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.

Part I: the Financial Crisis as Moral Crisis

What went wrong in the world of finance? Why did so many CEOs take such huge risks? Why did so many directors engage in fraud? A detailed analyzis of the financial crisis and the accounting scandals goes beyond the objective of this chapter. But in order to judge whether social enterprises and impact investing embody a fundamental rethinking we have to understand some of the main characteristics of the financial crisis and the different accounting scandals. Many books have been written on these, but I will base my analyzis on three authoritative sources: the documentary Inside Job about the financial crisis, the book Too Big to Fail about the fall of Lehman Brothers and its consequences, and the book The Smartest Guys in the Room about Enron.

In The Smartest Guys in the Room: The Amazing Rise and the Scandalous Fall of Enron, Bethany McLean and Peter Elkind provide an inside view. It starts in 1984 when Ken Lay becomes the CEO of Houston Natural Gas and ends with the collapse of Enron in 2001. Along the way it describes the development of new financial products; the method of mark-to-market accounting that led to overrating; the fraudulent financial constructions of hiding debt in subsidiary companies; the corporate culture of vicious competition; and the hubris of its main characters. Finally, it tells the story of an enterprise that abandoned its roots, which lay in providing society with good services.  Enron is not an isolated scandal but a "symptom of a system that fails on all points".

The international bestseller Too Big to Fail by Andrew Ross Sorkin gives an inside view of Wall Street and the bankruptcy of the Lehman Brothers investment bank. It reveals what happened behind closed doors and describes the actions of the leading figures in this financial drama. It tells the story of the "fallibility of people who thought they themselves were too big to fail". Sorkin provides an in-depth insight into their personalities, their hunger for power and their greed.

The 2010 documentary Inside Job by Charles Ferguson provides a staggering report on financial malpractices. It tells the story of new financial products with large risks that drove companies, shareholders and customers to the abyss. Deregulation of financial service industries led to high-risk investments with customers' savings and to large-scale lending, where in some cases the leverage ratio of lending exceeded thirty times the assets of a bank; or in the case of Iceland, loans taken out in excess of ten times the size of the country's GDP. These were margin levels comparable to the prelude of the crash of 1929. It shows that deregulation enabled the creation of a chain where all risk was passed on and exposure was maximized, but no one was responsible: the homeowner's mortgage and debts to the local lender were bought up by large investment banks, who bundled debts to create derivative investment products.

These products in turn were sold to investors, but also insured, swapped and passed on as new insurance investments. The same investment bank would simultaneously sell a product to clients while betting on its failure. Very few understood the complexity of this increasingly unstable system, in which CEOs and traders rewarded themselves with short-term premiums and bonuses while passing losses on to others. They lost sight of long-term risks and isolated themselves from the wider economy, society and even their own companies. They eventually gambled not only with their clients' and investors' funds, but also with their own firms and the entire financial system. The cover of the DVD ironically notes that the film cost over $20,000,000,000,000 to make!

"The core of the problem of the financial crisis is the single-minded pursuit of shareholder value. As a result, banks have abandoned their core objective: to fund enterprise". – Pieter de Rijcke

We can draw on the so-called 'practices model' to understand the financial crisis and accounting frauds. This model was developed by the philosophers Jochemsen, Glas and Hoogland.  A big advantage is that it encourages us to understand professional practices and institutions from three different perspectives: the intrinsic nature and purpose of the enterprise (structure), its roots in society (context), and the basic beliefs that motivate its actors and their culture (direction).

Structure

The structure of a practice refers to the intrinsic nature of a practice and the formal aspects of an organization. It has to do with the nature of the primary process, its organizational structure, procedures and code of conduct. The discussions induced by the crisis and the accounting scandals focused on the 'rules of the game': statutory regulations, internal procedures, and supervision. Better rules and more supervision are required to prevent new crises and scandals. Consequently, in the whole of the Western world accounting principles for business and the regulation of banks are being extended and sharpened, and supervision has been intensified.

In general, I agree with the call for more rules and supervision. However, this call can easily lead the conversation away from the core issue-namely, that practices and their structures primarily concern their 'internal goods', 'essence' or 'excellence', as defined by the philosopher Alasdair MacIntyre, who in turn draws upon Aristotle.  The idea of 'internal goods' refers to the values that are realized specifically by those practices.

