Impact Investing and Social Renewal

Introduction

The global financial crisis and accounting scandals involving large companies have stimulated a new assessment of the contribution of enterprises and financial institutions to economic prosperity and the greater public good. This has led to the re-evaluation of the relationship of businesses to their stakeholders and to underlying economic structures. It has also drawn attention to the ideas of social entrepreneurship and impact investing. In this chapter we explore these ideas by considering their philosophical basis in light of corporate social responsibility. We present six case studies: Grameen Bank, Tendris, two initiatives by the Noaber Foundation and two by DOB Equity for Africa. These social entrepreneurs and impact investors are distinguished by their social objectives, values and worldview, with a focus on the interests of all their stakeholders. In the next decade, social entrepreneurs and impact investors will grow in number and play an increasing role in global development.

The key factors are idea and vision, mission and strategy, leadership and the window of opportunity.

In 2008 the world economy was shaken to its foundations. The bankruptcies of Bear Stearns and Lehman Brothers marked the beginning of a financial crisis that spread across the world. Many people lost their jobs, large banks went bust, and several countries and cities came close to bankruptcy. The crisis also increased injustice in the world. A price was paid in rich countries by members of the lower classes who lost jobs, savings, pensions and homes; and by poorer countries whose economies collapsed. In retrospect, the financial crisis cannot be seen as an isolated incident. It was preceded by a number of accounting scandals and bankruptcies that indicated that something was going wrong: Waste Management in 1998, Enron in 2001, WorldCom in 2002, HealthSouth in 2003, Freddie Mac in 2003, and the American International Group (AIG), which had its own executive accounting scandal in 2005 and was at the center of the financial crisis of 2008. Since the crisis, many measures have been proposed and executed to restore trust in the financial world, especially in new legislation and additional supervision. Opinions about the causes of the crisis vary.

Supporters of the free market believe that the present market is not free enough. They argue that regulation and interventions by governments and international institutions disturb the market. Others believe that the crisis was caused by flaws in our financial system and that the imperfections have to be repaired. Others believe that the fundamentals of our economy are wrong. They plead for a fundamental rethinking of our present economic order. Even long before the crisis, Christian economists have argued for the development of a new paradigm based on Christian values like solidarity and justice.

The aftermath of the financial crisis opened the door to a thorough assessment of the contribution of enterprises and financial institutions to the greater public good and economic prosperity. In this chapter we focus on one of the results of that assessment: a plea for social enterprises and impact investing. How are these terms defined?

Following concerns in recent decades that philanthropy was leading to dependency without fundamental improvements, the first steps were taken to combine philanthropy with business. This was first called 'active philanthropy', which later became 'venture philanthropy', making charities more business-like. With the introduction of the terms 'social venturing' and 'social enterprise', a greater emphasis was placed on the conduct of business with a positive social outcome. New company and charity structures to this effect are now recognised in the laws of several countries. Today the expressions 'social enterprise', 'social entrepreneur' and 'social business' are fairly well established. From the investor's point of view, different expressions are used: 'impact investing', 'social finance', 'mission-related investments' and 'blended investments'. The term 'impact investing' is used most often today, and we prefer it because it most clearly expresses the intention of investors: to make a social and societal impact. The essence of impact investing is the manner in which it makes a social impact by connecting parties and stakeholders.

Social entrepreneurs and impact investors believe that social goals can go hand in hand with financial returns. Many of them think that the primary objective of an enterprise is to contribute to the public good and view profit as a means to guarantee a sustainable contribution. The Global Impact Investing Network defines impact investing as 'investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return (...) and target a range of returns from below market to market rate, depending upon the circumstances'. This definition shows that social enterprises and impact investors are distinguished by having the intention to generate social and environmental impact with an eye on sustainability and the long term, by accepting short-term returns below a market to market rate. This network is expanding each year and combined assets designated for impact investing are projected to reach $1 trillion by the end of this decade.

The objective of this chapter is to explore the ideas of social enterprises and impact investors with the background of the financial crisis. I would like to answer three questions:

This chapter has three parts, starting with an analysis of the financial crisis. With philosophical considerations about the relationship of business to the economy and society, we consider the financial crisis and the accounting scandals to get a deeper insight into what went wrong. We argue that the problems in the financial sector are not an isolated incident but symptoms of a wider societal problem in which financial standards replace all social values and people are reduced to instruments rather than ends in themselves. In the second part, we consider several case studies of social enterprises and impact investors. In the final part, we examine the nature of social enterprise in relation to the problems that underlie the financial crisis. Are social enterprises a viable solution? We explore the role and potential of social enterprises and impact investors for the future of global development.

Source: Martin Verkerk, https://archive.org/details/breakthrough-innovation-impact/page/n365/mode/2up
This work is in the Public Domain.