BOOK REVIEW: Doing well by doing good

Real Impact: The New Economics of Social Change, by Morgan Simon

IT IS fair to assert that the “free-market-plus-charity” model (make lots of money and donate some) is failing to produce global prosperity and well-being.

Here is where “impact investment” comes in. This is the practice of investing not just for profit, but also for social benefit. It is a trillion-dollar trend most people have never heard of. Impact investing is the opportunity to make sustainable social improvements, explains the author, Morgan Simon, herself heavily involved in this combination of investment and doing good.

With trillions of dollars migrating toward positive social and environmental purposes, we have the possibility of mitigating the debilitating, inter-generational effect of poverty, inequality and powerlessness. And all through changing only the role of capital in society.

Real Impact is inspirational and a guide to fostering world-changing impact for the many still not benefiting from a free market. It is a way to use money to build a new economy, leveraging the traditional practices of commerce, trade, and investment to replace the poverty, inequality and powerlessness of communities across the globe.

Many would assume that impact investment is very much like a ‘houseboat’. Not a great house and not a great boat. This book argues cogently that it doesn’t have to be that way.

Real Impact focuses on investment with integrity and accountability, in a way that genuinely solves problems for the long term. There is, after all, no end of accounts of failed investment in social upliftment that amounted to nothing at best, and greater harm at worst.

Bridging social justice and impact investment always begins with the best of intentions, but these intentions need to be channelled so that both social justice and investors’ interests are served.

In South Africa we have mature activists who share a deep understanding of the costs of having no interventions to solve our social problems, coupled with a vision of what social and environmental harmony might look like.

We also have an experienced and sophisticated investment community, who know how to bring together large amounts of capital and effectively leverage it towards a goal. This is an incredibly powerful and underutilised combination for creating a more generative and just world.

It provides an opportunity for the private sector to convert the economy into a tool that works for all of us, and is an effective mechanism of change for the people and communities left behind for far too long.

Simon offers the example of the world’s most generous nation, the US, where foundations give away about $46bn each year! But when one considers that $196trn circulates in the global economy every single day, “it’s as if there were an oil spill covering 4,268 square miles of ocean, and you have been provided 1 square mile’s worth of paper towels to try and mop it up. Good luck with that,” she notes.

Attempt to align money with values

Impact investment is an attempt to align money with values. It is the practice of selecting for-profit investments, with a keen awareness of the social and environmental outcomes of such investments. This way, using the US example, rather than hoping the $46bn spending of philanthropy will permanently solve social injustice, we can leverage the $196trn that circulates in the global economy every day for social justice causes.

The origins of impact investment can be traced back to the investment policies of the Quaker community, who refused to invest in the slave trade in 1758.

“From a micro perspective, even if you excluded externalities, and just focused on financial track records, study after study has shown that impact investments have been able to outperform the market with lower levels of volatility,” claims the author.

In 2010 J. P. Morgan published a report entitled ‘Impact Investments: An Emerging Asset Class’, projecting that the impact investment industry was primed to produce up to $667bn in profits over the next decade.

This, in effect, means that one can do well by doing good.

Thinking that the free market can solve social problems is anathema to many on the left. However, to consider impact investing fairly, we need to accept the fact that commerce generally is a neutral tool, designed to take resources and turn them into more resources.

Two comparative case studies

Consider two simple cases that serve as examples. In one a local non-profit organisation gives free tractors to an agricultural community in rural Ghana. To receive money to maintain the tractors and purchase seeds, the organisation must petition someone in the donor’s office in New York. Not an atypical situation.

In the second, an investor and the community in Ghana work together to figure out the appropriate business model for farmers. How much will tractors increase their productivity, and thus how profitable can they be? They conclude that the purchase of tractors makes economic sense, and then purchase them through a loan.

The repayment of the loan requires having an accounting system, which also helps the farmers to better manage their cash flow. In five years, the loan is paid off, and the farmers are earning enough to buy their own inputs. The investor goes off to fund another community.

In case one, there is no positive impact at all in the short term. In case two there is a long-term, systemic outcome: the transition of decision-making, skills, and assets from the hands of a few to the many, and a new dynamic is set up for the community, producing a much more balanced society.

Will impact investment produce a return at market rate, or only below? Perhaps the question should be: what would actually be a reasonable return that would create long-term benefit for all?

It is the largest pools of capital - endowments, long-term investment funds and the like - that are best able to think in this manner. Through their heft they can have the biggest positive impact. Little wonder that they are becoming the focus of impact investors.

Impact investing begins by defining the impact for the beneficiaries of the investments, equally with the investors and entrepreneurs. To avoid ‘impact investment’ replicating the errors of top-down charity, the author has formulated three principles for an investment to have real impact.

These are: engage communities in design, governance, and ownership. Add more value than you extract. Fairly balance risk and return between investors, entrepreneurs and communities.

This book is a great start to a powerful way to address seemingly intractable problems that affect all in a society, not only the poor.

Readability:   Light ---+- Serious
Insights:       High -+--- Low
Practical:       High -+--- Low

  • Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Executive Update. Views expressed are his own.

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