The internal goods concern the legitimacy of an enterprise's 'license to operate' or 'right to exist'. The internal goods of healthcare are cure and care for patients, and the internal goods of banking are financial services for citizens and enterprises. For Plato in The Republic, the essence of a physician is the extent to which he is a healer. As a corollary to his work, the doctor makes money; but being a money-maker is not an essential part of the definition of a physician.

The idea of 'internal goods' is contrasted with the idea of 'external goods', which are those goods that are external to the aims realized by the practice, e.g. prestige, status and money. Being a rich or famous doctor is not a part of the essence of the practice of medicine, which serves to benefit the patient. The private benefit to the physician is the external good.

The idea of 'excellence' emphasizes that practices are not about average performance but about excellent performance according to the aim of the pursuit and the standards in the sector. MacIntyre emphasizes that the realization of excellence in internal goods requires virtues that are characteristic of that practice. That means, in his modern reinterpretation of Plato's and Aristotle's philosophy, 'excellence' and 'virtues' are directly related.

Additionally, in the ethics of Aristotle the idea of 'happiness' (eudaimonia) is not a short-lived emotion, but a term that implies a lifelong 'living well' and 'faring well' according to fulfillment of the potential and highest abilities of human nature. The ideas of 'internal goods', 'excellence', and 'virtues' clearly show where business institutions failed. The focus was shifted from 'internal' goods to 'external' goods. The primary purpose of a business is to provide excellent goods and services, to which profits are a corollary. Losing sight of the primary purpose means replacing excellence with profits, and reducing virtues to targets. In addition, long-term sustainability was replaced by short-term focus on profits and bonuses. Robert Solomon describes this financial focus as 'abstract greed' because in his view it has nothing to do with 'real wants, real needs, or real expectations'.

Context

The context of a practice refers to the influence of the environment on professional practices and the organizations in which they are embedded. It refers to the network of stakeholders that exert influence on the organization.

In business ethics there are two approaches with respect to stakeholders. Milton Friedman argues that business corporations have only one social responsibility: to increase their profits. Consequently, a corporate executive should focus on only one stakeholder: the owners or shareholders. Friedman believes in the free market, denies social responsibilities other than increasing profits, understands society as a 'collection of individuals' and of the various groups they 'voluntarily form', and states that business has to stay 'within the rules of the game' (legislation). On the other hand, R. Edward Freeman argues for a broader stakeholder approach. In his view, stakeholders whose interests are affected by an enterprise have a right to make a claim. That means that a corporate executive has to balance the multiple claims of (conflicting) stakeholders.

He acknowledges that business has a normative core that reflects 'liberal notions of autonomy, solidarity, and fairness as articulated by John Rawls, Richard Rorty and others'. The financial crisis and accountancy scandals show that the Friedmanian approach dominates in many organizations. From a philosophical point of view, a 'double reduction' takes place. First, the broader societal context of stakeholders is reduced to shareholders. Second, the interests of shareholders are reduced to short-term financial interests.

Direction

The direction refers to the basic beliefs that underlie the professional practices and institutions in which they are embedded. Inside Job, Too Big Fail and The Smartest Guys in the Room clearly show that many financial institutions and industrial corporations believe in the idea of the free market, deregulation by governments, maximization of profits, and fierce competition. John Gray goes one step further. He describes the present business climate as a utopia that spurs its followers to a blessed future and legitimates any action to realize that future.  John Cassidy describes the rising influence of what he calls 'utopian economics' that is blind to how real people act and denies the many ways an unregulated free market can produce disastrous unintended consequences. From a philosophical point of view, I would like to emphasize the direction component of a practice in general and the values and beliefs that underlie organizations in particular. Worldviews, values and basic beliefs not only determine the way we observe the world but also guide our understanding of reality and even steer the way we shape the world. The idea of the financial world as a 'professional practice' was very helpful in analyzing the financial crisis and its features. I draw three preliminary conclusions.

First, regarding structure, the financial industry has lost sight of its primary calling. This industry focuses its attention on maximizing turnover and profits instead of delivering excellent financial products that serve customers and contribute to society's long-term prosperity.

