What I am Doing Here Part 1: Historical Context and Impact Investing

[This is the first part of a much longer post about what I am involved with here in Ghana. Hopefully, it’s informative and not too long-winded! Again these are my opinions and ideas, not representative of any larger group. Next post I’ll have some pictures and more exciting stuff from my trip to Mole National Park this weekend.]

The world of aid and international development has been in a state of constant flux and commotion since the concept was invented near the end of the Second World War. The idea, namely, that a country or group of countries espoused to have “development” can pack it up and ship it out to places that are determined to need it, has proven extremely resilient and captivating despite an eye-popping history of failure, waste, and incompetence. The reasons why this area has been constantly picked apart, reorganized and reimagined are many, but some of the more important ones include the startling complexity of actually making this idea work, and the fact that everyone seems to have a different opinion about how to approach the issues or their own pet projects and ideas. This seems to lead, invariably, to a constant flow of development trends and fashions that rise and fall like the prices of their silver bullet point solutions.

I won’t attempt to cover the history of international development here, nor am I any sort of expert on the topic, but there have been countless books written, hands wrung, eyebrows furrowed and knickers knotted about what it is, why what happened in the past did not work and what new ideas would make it better.  Part of what fascinates me about this subject, is the multiplicity, dichotomy and contradiction of ideas involved and the fact that, despite the hard work of thousands of passionate people, the billions of dollars thrown at it over the decades, and the intellectual brain juices that have been squeezed into it, it is still hard to call international development a success with a straight face.

Trying to force development on a country or group of people seems to me akin to trying to make a tree healthy by air dropping soil, water and fertilizer on it, giving it periodic blasts of CO2 and UV radiation and showing it pictures of how other trees have grown. The tree already knows how to grow, in fact it has been around for quite a while already, what’s needed more than anything is a healthy environment, time to grow, and the removal of unfair barriers that are holding it back. Instead of poking and prodding it like a well-meaning but clumsy toddler with pudgy fingers, a better approach might be to begin with cleaning up the polluted air and water around it, removing the rocks impeding its roots, and maybe even trimming back some of the overgrown branches of the surrounding successful trees so that a little more sunlight can shine through.

Do not get me wrong, despite my delight in naysaying and cynicism, there have been many positive results, successful projects, and lives changed for the better. And, I wouldn’t be passionately interested and actively participating in this work currently if it was just a voyeuristic car-crash watching pastime that was beyond redemption. What I see is humanity struggling up against the boundaries of extreme complexity and coming to terms with its own deeply embedded systems that we shape and that shape us. Our collective ability to overcome massive hurdles from human rights and justice to poverty and development to climate change and global warming hinges on our being able to work with this complexity and each other.

Development is an answer no one was looking for to a question that still hasn’t been understood correctly. Still, the world keeps on spinning and the logical reductionism that says every problem must have a solution continues to hold fast.  The current iteration of this thinking finds us in the early 21st century having gone through the massive infrastructure projects of the 60s and 70s, the structural adjustments fiascos of the 80s, and the micro-finance explosion of the 90s, (among other trends). Arriving at the present day with a new set of buzzwords and theories with names like “impact investing”, “development impact bonds”, and “enterprise philanthropy”, we are once again just at the cusp of a new breakthrough solution.

Impact Investing is loosely the area of development in which I am working and is a relatively new trend, (or a rehashing of old ideas depending on your perspective). It falls under the larger umbrella of social finance which is an attempt to apply some of the successful approaches of business to the world’s social and environmental problems.

The core tenets of this approach are as follows:

1)      Business and capitalism have been massively successful and efficient at getting things done in many places in the world, and small businesses in particular are where a huge amount of the product and services we all rely on come from.

2)      “Historically, regulation – and to a lesser extent, philanthropy – was an attempt to minimize the negative social consequences of business activities. But there is a history of individual investors using socially responsible investing to express their values, usually by avoiding investments in specific companies or activities with negative effects.” (Wikipedia)

3)      “It’s going to take far more money than all the philanthropies and governments have at their disposal to make a significant impact on improving the lives of all the poor and vulnerable people in the world…Impact investing – which helps address social and/or environmental problems while also turning a profit – could unlock substantial for-profit investment capital to complement philanthropy in addressing pressing social challenges” (The Rockefeller Foundation)

4)      “Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances.” (The GIIN)

5)      “At scale, an impact investing industry could allow for a renewable and sustainable form of financing for an endless array of initiatives, from poverty alleviation and affordable housing, to natural resource conservation, and even clean infrastructure projects.” (RBC)

Growth Potential for Impact Investing. (impactinvesting.marsdd.com/‎)
Growth Potential for Impact Investing. (impactinvesting.marsdd.com/‎)

This approach builds on the ideas of micro-finance, i.e. that money and credit make the world go ‘round and that by keeping these flowing freely people and businesses will be better able to bootstrap their way out of poverty. Impact Investing also adds in elements from the venture capital and investment worlds with tools and concepts like “portfolios”, “asset classes”, “investment due diligence”, and “payback periods”. It also attempts to improve upon them by adding requirements for “social and environmental impact” as part of the terms of the agreements.

