Impact investment, investing in projects that bring positive environmental and social benefits, although unfamiliar to Chinese people, has gradually entered everyday discourse with the popularization of the ESG concept. Kevin Owocki, the founder of Gitcoin, emphasizes in his book "GreenPill" that the construction of public goods will guide web3 to provide positive value to human society, which coincides with the concept of impact investment.
But impact investment is easier said than done. How do we evaluate the positive or negative impact of projects? How do we shift the attention of profit-driven capital to environmental and social values? How do we mobilize the power of the public and the government to drive corporate strategy changes?
Perhaps the more fundamental question is that criticism from the left has always believed that there is an irreconcilable contradiction between the capitalist system itself and environmental protection and gender equality. Is it possible to reform it within its own system? Or, as futile as trying to pull oneself up by one's own hair? In any case, web3 opens up new space for thinking and practice. In this podcast, host Kevin Owocki, along with Li Jin from Variant Fund and Matthew Frehlich from Protocol Labs, explores multiple dimensions of this issue.
Introduction#
💡Impact investment is investing in projects that bring positive environmental and social benefits. Although unfamiliar to Chinese people, it has gradually entered everyday discourse with the popularization of the ESG concept. Kevin Owocki, the founder of Gitcoin, emphasizes in his book "GreenPill" that the construction of public goods will guide web3 to provide positive value to human society, which coincides with the concept of impact investment.
However, impact investment is easier said than done. How do we evaluate the positive or negative impact of projects? How do we shift the attention of profit-driven capital to environmental and social values? How do we mobilize the power of the public and the government to drive corporate strategy changes?
Perhaps the more fundamental question is that criticism from the left has always believed that there is an irreconcilable contradiction between the capitalist system itself and environmental protection and gender equality. Is it possible to reform it within its own system? Or, as futile as trying to pull oneself up by one's own hair? In any case, web3 opens up new space for thinking and practice. In this podcast, host Kevin Owocki, along with Li Jin from Variant Fund and Matthew Frehlich from Protocol Labs, explores multiple dimensions of this issue.
Embedding Impact in KPIs#
Owocki poses an open question to the guests: How can we promote impact investment in the web3 space?
Frehlich believes that to create a sustainable impact investment market, on one end, you need pools of capital that align with values and are sustainable for reinvestment over the long term. This requires some level of value capture. On the other end, you need projects, people, and organizations to allocate resources to renewable causes, such as open-source software, carbon offset, and journalism. There is a real need to allocate our smartest and most driven teams to these projects, but to make it happen, we need pools of capital that align with values and the right teams.
Jin suggests expanding the vision beyond web3 and looking at the bigger picture of impact investment. Impact investment is about pursuing positive social and environmental impact beyond traditional financial returns. Traditionally, the driving force behind most capital has been profit. To make impact investment happen, the evaluation of impact should be tied to financial returns and incorporated into the main KPIs of companies or projects.
Regarding Frehlich's view on efficient market hypothesis, Jin points out that we should not overlook the phenomenon of market failure around us. Markets are not always efficient, and supply and demand are not always cleared at the most socially beneficial points. Market failures can stem from externalities not being internalized, imbalances in market power distorting the market, or information asymmetry, among other factors. By placing the consideration of impact outside of financial incentives, it already explains why we don't have more impact investment, because impact is treated as a separate KPI from financial returns. So we should embed impact in the consideration of financial returns and then optimize that consideration.
Frehlich agrees with this perspective.
99% of Emissions Reduction Comes from Government Mandates#
When it comes to global climate issues, companies are undoubtedly the most important direct stakeholders, but how to drive companies to look beyond profits is a micro-behavioral question. Both the host and the guests point to the public and the government as the driving forces.
Jin states that some companies have already shifted their strategies towards green emissions reduction. It would be interesting to explore the motivations behind their transformation and how to extend this change to other areas of impact investment.