Second, regarding context, the financial industry has lost its roots in society. It concentrates its efforts on serving the financial interests of shareholders instead of the financial and non-financial interests of all stakeholders.

Third, regarding direction, the financial industry is in the firm grip of the ideology of the free market. A worldview or ideology functions not only as a guide for action but also as a pair of glasses with which to observe society and to legitimate its ideas. The analyzis of the financial crisis and accounting scandals showed that key players in the business and financial world were profit-driven, focused on the interests of the shareholders, believed in the free market, and rejected control by the government.

Incident or Symptom?

"The financial crisis finds its origin in 'self-interest'. The financial world and the business community had created their own world. They forgot that they were part of a larger whole. They forgot that 'shareholder value' and 'profit' are only means to reach societal goals (...) Short-term profit was at the expense of long-term sustainability (...) Perhaps the most devastating development was a new split between the public and the private. The public sector became responsible for the common goods and so the private sector could narrow its focus to individual needs. This new split made the public sector into a 'cost area' and the private sector a 'profit area'. All the problems in the field of common goods (social security, healthcare, environment) can only be solved by cooperation between the public and the private sectors". – Paul Baan

"There is a big difference between enterprises quoted on the stock exchange and enterprises that are owned by families. Generally, the former have a short- term orientation and the latter a long-term orientation". – Pieter de Rijcke

How should we understand the problems in the financial world? Are they limited to this sector or are they a symptom of a wider problem? There is a lot of evidence that the problems of the financial sector are not an isolated incident but a symptom of a more general societal problem. We noted that the financial crisis was preceded by a number of accounting scandals in the industry, revealing that fraud, violation of laws and the disregard of the justified interests of stakeholders were widespread. Another signal is the large number of environmental disasters caused by major companies who had cut corners on safeguards, such as the Gulf of Mexico oil spill (BP), the Niger Delta (Shell), Bhopal (Union Carbide), Love Canal (Hooker Chemical), Minamata Bay (Chisso Corporation), Exxon Valdez (Exxon), and Three Mile Island (General Public Utilities Corporation). Although every scandal, fraud and disaster has its own characteristics, analysis shows that in nearly every case maximizing short-term profit while neglecting the justified interests of stakeholders can play a dominant role.

Critical scholars warn that the ideology of a market economy penetrates other sectors of our society. For example, in What Money Can't Buy: The Moral Limits of Markets, Michael Sandel argues that market values are penetrating every aspect of our lives. He illustrates by a number of examples how personal and social goods like health, education, family life, nature, art and civic duties, as well as national security and public safety, are being turned into commodities that can be priced and traded, corroding their intrinsic meaning and value. He signals that Western society "drifted from having a market economy to being a market society".

Sandel's warning is confirmed by Michael Porter and Elizabeth Olmsted Teisberg in the field of healthcare. In Redefining Health Care: Creating Value-Based Competition on Results (2006), they present an analysis of the healthcare system in the USA. They note that healthcare has lost its primary calling: it is not focused on value for patients. Further, they show that healthcare institutions concentrate on their own financial outcomes instead of the interests of all stakeholders involved. Consequently, they plead for a radical reorientation of healthcare. They write: "Ironically, the solution to the crisis lies in refocusing the healthcare system on health".

The problems in the financial sector are not an isolated incident but a symptom of a wider societal problem in which people are viewed instrumentally. If people are not considered ends in themselves, but only as a means to profit or prestige, then it leads to the three fundamental problems that underlie the financial crisis: a loss of the primary calling of businesses to provide excellent goods or services; a loss of societal embedment; and a loss of non-financial values.

To return to Plato's example of the physician: the loss of his primary calling will reduce the role of the physician to that of technician and moneymaker, in which the patient is a means to serve the doctor or the business that is the hospital. In a sense, this instrumental treatment of the patient also leads to a loss of identity of the physician, who would have ceased to focus on the inherent excellence of the art of medicine. In the case of businesses, the sacrifice of excellence for short-term profit can lead to indifference, a loss of identity of the company, and ultimately to collapse.

If companies lose the connection to the society in which they are embedded, they will neglect their responsibility to all stakeholders except the share-holder. Banks judge people by abstractions without knowing them; companies are indifferent to the wider society in which they operate, and do not see the connection between their own profitability and the wider social and public good of a prosperous society.

