CELEBRATING 30 YEARS OF GLOBAL PARTNERSHIPS
Reflections on Impact-First Investing: Why it’s the Right Strategy at a Critical Moment
By Rick Beckett, CEO Emeritus at Global Partnerships
For almost two decades, Global Partnerships has invested in sustainable solutions to poverty, emphasizing the inclusion of poorer and marginalized people while expanding access to economic and other forms of opportunity that empower people to earn a living and improve their lives. GP’s investing has been guided by an abiding belief in the power of opportunity, a deep commitment to staying grounded in the lived reality of people living in poverty, and a willingness to set aside conventional wisdom and think differently about capital to generate more impact.
What has come to be called “Impact-First Investing” is at the heart of GP’s work. I have come to believe not only that it is essential to the future of global development but also that it is an extraordinary and compelling way for people with philanthropic assets to deploy capital, have a lot of positive impact, and recycle capital to do it over and over again. Here’s why.
Global Poverty is a Market Failure
There is no question capitalism has been a powerful engine for progress and prosperity. Economic globalization and investments in businesses and technology have given rise to a macroeconomic transformation that has increased incomes and driven improvements in health, education, and housing in ways that few thought possible. By most measures, humankind has never been healthier, wealthier, or better educated.
And yet, poverty is widespread and persistent. Some 3.8 billion people still live on dollars per day. About half the world’s population lacks access to essential health services, 2.4 billion don’t get enough food to eat, and 1.8 billion don’t have adequate housing.
Surely, these realities suggest that there are limits to what traditional investing—with its relentless focus on maximizing risk-adjusted financial return—can deliver. And while the public sector plays an essential role in funding economic and social progress, it, too, has been unable to close the persistent opportunity gap for billions of people. Philanthropic support is also important, but there is not enough philanthropy in the world to fund global solutions at scale for intractable issues like economic poverty or food insecurity.
Progress Begins with Thinking Differently About Capital
Impact-first investing is a profound shift in how we think about the purpose of capital. Contemporary capitalism is built on the belief that there is a fiduciary duty to generate the greatest possible financial return, and traditional investing prioritizes achieving financial return with little, if any, regard for social or environmental outcomes. Most of what is called “impact investing” today is, fundamentally, return-first in that it seeks the same risk adjusted financial return as traditional investing while doing less harm or doing some good. This seriously limits its usefulness in addressing problems of global poverty.
Impact-first investing is different. It offers a perspective on capital that aligns the meaning of money more closely with improving people’s lives by seeking the highest possible impact subject to preserving capital. In its intention to harness the power of capital to serve as a catalyst for creating a better world, impact-first investing is like philanthropy. Where it differs is its focus on capital preservation, which means money is continually recycled back into investments that create more and more impact. This recycling of capital creates enormous potential for activating assets already dedicated to philanthropic purposes that sit idle with respect to impact because they are invested using traditional, return-first strategies.
Consider, for example, a foundation with $100 million in assets that distributes $5 million each year in grants and invests the rest using a conservative approach designed to yield a 5 percent return. Each year, 95 percent of its assets are idle with respect to impact. Over a decade, the foundation will make $50 million in grants, with $100 million in assets remaining. If that same foundation pursues an impact-first strategy with all its assets, after 10 years it, too, will preserve the original $100 million, but the cumulative annual amount deployed will total $1 billion—a 20-fold increase in capital activated for impact.
Impact-First Investing Can Unlock the Power of Social Enterprise
Impact-first investing is important because it is the fuel needed to power social enterprises that offer affordable access to products and services that improve lives, sustainably and at scale.Designed to address the needs of people in marginalized communities, social enterprises are essential to closing the opportunity gap for many of the billions of people around the world who still live on less than $5.50 a day.
There are many successful social enterprises in the world, including BRAC, which reaches more than 800,000 people in Africa and Asia by supporting women-owned small businesses that bridge market gaps for those living in poverty. Aravind Eye Care System in India provides more than 6 million patient visits and performs more than 700,000 sight saving surgeries and procedures annually in underserved communities. In Sub-Saharan Africa, One Acre Fund offers training and services that help 4 million subsistence farmers increase yields and sell crops at higher prices.
These social enterprises, and others like them, are making a difference at scale, and they share a deep commitment to the well-being of their clients coupled with an ethic of honing their products and pricing over time to increase impact.
But, if social enterprises are so promising, why aren’t there more of them? One of the most important reasons is a lack of access to capital aligned with impact. The imperative to maximize financial returns that drives most investment creates economic incentives that undermine the ability of social enterprises to achieve higher impact.
For example, microfinance organizations are much more likely to create real economic opportunity for women living in poverty when they accompany small loans with training that helps borrowers make the most productive use of their working capital. But the cost of providing educational services reduces profit. When investors prioritize financial return over impact, it creates overwhelming incentives to move upmarket and serve less marginalized people, or to offer loans without the training and education that are essential for better results.
Impact-First Investing Works
As a relatively new discipline in a complex world filled with difficult economic and geopolitical challenges, it’s not perfect, but impact-first investing works.
Global Partnerships has deployed more than $830 million in impact-first investments to microfinance institutions, agricultural cooperatives, and other social enterprises that have advanced opportunity for more than 37 million people living in poverty across Africa and Latin America.
What makes these results meaningful and compelling is the improvements they deliver to people living in marginalized communities. In Nigeria, for example, where nine out ten people live on less than $5.50 a day, Global Partnerships supports the work of Grace and Mercy Households Improvement Initiative, a microfinance organization that provides working capital and financial literacy training to more than 200,000 women entrepreneurs. According to feedback from these women, 97 percent now earn more money, 87 percent have increased the amount and quality of food they serve to their families, and 82 percent spend more on their children’s education.
This ability to measure results is a critical aspect of impact-first investing. Defining indicators and gathering feedback from the people served in order to gain an accurate, rigorous assessment of benefits generated is critical. This provides the transparency needed to understand how well—or poorly—impact-first investments are performing, reduces the risk of impact washing, and is essential to refining investment strategies over time.
Now is the Time for Impact-First Investing
I have come to believe the conditions are right for impact-first investing to emerge as a significant and distinct asset class in global development. There is growing awareness of inequity in the world and the role it plays in intensifying social upheaval. Economic progress at the lowest levels of global income distribution means there is a huge emerging market numbering in the billions of people. Advances in technology are changing the economics of delivering services to marginalized communities. And a new generation of philanthropists and investors is hungry for innovative approaches that deliver greater impact.
At the same time, the recent seismic shift away from government support for global development creates a new urgency to embrace a more expansive view of capital that recognizes the deeper meaning that comes when we unleash its potential to improve lives.
In this critical moment, if private foundations, philanthropically active family offices, and individuals with donor advised funds were to allocate a fraction of the more than $2 trillion in assets they control to impact-first investing, it would mobilize tens of billions of dollars for efforts to create significant, measurable improvement for people who live in poor and underserved communities around the world.
Nothing in this article/post is an offer to sell or a solicitation of any offer to buy securities by any party.