Jasmine McGhee: Hi Dana.
Dana Bezerra: Good morning, afternoon… something.
Some part of the day. Alright, I’m going to start with the first question. So, Dana, you just finished your first year as president, congratulations.
What did you learn?
Well, as you know, I’ve been at Heron 13 years. So, I think for me, coming into the position, there was a deep sense of honoring both of what I feel like are the two previous versions of Heron that I lived in. Heron 1.0 I would broadly describe as being a version of Heron that was deeply community and practitioner-based, and really focused on honoring the wisdom of our community partners, and Heron 2.0, that I would describe as really focusing on our asset-owner chops, and focused on using our wherewithal in capital markets to try and create some change. And so, coming into this year, we were really oriented around trying to work at the intersection of those two things, to bring back the depth of understanding of our communities along with the strength of our work in capital markets, and I think I learned it’s really hard to operate at the intersection of communities and capital markets. And, even with a clear vision, the execution is a long and winding path.
With that in mind, what are you anticipating for next year?
So, I think we have a little more clarity on what we would like to try as guided by those we’ve been in partnership with, who both identified strengths that we either did acknowledge we had or weren’t so clear about, and really trying to work in the white space that is the gap between what communities need to be prosperous and how capital markets currently show up, and I think it’s an ambitious goal for us to try and pursue, but I think it’s one we’re committed to trying not only this year but in subsequent years, and really being committed to being a learning organization as we go. So, course correcting based on the experience of all of our partners. It shouldn’t be a boring year.
As part of that transition into the next year, I know Heron is thinking of a different investment process than what is usually thought of. Would you mind walking us through what that looks like?
Definitely. And I think, honestly, Heron has really been on the leading edge of this for a long time. So, engaging in mission-related investing, impact investing, etc. But I think the difference this year, and where we’re trying to go next, is that, as we reentered communities, one of the things we were committed to restoring is a deep belief in the agency of communities. People tend have a vision for how to improve their lives if you spend time to draw them out on it.They often have really good ideas for their places.
And so, as we started reentering places, what we heard pretty regularly is what place’s visions for themselves were, and where the obstacles were. And we try, when we enter a community, to explore very quietly. There’s a power dynamic and a power imbalance when you’re a funder or an asset owner. Places are looking to you, not always, but often for the answer, or in particular, for the fundable answer. And in trying to both honor their agency while not usurping it, we do a fair amount of quiet exploration in places, just very quietly poking around trying to understand what’s contextually or environmentally knowable without really taking up the time of partners. So, I would say, identifying the agency, working to understand the context of the place and then looking at, for Heron, what we refer to as the capitals. How is the place currently stacking up with its stock of, say, human capital, or natural capital, or civic engagement and civic capital, or its financial capital, its access to resources?
And that’s really a Heron internal function at this point: what does the community have available to it in each of those, and where are the gaps both identified by us and community partners? And what I think tends to happen is that certain themes start to emerge, that certain issues are prominent in a place. Housing is an issue, or the civic engagement, or the capacity for collective action is lacking. So really starting to focus on areas or problems or issues where our team can take a deep dive with our partners and say, “What’s the root of the issue? How might it be solved?” And leveraging Heron’s ability to bring many partners to bear, capital markets partners as well as community partners, to try and structure and get our arms around what are these underlying fundamental issues that are standing in the way of prosperity of place.
And, importantly, I think different than in the past, these aren’t investable, or “shovel-ready” as our field likes to say. They’re messy. And, often you’re picking up breadcrumbs of what the issues are. And I think there’s a role for us and others to play, we like to say midwifing these opportunities into the market. So, spending the time to say it’s not investment-ready, and maybe it doesn’t even need financial investment, maybe it needs connections or different partners or new partners or additional partners, and really midwifing those opportunities into something that we can get our arms around as an investment opportunity.
And then starting to frame that universe of investable opportunities as our investment universe. And I would draw that, I think that was an organic lesson for us, that we are called to really try and advance the agency of communities, and yet, for Heron in particular, when we stepped back and compared that to what our current investment environment is, we saw some pretty significant differences.
For example, currently, and consistent with Heron practice, if you’re thinking about engaging in impact investment, most of the time you have advisors, RIAS, asset managers, etc. who, the moment you sort of cross through the threshold into their doors, they explain to you what your investable universe is, what your potential range of investments options are, and when you think about it that’s really a universe that’s been defined by capital markets history, rather than any sort of problem you’re seeking to solve or challenge that a place is facing. And so, for us, we think of that as the investable universe is defined by investment managers. There’s some fundamental, some buy and sell-side analysis that goes on. That’s where most of the market operates. Even our impact-investing universe might provide an ESG overlay, or a values-based overlay.