These are related to the third problem: the loss of non-financial values, when the drive for profit erases any sense of justice. In other words, the financial values that govern the economy (economic prosperity) and the social values that build society (public good) are disconnected. These three losses are the long-term moral causes of the financial crisis and accountancy scandals that we have described above.

In the next section, I consider six initiatives by social enterprises and impact investors, who are driven by a concern for the public good and combine business objectives with the aim of a sustainable social impact. The objective is to investigate whether these initiatives and organizations provide a fundamental solution to the problems revealed by the financial crisis.

Part II: Social Enterprises and Impact Investing

Social enterprises have the potential and capability to reconnect financial values with the public good. It is possible for impact investors to address pressing societal problems that are not addressed effectively either by the government or by the market.  If our analysis of the financial crisis makes sense, then social entrepreneurs and impact investors focus on excelling in adding value to society ('internal goods', 'excellence'); recognition of the justified interests of all stakeholders; and values like sustainability, stewardship, justice and peace.

In this section we will consider six varied examples of social enterprises and impact investing in the areas of finance, sustainability, health and agriculture. Each of these is an example of a profitable business, but also motivated by a desire to make a lasting positive social impact: Grameen Bank (microfinance) and Tendris (sustainability), two projects by the Noaber Foundation (healthcare) and two by DOB Equity for Africa (food). Paul Baan founded and leads the Noaber Foundation; and Pieter de Rijcke's family founded the Stichting De Oude Beuk, renamed the DOB Foundation, which trades under DOB Equity for Africa. With pioneering initiatives, they put social ventures and impact investing on the map in the Netherlands. They also took the initiative of endowing a chair in Social Venturing Economics at Tilburg University in the Netherlands.

Grameen Bank and Tendris

The world's most famous social enterprise is the Grameen Bank, founded by the Nobel laureate Muhammad Yunus. He launched a research project in Bangladesh to study how to provide banking services to the rural poor. This research resulted in a bank that delivers small loans (microcredits) to the impoverished without requiring collateral. A group-based approach is applied to use pressure from the other members of the group to stimulate a responsible use of the money and to ensure repayment. The Grameen Bank gives small loans to the poorest of the poor, many of them women. In October 1983 the Grameen Bank was authorized by national legislation to operate as an inde- pendent bank. In the period from 1976 to 2009, the cumulative disbursement was $8.7 billion with nearly 8 million borrowers, of whom 97 per cent were women. In the year 2009, the total disbursement was $1.15 billion, with an end-of-year outstanding loan book of $790 million. The loan recovery rate is an impressive 96.7 per cent.

The second example is Tendris, established in the Netherlands in 2002 by a group of entrepreneurs concerned with sustainability. Tendris believes that the big issues of our era like climate change, depletion of raw materials, hunger and drought can be solved by thinking and acting differently. Tendris also believes that people can be invited to adopt a sustainable lifestyle by offering real solutions that increase the quality of life by using a commercial approach. Its mission is 'to make the world a better place' by offering 'relevant products that contribute to this way of life'. Tendris has established among others Lemnis, a company producing LED lamps, and Innolumis, a company that offers public lighting solutions. One of Tendris's new projects focuses on pumps based on disc stream technology to develop less expensive and more fuel-efficient pumps for developing countries. Its mission focuses on supporting the development of commercially viable and environmentally sustainable solutions.

The Noaber Foundation: VitalHealth Software and the Netherlands Institute for Prevention and Early Diagnosis

The Noaber Foundation pioneered impact investing in the Netherlands, and aims to achieve structural transformations in healthcare by encouraging innovation, especially in the nexus of healthcare and information technology. The objective is to contribute to sustainable healthcare, in view of demographic changes and the increase in costs. Our healthcare system's current activities are mainly triggered by the occurrence of symptoms. Our knowledge of risk factors that lead to life-threatening diseases is increasing, and preventive measures to influence specific risk factors have been shown to prevent or slow down relevant disease processes.

