Neither profit nor charity: Social Impact Investing
The ongoing global financial crisis has taught us one thing in particular, that the previously applied growth models have demonstrated their clear limitations. This is evident in the ubiquity of impoverishment, social inequalities, the issues with public order, the inability of nations to accommodate new demands, the rampant incompetence and public corruption. Therefore, what we need is a new growth model that integrates the social, economic and political spheres.
In other countries, especially in Anglo-Saxon countries such as Great Britain, USA, Canada and Australia, the concept of social innovation has for some years now been developed and implemented into political and economic decision-making. Social innovation implies the ability to respond to emerging needs by engaging in new methods. As vague as this may sound, it reflects a new logic that those countries have harnessed to implement growth policies completely unlike past approaches.
Social impact investing is not just a theory but a solid and innovative mechanism for a country’s growth. First, it involves different participating actors, public and private – it is no longer the government acting alone, but also private investors, financial intermediaries, and non-profit organizations. Secondly, it kills two birds with one stone by making a strong social impact while producing profit, making it worthwhile for both the individual investor and the entire community. It has been proven that social development stimulates economic growth.
Today, the world is ready for this model, as over time the hard line between making a donation and making a profit has gradually become hazy. In the past, the social-business dichotomy was made real to us by well-off individuals who, on the one hand, sought profit without necessarily paying too much attention to the means of achieving it, and on the other hand, sought out self-rejuvenation through charitable work in hospitals and churches. Today, however, the lack of public resources is turning a new leaf on this culture, which means that philanthropy coupled with profit is not only possible, but also advantageous.
This is demonstrated by the mechanisms for social innovation which have already been tried and tested in countries such as Great Britain and the USA through Social Impact Investing (SII). This solution encompasses a spectrum of investments (loans and equity) which are based on the assumption that private capital can contribute to create, even in concert with public funds, positive social impacts and private economic returns. The key points of the SII are its targeted impact and change on society, quantifiable goals, a focus on outcome (the change perceived by the community) rather than output (the amount of money given out), and the economic yield for investors.
Contrary to common belief, SII instruments are not only suited to emerging markets, but also to developed ones as well, as they bridge the gap between the welfare demand and the dilemma of insufficient financial resources. This is a dangerous gap that concerns the G8 countries, who in the next ten years will have to tackle a huge demand for welfare assistance that cannot be backed by public funds. Social impact investments can become the link between the need for essential services, insufficient public resources, and the investors’ profit goal.
It is telling that the term impact investing was coined by the J.P. Morgan and the Rockefeller Foundation in 2008. The financial world is also beginning to take note of social impact investing, in large part because it involves highly non-correlated investments (for example, less country risk) and therefore with longer-term yields sometimes lower than the market value, but less volatile.