But my point is, each of those things is taking a predefined, not specific to me or our interests, investable universe and winnowing it down. It’s going from broad and relatively conventional to smaller and smaller and smaller. And it ends up in a place where the investable universe ends up quite small. And, frankly, at least in Heron’s experience, ultimately unsatisfying. You end up with better options through the lens of your mission but nothing especially compelling. Nothing that is addressing a need in a place. At least that’s been our experience. So, for us to not be intellectually dishonest in the process, I would argue that this is even where Heron’s own portfolio has lived. So the U.S. Community Investing IndexTM, that Heron controls and updates the intellectual property for every year, we think it is better than a lot of options when it comes to public equity investing, but it is very much in this conventional investment universe made smaller and smaller and smaller based on data and screening criteria. What it is not, is what we spoke of a moment ago, is starting with the challenges of prosperity in place and trying to solve for that.
So, certainly for Heron, I think we came to the investment portfolio with the intention of expressing the interests and concerns of our partners. But that was constantly diluted by the data and information that was available in the investable universe.
As a result, the community’s voice is almost gone if not entirely gone from an investment portfolio by the time you arrive at a product or a fund or a point of view about an investment. In sharp contrast to where I think we’re going in the future, I think for Heron, we’re trying to use community voice as the directional to create the investable universe that we would try and source, identify, structure, midwife, and ultimately put money in.
And what exactly does that mean for investment returns?
So, Heron is an interesting shop. I don’t know what it means in terms of investment returns. What I can say is that Heron has always been committed to being motivated money and being money that is guided by our partners in the interest of prosperity in a place, and that is a different thing than being what I’ll call dumb money. So, Heron is always trying very specifically to put the right money, or frankly resource, be it a human relationship, social capital, whatever, into the right deal, opportunity at the right moment. And I think we’ll be guided by that. But I think the jury will be out in terms of what it means for investment returns, and the follow-on to that, what will it be measured against? When you think of constructing portfolios as originating in community agency and a drive for prosperity, we don’t have an index for that. And, so when impact investors or otherwise speak to each other, and they say, “What is your performance?”, the presumptive answer is that you will respond with some version of up, down, or derivation from an index. And we won’t be operating in that environment as we move forward.
If you consider how Heron’s new investment process deviates from the norm, what do you think are the challenges in figuring that out?
Many. I like to say, as stolen directly from my friend and author Charles Eisenstein, that we are absolutely operating in the space between stories. I think for Heron and constituents that we work with, we are very clear that the old economy, the economy that created the inequality that we live with now, is over. It’s dying, it’s on the decline. But we don’t yet know what the future story is. And it’s a really uncomfortable place to be. But I think as philanthropists, as well as impact investors, we are called to lean into the emergent and to try and bring the next economy to bear. I think there’s a lot of things, that the answer for me will be that we’re not sure. But we’re working to manifest a better version of a more holistic and equitable economy than the one we have.
Can you describe an opportunity that would fall out of an investment process based on community agency?
Sure. So, for example, we’ve been doing some work in the San Joaquin Valley, and we can talk more at length as to why we’re working there, but one of things when we started working there was, over time, it came up with the community that a need there, a real need, was affordable housing. That was a little bit of a surprise to us: we had sort of considered it a relatively lower cost market. It’s not the Bay Area, it’s not LA. But the Valley made the case that given where price points are, and where the cost of housing, literally to construct and maintain it is, there’s a gap. So, when we did this deep dive I was referring to earlier, a couple things emerged. One was that the conventional tools for solving the problems weren’t quite filling the gap. And, so in classic Heron fashion, we were pulling all the data we could to find out what could be done in this place to deal with affordable housing, and we discovered that some of the tools that are presumed to be operating weren’t, either because human talent had moved on, or because the capacity simply had been lost.
There’s a potential to use the market that is now, as inefficient and unequal as it might be, there still might be a version of the using the market that exists now to service the people and populations we all care about. And if that’s the case, Heron can potentially play a role both as philanthropists to nurse or midwife the opportunity to market, and potentially as investor to standby as a buyer of the paper or the bonds that would help folks gain access to affordable housing.
So, in that instance, a not surprising need, a regular tool to service it, but the patching it back together in a way that serves populations we care about.
I actually think that’s one of the things core to Heron’s, call it, realization. Because Heron has the benefit of not having an investment side of the house and a programmatic side of the house, we often take for granted that the bulk of our staff often works with one foot in each side.
And I think for us, it became very clear as this process started to illuminate itself for us, that when you’re an asset owner, most of the time the power resides with the wealthy and the privileged. It takes wealth and privilege to have an investment portfolio where you’re even discussing an investable universe and you’re debating the merits of investments, and frankly, the merits of how to have those better reflect the things you care about. That’s a very different dynamic than working on the ground in communities with people and populations who know firsthand what it is to lack prosperity, or paths to prosperity, and the direction Heron is moving, I think, really seeks to honor that wisdom. What the communities know to be true about their circumstance, their history, their struggles, their obstacles, and really seeks to shine a light on those things and say, what tools do we as an asset owner who is privileged, what do we have as tools to bring to bear to try and eliminate, eradicate, improve this situation, rather than being investor focused. So, I think at its most basic, I would say the current investment process, the conventional investor process, is investor-focused. The process we’re describing is human-focused.
