The concept of impact investment, which has the explicit purpose of supporting economic and community development, is receiving a growing amount of attention from an increasingly diverse set of financial players.
The goal of impact investment is to have a social impact while making the kind of returns that conventional markets provide. Tweet This Quote
This is one of the most exciting, and potentially problematic, trends I’ve seen over the last decade. As with any new field, impact investing raises many questions and issues—and the answers and intended results remain up for grabs. J.P. Morgan has projected close to $700BN in profits from impact investment, but who do these profits benefit?
I am concerned that in a drive for global scale in impact investment, we will lose the voices that should matter the most—the billions of people directly affected by the enterprises funded by our investments. I am advocating for the establishment of effective mechanisms to empower “beneficiaries” to be actively involved in the planning, execution, governance, and ownership of enterprises, and in the flows of capital connected with them.
Below are several dynamics at play in the current impact investment market, many of which have proven problematic.
1. Investors and entrepreneurs profit at the expense of communities
The goal of impact investment for many is to have a social impact while making the same kind of investment returns that conventional markets have provided. If that remains the case, and if the ownership of social enterprises remains limited to the privileged, then it is difficult to imagine that impact investments will ultimately benefit communities, or facilitate any sort of resource transfer from the global north to the global south (or in the US context, from rich to poor).
Impact investment needs a balance of risk and return between investors, entrepreneurs, and communities. Tweet This Quote
If ownership structures are not addressed, then by definition, these investments must be extracting value from the communities they affect, repeating the cycle of exploitation we have seen under so many different names. This is particularly apparent in the context of projects that see poor communities singularly as consumers rather than as participants in all aspects of the economy.
There is an implicit, yet often unacknowledged, tension in impact investment between how producers are paid, how steeply consumers pay for products, and how much entrepreneurs and investors can make or expect to make over time.
2. A misaligned definition of impact
Some of the large financial institutions jumping on the impact bandwagon have made public statements defining impact as simply any investment made in a developing country. The many communities who have suffered from natural resource extraction, displacement and poor labor conditions know this is not the case. Similarly, well-meaning entrepreneurs tend to define community involvement as product research, rather than creating infrastructure for long-term engagement and community leadership development.
This is largely due to the fact that impact investment has evolved as a “top down” industry—with investors setting the criteria for impact and returns with the consequences filtered down from entrepreneurs to communities.
Poor communities need to be seen as participants in all aspects of the economy, not only as consumers. Tweet This Quote
3. A major “capital gap” for community-run projects
Although many investment projects are executed in the global south, they are generally run by the privileged—these entrepreneurs and their investors are the ones who will receive the $183-$667 billion in profit that J.P. Morgan projects. It is exceptionally rare to impossible for communities, organizations, or individuals from the global south to receive access to funds if they do not speak English or have advanced degrees.
4. Capacity-building is lacking
Capacity building programs for entrepreneurs to receive training and access to funding are plentiful, but similarly limited to a global elite. The Unreasonable Institute is a rare exception. Additionally, there is a need to explore methodologies that will respect community leadership models already in place, rather than asking communities more accustomed to collective structures to adopt Western business models.
Ideally, the entrepreneur would do more leading from behind than carrying the torch his or herself.
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5. Lack of community organization
Finally, there is an urgent need for capacity-building programs to integrate a broader understanding of community organizing alongside traditional business education. The entrepreneur indeed has a crucial role to play, but ideally would do more leading from behind than carrying the torch his or herself.
Signs of hope—innovative impact investment that ensures assets stay in communities. At the same time that I see the potential greenwashing in the impact investment industry, I am deeply encouraged by the emerging group of entrepreneurs and investors who are finding ways of placing community needs first.
Innovative impact investment ensures that assets stay in communities. Tweet This Quote
Reflecting broader trends in the establishment of the solidarity economy globally, I see the emergence of what I call transformative finance. Key tenets of projects supported by transformative finance are as such;
- Projects designed, managed, and owned by those affected by the projects
- Local assets that support long-term sustainable development on the community’s own terms
- Projects designed to add, rather than extract value from communities
- A balance of risk and return between investors, entrepreneurs, and communities
Transform Finance projects are thoughtful about how to engage communities not just as producers or consumers, but as leaders and change agents. They create explicit ownership structures that reflect this appreciation and intention. In their structural makeup, they create mechanisms of direct accountability to the communities they serve.
They also ensure that productive assets remain community-owned and that the use of those assets is determined by the community for continued development. These enterprises are still often led by dynamic entrepreneurs, but in these cases they see their role as community organizers rather than top-down leaders.
Transformative finance happens when projects are designed to add, rather than extract value from communities. Tweet This Quote
One such leader is Brendan Martin. He is the founder of The Working World, an organization based in Argentina, Nicaragua, and New York, providing innovative financing for worker-owned co-ops based on a co-determined business plan and revenue share that ensures value created stays primarily within the community. Over the past eight years, they have recycled more than $1.2M into 600 investments, with a 98% repayment rate. The Working World raised capital from a number of investors (including a Toniic member) to finance a sustainable green windows cooperative in Chicago.
It’s the efforts of founders like Brendan that serve as a beacon for the direction entrepreneurs and investors need to go in order to transform the world of impact investing.
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A version of this post originally published on UNREASONABLE.is in December of 2012. It has been updated and reposted to inspire further conversation.