Jin analyzes that there are two explanations for the attitude shift towards climate issues. Either it is a cultural shift where corporate leadership accepts responsibility for addressing climate change and voluntarily implements carbon reduction, or it is because consumers care so much about climate change that companies and brands that demonstrate a sense of responsibility towards climate issues in their consumption habits are favored. As a result, companies comply with consumer pressure to maximize profits.
Owocki adds that in the carbon credit market, 99% of carbon credits are purchased due to government mandates, meaning that only 1% is voluntary. (This statement is supported by Jin.) The next question is how to make companies voluntarily purchase carbon credits in order to expand the carbon credit market.
Regarding government regulation, Frehlich believes that in democratic politics, the root lies in the public transmitting values through votes and representatives in parliament.
Jin believes that not only consumers can exert pressure, but investors also have a significant say on the other end of the corporate spectrum. Capital owners, as a special small group, largely determine which startups in the United States receive funding and thus grasp the overall direction of technological innovation. Obviously, this group does not represent society. There is a widely circulated joke that a VC in Silicon Valley invested in a bubble tea delivery store, and people make fun of it because it solves the problem of a small group of wealthy people instead of addressing more widespread issues. This brings us back to the topic of web3, which has a mechanism to democratize investment. In theory, anyone can participate in the investment process. People can pool funds on the chain through investment clubs or DAOs and vote with their feet and money. They can guide the treasury's investments, such as Nouns DAO. When ordinary people can decide on investment choices, there will be a huge transformation in the types of innovation and the impact they generate.
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(The following section starts at 48:14)
Frehlich emphasizes that web3 forces us to think about resource allocation and distribution and **fundamental questions about what capitalism and markets are, leading to community participation. What if we use DAOs instead of governments or NGOs for resource allocation? Will we be more effective in answering questions from the grassroots rather than a more centralized position? Some experiments have already emerged, such as quadratic voting, which is great for Gitcoin's exploration, and Optimism is also experimenting.
Reflecting on Impact#
Returning to more fundamental questions, what kind of impact do we want to see from investments, and if this impact cannot be quantified, it is also difficult to generate clear investment prospects.
Jin quotes a friend's complaint that even for seemingly clear businesses like carbon reduction, the market is still chaotic. It is quantifiable how much carbon dioxide a tree can absorb, but there are so many types of solutions, paired with different levels of carbon offset, and a lack of transparency, among other factors. Considering the different types of impact markets we need to address, such as poverty alleviation and job creation, it becomes even more difficult to prove impact and track every step of the process to verify whether the impact of a project is positive.
Jin says that from the history of the investment industry, we have thought that we have had a positive impact on the world, but in reality, there have been complex and unpredictable consequences, some of which are negative. For example, dating apps, which are great in theory for helping people find soulmates, have unpredictably changed people's psychology and behavior. Did it increase people's happiness or weaken it? Did it increase the chances of finding true love or the opposite? It is very difficult to measure. These startups have received funding and achieved market success, but the real impact is very complex and subtle, and it may even be impossible to accurately calculate.
Frehlich acknowledges that we cannot grasp all the variables because they are nonlinear changes, but we may be able to grasp some of the linear effects, even if we don't know the exact statistics. For example, the carbon emissions market may have significant misallocation of resources, but we are slowly improving. We are dealing with an imperfect system, but we are constantly iterating, with tools being developed, infrastructure being built, and methodologies being optimized. We are making them better. Does this constitute a reason for investment?
Jin resonates with this and says that it is a cause worth striving for. In fact, it is one of the most important causes in the world. From the beginning, we need to have philosophical thinking about what we care about and want to see in the world before we can start thinking about allocating funds in that direction.
Jin shares her recent blog post "The Justice of Web3," inspired by Rawls' "A Theory of Justice," which reflects on how to allocate resources in the most socially optimal way when resources are scarce. This is actually the starting point of our entire conversation. People always rush to pursue various forms of impact without going through this basic reflection.
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