Talk to me about risk. Where does risk reside and how is risk analyzed?
Definitely. So, I think conventionally risk is often addressed by modern portfolio theory. Risk is taken to mean risk to the investor. Maybe, in some circumstances, it’s meant to be risk to the operating enterprise so that the enterprise can pay back the investor. I think in the world we’re describing, risk is really to people and places who are already often disenfranchised, or behind the curve, or left out. And part of what we’re seeking to address, and thinking about investing this way, is returning risk to those who can afford to take it and helping to ameliorate it from those who can least afford to take risk. And if as an asset owner we are able to bridge part of that gap, I think we’re called to do that, in particular as an asset owner who operates in a tax advantaged environment.
I think the biggest hurdle is the existing story, the existing infrastructure, most likely does not want us to do this. There are a lot of entrenched interests in the traditional investing environment and we are suggesting that perhaps their world be reordered. And that rarely goes over well. So, I think there are substantial hurdles. In specific, for example, trying to find advisors, colleagues, consultants who can assist, is difficult. People tend to be oriented to the environment that is, and I think that’s why it’s perpetuated. And there are fewer seeking to move into a market that doesn’t yet exist, and that’s part of what we’re asking them to do.
Yeah! Well growing up in the San Joaquin Valley myself, not too far from Hinkley, California, which was made famous by the Erin Brockovich movie, I always think of the scene in that movie where Erin Brockovich and the law firm are meeting with executives from the company and they’re discussing whether or not the company’s pollution is problematic for the water in that community. And the lawyers and the company are maintaining that the specific version of pollution was not a problem. And Erin Brockovich makes the point, as she points at the water around the table, that that’s great because the water was from Hinkley that she brought in just for them. And remarkably, none of the team from the company or the law firm would drink it. To me it’s just particularly poignant to me that people are willing to take risks at the expense of others that they’re not willing to subject themselves to.
And I think when we talk about fiduciary duty and obligation to people in places, that’s the type of thing that we should be considering.
Well, I think at its most basic, when we talk about investors we’re thinking of investors as providers of capitals to companies. And I would also point out that for many companies, consumers are a significant constituency. So, to me, investors that are providing capital or investing in companies, or frankly even consumers who are shopping with companies, are complicit in the behaviors of those companies. And to not see that as full cycle, I think is a fallacy. It causes us all to be comfortable because it gives us distance from the outcomes that we don’t want to necessarily pay attention to. And I think at the end of the day, if you’re affiliated with a company as a customer or an investor, you’re called to at least understand the effect of that company on people, place, and planet
Yeah it’s really a complex equation and something for a different time we can talk about Heron’s own experience. I think what Heron has learned over time is you can’t really isolate on a single action or effect of an enterprise. You are really called as a conscious investor to know what’s knowable about an enterprise across all of its activities. So, the way Heron thinks about it, we refer to it as the net contribution of a company. But we think about what you just highlighted: they employ people; they engage in a community, they do, or they don’t pay taxes. Their product and service is or isn’t dangerous. And at the end of the day, it’s a balancing act. Not all of those things are always going to be positive and certainly they’re not always going to perform to a level that we think is sufficient, and yet at the end of the day, are they contributing more than they’re extracting from society? I think that’s what we’re called to know, or at least understand, and then over time it would be nice, not always within our control, but it would be nice to see progress on those metrics, in particular the ones that we wish were better.
Yeah, I actually appreciate the question, because what I’ve described is Heron’s journey, and Heron is a place that is not like many others, and we’ve been on this journey a long time. So, what I’ve described is our story and I think it’s the right thing for us to be challenging. That said, I think it’s important to meet people where they are. And so, I would share with any asset owner, as we do often, that the first step really, in my opinion, is to understand what you own, know what you own. And whether you have an existing portfolio or you’re setting out to build one, I think taking a look at what you have today and, again, back to knowing what’s knowable about its effects, again full spectrum, I think that’s doable. Insofar as there’s data on the effect of a company or a fund, I think it’s important to know what’s knowable and to just really sit with that. Even if there’s no action taken, just sit with the mission of the entity or the values of the people, the investments that you currently own, and give time to that exploration around any spots that are itchy, or that don’t sit right, and make small tweaks.
I think there’s great value in incrementalism and moving forward as you can. At Heron, I say all the time, stumbling forward is a reasonable path, and I think that’s what we’ve done. Overtime, I hope the environment emerges where people can tackle this more elegantly than we have, but in sharing our journey our goal really is to say to others, “Don’t always do what we did, here’s our lessons, and you should chart your own course.” So, I would say know what’s knowable and make small, incremental tweaks from there. And even if that means that as philanthropists you’re further ahead, I think that’s an okay thing. And try to have the portfolio catch up.