and I have been working on," the problem would be that many people want to invest in impact capital, but they don't know how to do it. What if we could use technology to lower the friction cost of connecting those who want to invest with those who are actually doing impactful things? If we could reduce that friction, that's essentially what technology can do. It's not just digital technology, but all types of technology. Everyone thinks so.
Have you come across any contemporary projects, solutions, or new ways of doing impact investment that have inspired you? Is there anything you would like to highlight as a positive direction to follow, whether it's a startup, a new policy, or something else?
Well, how about friends? Yeah, I think I can find someone who sent me something that inspires me. There is a Swiss crowdfunding platform. I believe it's not the first one; there was one in the US called Calibra. Now they have one in Switzerland called Inyova. So it's targeting the European market and is based on impact investing crowd platform. They're trying to bring impact products to the public market. My criticism is that what they're actually investing in still doesn't feel quite like impact to me. But anyways, it's a start to educate people, and they're targeting youth in particular. So that's exciting. Also, regarding the deployment of capital, there's a South African firm called Business Partners International. I love how they use technology to lower the transaction cost of deploying capital, removing people from the process. They make thousands of investments in SMEs in Africa, which others would have considered too risky.
Wow. You know, I would like to end the interview in a typical fashion, with the usual question about recommendations for books or podcasts to read or listen to. In your case, we already have your book to recommend. But if you had to suggest just one resource, what would it be?
I once did an interview like this on a podcast and I think this book still has value. I'm constantly reading, so I could probably give you a ton of book recommendations, but the one that I always love to answer with is "Crazy as a Compliment" by Linda Rottenberg, the founder of Endeavor, an entrepreneurship support organisation. I really love that book and Endeavor. Basically, if you're not challenging the status quo and trying to push and innovate, what are you doing? People will call you crazy when you try to do those things, but it's actually a compliment. Don't be discouraged.
Are you intending to stay in this field?
In the field? Yeah. I mean, I don't know what role exactly. I feel like, while I've jumped around in my career and done slightly different things, the general progression has been in the same space.
And if we had to create a completely new role in the impact investment, practice or strategy, some arrow like a job description that doesn't exist yet, what would it be?
The Chief Purpose and Impact Officer of a pension fund in China oversees a powder keg of assets with a potential impact on 2 billion people. This presents a huge challenge that still needs to be tackled.