The increased acknowledgement of the importance of risk reduction and disease prevention has renewed a focus on developing effective prevention and health maintenance strategies. The Noaber Foundation was closely associated with the establishment of two social enterprises: VitalHealth Software and the Netherlands Institute for Prevention and Early Diagnosis (NIPED). Together with the Mayo Clinic, the Noaber Foundation launched VitalHealth Software in 2006. The key idea was to combine the best medical expertise of Mayo Clinic with the information technology and entrepreneurial experience of the Noaber Foundation by developing cloud-based eHealth solutions for managing chronic diseases such as diabetes, chronic obstructive pulmonary disease, heart failure, cancer, Alzheimer's and depression. Its headquarters is in Ede, the Netherlands, and it has locations in the US, India and Germany.

VitalHealth defines itself as an impact-driven enterprise. The idea of 'im- pact' determines its mission, vision, business processes and reporting. VitalHealth defines its mission as 'improving the health of millions of people through eHealth solutions'. This mission is made concrete for patient empowerment (2016 target: 10 million impacted patients), medical professional empowerment (2016 target: 50,000 impacted professionals), and number of diseases (2016 target: 10 impacted diseases).

Social Impact Indicators are reported quarterly and are part of the bonus and incentive system at all levels. Such a social return on investment calculations plays an increasingly leading role in sales pitches and development priorities.

The Netherlands Institute for Prevention and Early Diagnosis was established in 2004. It has forged an alliance of physicians, scientists, social investors, corporate partners and government agencies to develop and launch an evidence-based knowledge and decision support (KDS) system for personalized prevention. This system was marketed under the name PreventionCompass and developed in accordance with stepwise care principles and the Chronic Care Model. It is based on evidence-based algorithms, test and treatment thresholds, scientific guidelines and best practices.

To raise awareness and inspire individuals to take specific actions to pro- mote their health, design and communication is based on behavioral frame- works, including motivational interviewing, protection motivation theory, stage theories and social cognitive theory. The PreventionCompass links a personal risk profile to a tailored health maintenance programme, including self management modules, best-practice lifestyle services and medical follow-up.

The knowledge and decision support system also allows for regional adaptations. It has a modular structure that integrates risk profiling for various chronic diseases, including cardiovascular diseases, diabetes, kidney disease, common mental disorders, chronic obstructive pulmonary disease, musculoskeletal disorders and some frequently occurring cancer types for which early detection is meaningful. The risk profiling includes a web-based questionnaire (medical and family history, lifestyle, motivation, personality), biometrics (blood pressure, body mass index, waist circumference) and laboratory evaluation of blood, urine and feces. The application of the PreventionCompass supports the following goals:

The PreventionCompass was first implemented and evaluated in the occupational health field where it has been shown to be feasible and to stimulate individuals to undertake health-promoting action resulting in a healthier lifestyle, a decreased cardiovascular risk profile and a 20 per cent reduction in absenteeism.  In 2010 the NIPED developed with a number of medical organizations the so-called PreventionConsult.  This is a web-based health risk assessment of cardio-metabolic risk and lifestyle management. 33 A large- scale feasibility and cost-effectiveness study of primary care was carried out.

This initiative was received with a lot of enthusiasm. However, the times appeared not to be ripe for preventive healthcare: the turnover of the enterprise did not meet expectations. The worsening economic conditions appeared to be the last straw: turnover dropped further and the company went bankrupt in May 2013. At the same time, a new marketing strategy was developed and new implementation plans were made. The Noaber Foundation was one of the impact investors who made a relaunch of this important social initiative possible. The new approach is gradually beginning to pay off: the company is now making a profit.

DOB Equity: Tanga Fresh and Prothem

DOB Equity is an independent, long-term investor in companies in East Africa.  It invests in companies that will contribute positively to a more social and sustainable society while delivering long-term profitability. The fund is evergreen, with all proceeds from investments reinvested, making it a true long-term growth partner to portfolio companies. Here we highlight two of DOB Equity's Africa projects: tea growing in Burundi and milk production in Tanzania. Both cases show how the programmes provide stability and continuity for smallholders who were otherwise at the mercy of either state-based or private monopolies. This cup of milky tea is designed to change the social and economic context.

In Tanzania, the climate is divided between the wet season and the dry season: milk production is abundant in the wet season and low in the dry. Together with others, DOB Equity invested in Tanga Fresh, the main dairy processor in Tanzania, founded in 1996. Tanga Fresh is co-owned by Tanzania Dairy Cooperative Union (TDCU), a cooperative of more than 4,000 small- holders who are guaranteed that their milk will be bought by Tanga Fresh whatever the season. This continuity guarantees the income of smallholders, which allows them to invest with an eye on the long term. New mechanisms have emerged, with auctions allowing farmers to buy a cow on credit while paying it off with milk earnings.