Types of Impact Investments (impactinvesting.marsdd.com/‎)
Types of Impact Investments (impactinvesting.marsdd.com/‎)

The quantifying of social and environmental impacts, both positive and negative, has been notoriously difficult (or conveniently ignored?) in traditional capitalism and these effects are usually grouped under the term “externalities”. Part of what social finance attempts to do is build a framework on which to compare and measure the externalities created by businesses. By standardizing these measurements, the extent or existence of social and environmental impact can be determined and thereby “re-internalized” back into the core operations of the business. One such framework is the IRIS metrics created by the GIIN (Global Impact Investing Network) another is an assessment prepared by the B-Lab (Benefit Corp) and ANDE (Aspen Network for Development Entrepreneurs) which allows businesses to benchmark their activities and approaches to see how and where they might improve. This approach is still in its infancy, but I think it has enormous potential to create change as long as the right companies sign up for it.

Impact Capital Spectrum
Impact Capital Spectrum

Additionally, I see several other very positive things about this approach:

1)      Impact investing seems to be more equally applicable to both the developed and developing worlds. Unlike microfinance, which doesn’t find much of a niche in the developed world, Impact investing could conceivably be applied equally well to an agricultural initiative in Canada, or a housing project in Brazil. This might lead to us being a lot more fair and honest about what is working and what isn’t when it is in our backyard as well as someone else’s.

2)      Small and medium-sized businesses are not going away any time soon, and these entities meet many of the needs of society in a relatively efficient and fair way. (Large or multinational businesses beholden to shareholders are quite a different story). Giving these smaller players access to capital so that they can play their part in meeting these needs seems beneficial.

3)      Money makes the world go ‘round and it makes sense that if you want to have a profound and highly leveraged impact on the way the world works, you would go after businesses and the way the financial and economic world works.

4)      Impact investing is also helping challenge the core tenet of business, (that is, to make money at all costs), and is changing the conversation about what role business should play in society.

5)      As an investor myself, I’m very concerned about where and with whom my money is sleeping at night. Right now the choices for maintaining your values with your savings include storing them under your bed, investing in the typical mutual fund mixed bag of stocks and bonds, or maybe trying “socially responsible investing” which provides only a negative screen for the very worse companies. Having the option of putting my money somewhere that at least has the chance to do some active good, is very appealing.

Despite the potential, there are still many kinks to work out with the impact investing approach and questions left to answer. Here are a few to get you thinking:

1)      There appear to be few ways that fundamentally meet the needs of the poorest people that will generate any sort of return on investment. Healthcare, infrastructure, education are generally not regarded as money-making opportunities (though they can be) and as such are often highly subsidized by the government as examples of “common goods”. A corollary to this is do you really want to be making a profit off of a poor person’s healthcare or housing, and if so how much is acceptable?

2)      A lot of the major social issues that cause or are linked to poverty stem from existing government and/or market failures that require expensive and slow processes such as research and development, behavioural change, building a market, and maintaining ongoing services. The time frame for these sorts of processes is far slower than the 3-5 year horizon of most investments.

3)      What level of risk is acceptable for non-financial returns? If your stock investment loses 10%, the effects are fairly obvious. If your social impact investment in a housing project falls through, on the other hand, it could mean someone no longer has a place to live.

4)      Where did all this investment money come from in the first place? How did foundations like Bill and Melinda Gates or Rockefeller get their investment capital? And how might Impact Investing challenge or reinforce the already gross inequalities of wealth, power and privilege that exist in our world?

5)      Is it possible to maintain an objective, apolitical stance when dealing with social and environmental issues and values? Or is impact investing even purporting to be apolitical?

6)      How is all this investment and growth tied-in with the bounded ecological resources of the earth? Is it possible that all these new businesses will be able to operate in harmony with themselves, let alone with the planet?

Hopefully, your curiosity has been peaked about impact investing. Whether you see it as repackaged western imperialism, coached in the language of business and buttressed with pseudoscientific jargon, or as an extremely practical way to create change with a huge potential for worldwide impact, or somewhere in between, you’ll agree it is a very important topic. You will most definitely be hearing more about Impact Investing in the coming years so it’s important to be aware of it and start thinking critically about what is going on. What I am excited about is being involved with it from the early stages to see how rapidly and effectively we can test and iterate through all the bad ideas, before hopefully arriving at something positive. At this stage, I am equally concerned and hopeful, but there is still a lot to learn and explore.

In the next post in this series I’ll discuss how EWB Canada, ostensibly a group of practical engineers, ended up getting involved in this area and what we hope to achieve. Finally, in the last installment I’ll get into the details of the work I’m doing in Ghana and how it connects back to the big picture.

References and Resources:

http://en.wikipedia.org/wiki/Impact_investing

http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html

http://www.aspeninstitute.org/

http://www.bcorporation.net/

http://www.ssireview.org/blog/entry/the_trouble_with_impact_investing_part_1

http://www.sig.uwaterloo.ca/sites/default/files/documents/Developmental%20Impact%20Investing%20-%20Geobey,%20Westley,%20Weber.pdf

http://evpa.eu.com/wp-content/uploads/2010/11/IESE_impact-investing-print-version.pdf

http://www.rockefellerfoundation.org/uploads/files/2b053b2b-8feb-46ea-adbd-f89068d59785-impact.pdf

http://www.mim.monitor.com/downloads/Financial%20Capability_Bridging_the_Gap_Monitor.pdf