Tanga Fresh has built and improved the whole supply chain of milk from the Tanga region production area to market in the capital, Dar es Salaam. The DOB Equity investment was used to develop a new processing plant with a capacity of at least 50,000 liters per day. The combination of ownership by the supplying smallholders and a private investor, in combination with independent management, was the key to the success of Tanga Fresh. There is a relationship between revenue, profits and the price of milk: when profits rise, these can be passed on to the farmer. And the farmers, in turn, are shareholders in the company; they share in the profits and participate in decisions. The impact of this cooperative has been great: the amount of money paid to smallholders in the Tanga region increased from TSH 2,800,000,000 (3,000 smallholders) in 2007 to TSH 9,500,000,000 (4,500 smallholders) in 2013.

Prothem is a private company in Burundi that buys, processes and sells tea, procuring it from over 10,000 smallholders and providing them with agricultural advice as well as payment and extension services. Prothem existed before DOB Equity became involved and was the first privately owned tea factory in Burundi to enter into competition with government-owned plants. Its example of paying its farmers market prices has led to a doubling of income compared to what government-owned tea factories were paying. This combination of better business practice and increased transparency set a positive example that made a nationwide impact: now all government-owned factories also pay market prices to their smallholders.

Today, DOB Equity is focused on further improving efficiency, quality and the implementation of automation in payment-processing mechanisms and operations, which will also be carried out by government-owned tea factories. It is also working on achieving higher quality certifications, which in turn will enable a greater revenue to be passed on to farmers.

Prothem and Tangafresh provide stability and continuity by guaranteeing purchase and a fairer distribution of revenue. Both cases address the legitimate interests of all stakeholders - investors, entrepreneurs, government and farmers. The pitfalls of a monopoly market that would leave smallholders at the mercy of the state or a conglomerate are avoided - whether in a public monopoly where too much money disappears into the pockets of the civil service, or a private monopoly where the maximum is squeezed out for the benefit of a few.

The very nature of milk and tea means that they have to be moved fresh to the processing plant within four hours of harvesting or milking. This ensures a continual stream of process, and a continual stream of income to the farmers. In the case of durable products like coffee or chocolate, large quantities are produced and hoarded and a buyer appears once a season to make a large, market-disrupting purchase. Prothem's tea is processed continually and the entire sector benefits. DOB Equity is working to enable its produce to enter the European market.

Part III: Evaluation: Impact Investing and

The social enterprise versus the profit-driven organization

We considered the financial crisis and its moral causes in the loss of three elements: primary calling, societal embedment, and non-financial values. We next considered six cases of social enterprises that placed the social impact and public good at the heart of their business strategy. The moral and economic problems that caused the financial crisis do not occur here. Social entrepreneurship is a very young field that has not yet stood the test of time: it is too early to say whether it presents universal solutions. The specific character of social enterprises (and impact investments) comes into focus when they are compared with profit-driven organizations.  The main characteristics of a profit-driven organization as revealed in part I are:

1. External goods. Profit-driven organizations focus on external goods like profits. Excelling in business does not aim to excel in the values that are inherent to the business: the only objective is to increase profits.
2. Shareholders. Profit-driven organizations pursue the interests of one stakeholder: the shareholders. The justified interests of other stakeholders are only taken into account when they contribute to the interests of the shareholders or when they are legally required.
3. Worldview. Profit-driven organizations advocate a worldview that considers the individual as both starting and end point, emphasizing the free market and rejecting regulation by the government. If these elements are considered the most important, it can lead to the three losses of direction, context and non-financial values.

Social enterprises and impact investors differ fundamentally with respect to these three characteristics. First, the objective of social enterprises is to realize the internal goods that are inherent to a practice. The Grameen Bank focuses on good financial services for the poor, Tendris on sustainable solutions in poor and rich countries, the Noaber Foundation develops long-term healthcare services mainly in Western countries, and DOB Equity invests (inter alia) in the production of high-quality food. In the view of social enterprises the legitimacy of their 'license to operate' or 'right to exist' lies in the added value for the societies in which they operate: a positive impact on the lives of individuals, families, villages and rural areas.

One of the main challenges in this field is to make the impact of a social enterprise transparent and explicit. This requires that we understand the micro-mechanisms and pre-existing bonds that underlie the success and impact of social enterprises. For example, the Grameen Bank is very successful in granting microcredits to impoverished people without requiring collateral. The 'secret' of this success is a group-based approach that ensures a responsible use of the money which guarantees repayment of the loan. DOB Equity is very successful in East Africa with Tanga Fresh and Prothem. The most important factor in its success was the existing local cooperation between farmers and the fact that the farmers became co-owners of the company. When these micro-mechanisms are understood, transparency about the impact of social entrepreneurship can be created. One way is the so-called social return on investment (SROI). This method makes the social impact of an initiative explicit, determines the indicators that characterize this impact, and translates them into financial parameters. For example, a social return on investment calculation for the main projects of VitalHealth Software showed a social return ratio of two to five. That means that every euro invested in this cooperative resulted in a total social impact of between two and five euros. For the PreventionCompass of NIPED a SROI ratio of 3.2 was calculated.

Second, social entrepreneurs believe that every stakeholder has justified interests that have to be addressed. They also believe that cooperation with every stakeholder is required to develop solutions that work. The projects of the Noaber Foundation and DOB Equity are examples in which different stakeholders are involved to address innovation in healthcare and food production. The role that stakeholders play also comes to the fore in the process to determine the impact of an initiative. In the social return on investment method, not only is the contribution of every stakeholder to the solution valued, but the impact of the initiative on every stakeholder is also calculated. For example, the calculation of the social return of the PreventionCompass of NIPED showed that the employer benefits greatly from this initiative. It is important to note that involvement of stakeholders and maximizing societal impact is a normative characteristic of the idea of the social enterprise and impact investing, and is in agreement with the stakeholder approach and the idea of relational economics.

Third, social entrepreneurs and impact investors do not believe that the free market is the highest value, but pursue social and environmental values. For a PhD dissertation, Henk Kievit interviewed social entrepreneurs and impact investors and found that their activities were inspired by religious beliefs, the good example of their parents, or the feeling of a need to put something back into society. These inspirations drive them not only to pursue social and environmental objectives (first characteristic), but also to involve relevant stakeholders (second characteristic). Additionally, these inspirations motivate social entrepreneurs and social impact investors to accept a below market-to- market rate. The whole field of social entrepreneurship and impact investing shows that the world of business and financial services is not morally neutral, but is driven by a certain worldview and motivated by fundamental values.

The social enterprise and the idea of corporate social responsibility

Corporate social responsibility is now a catch-all term that recognises the societal responsibility of companies. The main idea is that companies have to consider the impact of their actions on society and should pursue the welfare of society as a whole along with their own interests. There are four components:

1. Economic responsibility: be profitable.
2. Legal responsibility: obey the law.
3. Ethical responsibility: be ethical. An obligation to do what is right, just and fair, and to avoid doing harm.
4. Philanthropic responsibility: be a good corporate citizen. Contribute resources to the community and improve the quality of life.

Another well-known version of corporate social responsibility is the so-called Triple-P approach as formulated by John Elkinton. In this approach social responsibility is summarized in three parameters: People (social justice), Profit (financial returns) and Planet (ecological limits). The basic idea of this approach is that a sustainable development of our society requires a social, economic, and environmental bottom line. In the last decade these ideas of corporate social responsibility have gained a firm footing in the business world. Many enterprises publish a corporate social responsibility report that covers its various responsibilities. In addition, several institutions publish lists of the ten, fifty or hundred organizations they rate as the most socially responsible.

The ideas of social entrepreneurship and corporate social responsibility have a lot in common. In both approaches economic, social and environmental values are acknowledged. In both approaches it is believed that the responsibility of the organization goes beyond legal regulations and that the legitimate interests of stakeholders have to be taken into account. The main difference between these approaches is that social entrepreneurship is first and foremost concerned with social and environmental objectives, whereas corporate social responsibility aims for a balance between social, environmental and economic values. This difference is (partly) rooted in the worldview of the main participants. For social entrepreneurs profit is a 'tool' to achieve the mission of an organization and a condition of gaining access to the capital of impact investors. Impact investors will accept a below-market rate when social or environmental goals have to be met. Corporate social responsibility, on the other hand, defines profit as one of its objectives and the commitment of the shareholders and investors depends on this objective; generally, a below- market rate will not be accepted.

Social enterprises, impact investing and the future of global society

Social entrepreneurship and impact investing have gained significant momentum in recent years. Estimates indicate that impact investing can become a new asset class or investment style that will grow to $1 trillion by 2020. In the same period, the total amount of financial assets will grow to about $900 trillion. This means that by 2020 impact investing will still only represent 0.1 per cent of all financial assets. However, the impact of social entrepreneurship and impact investing may be much larger than suggested by this figure.

The most important reason is that these approaches have a larger influence on local and international development than the mere size of the outstanding loans would suggest. Why can impact investing have a larger influence than its size suggests? Maximilian Martin states that impact investing is a sufficiently proven concept that governments can use as leverage to change the  world. He sketches four fields of global problems or 'megatrends', in which social entrepreneurship and impact investing will play a key role:

1. Massive pent-up demand at the bottom of the pyramid, i.e. the 4 billion people with annual incomes below $3,000 in local purchasing power.
2. Driving green growth. Environmental risks, shortage of raw materials, and ecological scarcities threaten humanity. A changeover to a green economy is required to support sustainable growth.
3. Reconfiguration of the welfare state. In many countries the welfare state is threatened by financial problems. The expenditures of government on healthcare, education, and welfare are higher than the revenues. A reconfiguration of the welfare state is required to guarantee a sustainable future.
4. Emerging 'lifestyles of health and sustainability' (LOHAS) consumers. In many countries, the awareness of consumers is growing that a paradigm shift is required with respect to lifestyle, health and sustainability. LOHAS consumers are willing to spend more on products designed to be environmentally sustainable and socially responsible.

The social initiatives presented in Part II all belong to these categories: the Grameen Bank, DOB Equity at the bottom of the pyramid, Tendris in green growth and LOHAS consumers, and the Noaber Foundation in the reconfiguration of the welfare state and LOHAS consumers.

Martin concludes that businesses shifting sustainability to the core of their business model "will see their ability to create value enhanced" and countries with a coherent and realistic embrace of impact investing will "see the lives of their citizens improved". It goes without saying that investments in these fields have a big impact on the development of the global world. Their impact is much larger than might be expected based on the amount of money involved. The examples of Grameen Bank, Tendris, the Noaber Foundation and DOB Equity speak volumes.

Conclusion

The financial crisis has provoked a thorough assessment of the contribution of enterprises and financial institutions to the greater public good and economic prosperity. One of the results of this assessment is a demand for social enterprises and impact investing. The objective of this chapter was to explore the social enterprise and the impact investor against the background of the financial crisis. This is a very promising field but still at an early stage. More research is needed on the long-term viability of these approaches. But it does appear that social entrepreneurship represents a serious attempt to build business on new moral and social foundations.

The first conclusion is that social enterprises and impact investors have a focus on the long term with the intention of solving social and environmental problems. They believe that business principles can address these problems in a financially sustainable way.

The second conclusion is that social enterprises and impact investors embody a new paradigm. They differ from profit-driven enterprises in every aspect: focus, managing shareholders, and worldview and basic beliefs. They differ from the idea of corporate responsibility in their main objectives: social and environmental problems.

The third conclusion is that social enterprises and impact investors may be a key in addressing several difficult problems facing Western society and the world such as the bottom of the pyramid, green growth, reconfiguration of the welfare state, and consumers focused on sustainable behavior. The amount of money involved in this field is relatively low but its impact is expected to be relatively large.

Interestingly, Maximilian Martin shows that the financial returns of impact investments are in fact larger than the financial returns of 'normal' investments. This has a lot to do with the focus on the long term and the sustain- able development of thriving communities. Much earlier, Collins and Porras have also shown that value-driven organizations are - in the long term - more profitable than profit-driven organizations. This data suggests that values, beliefs and fundamental motives make a big difference. It is a challenge for economists and philosophers to understand the mechanisms that underlie this difference - but a sound economic analysis must also learn to look at what cannot be counted.