“So, what exactly are you doing again?”
This has been the refrain of the last month of my life. I am interning this summer in a field known as social enterprise or impact investing, and most people haven’t got a clue what that means. But I understand the confusion; I wasn’t very familiar with the field myself until fairly recently. Fortunately, this line of work is not all that confusing when properly explained. So for those of you who are interested, I thought I would take a post to explain in more detail what social enterprise and impact investing are and why they matter.
Social enterprises/businesses are businesses that provide goods or services that improve the lives of the poor, and impact investors are investors who provide funding for such enterprises, hoping to make both a financial profit and a positive social impact. (Though I should note that some definitions of “social enterprise” simply stress the importance of environmental and social impacts on top of profit, with less of an explicit focus on serving the poor, while “social businesses” focus on the poor.) This is not the over-simplified justification for business-cum-development that is often heard on Wall Street (businesses create jobs globally, improving the lives of the poor). Indeed, it is clear that large corporations have both positive and negative effects on the poor around the world, and it is not always clear which effect is greater. But social enterprises are businesses that incorporate a social impact into their business models in such a way that without the benefit to the poor, the businesses would collapse (because the poor form the customer base). Such businesses provide cheap health services, clean water, low-cost communications technology, affordable education, and many other goods and services to those at the Base of the Pyramid (BOP), the world’s enormous untapped market of the very poor, particularly in Africa, Asia, and Latin America.
So why does this matter? It matters because so many efforts to improve the lives of the poor in developing countries over the last 50 years have failed miserably. There are numerous reasons for the failure of development projects, but the biggest problem is often the lack of proper incentives. Improper incentives flow into every element of a development project. In particular, there is no incentive for most donors to make sure projects are maintained, and until recently, when monitoring has become more popular, there has been no real incentive to ensure that projects actually make a positive difference. Wells are drilled but no one is around to maintain them. Large initial funds are spent but after the headline has been flashed on the evening news, no one has a stake in actually making the program work. The deliverable is dollars spent, not impact made. And much of the time, the person receiving aid never has any say as to what aid is given, when, or how.
This is not to say that all aid is bad. Some groups do tremendous work, and humanitarian aid in general seems to be largely beneficial. In addition, as I mentioned, monitoring and evaluation are becoming much more common, improving the quality of aid given. But in most cases, donors who do good work do so in spite of bad incentives, not because of them.
Social enterprise and impact investing offer a unique answer to the problem of sustainability. No business survives unless the customer actually purchases something, thereby voting that the product is valuable and desired. Thus, for a social enterprise that serves the BOP, the benefit of the poor is essential for the business to survive. Unlike in traditional aid, the incentives of the business and the customer are completely aligned; the good of one is tied to the good of the other. Thus, if a business provides a socially needed good or service that the very poor will purchase, the incentives to make a lasting impact are built into the system. Social enterprises cannot fix all problems, especially those that involve public goods, but they provide a promising method for improving many of the services most urgently needed by the poor.
That covers the basics of the enterprise side of things, but there is also an investor side, from whence “impact investing.” The main difference between impact investing and normal investing is that social benefits and environmental sustainability are considered alongside financial profit as criteria for investment. Each impact investor will have slightly different priorities, but as the field grows, standards are likely to develop that define the importance of each factor more precisely. Additionally, impact investors generally have a much longer time frame, willing to wait five or ten years or more for a payoff. For this reason, the funds provided by impact investors are often called “patient capital.”
So that is a brief overview of the field I am working in this summer in Nairobi. In my next post I will discuss my specific job and the organizations I’m working for in more detail. Later posts will discuss various topics related to both life and work in Nairobi this summer – I’m sure there will be plenty to write about. Those of you who have followed my blog for some time will know how sporadic I can be, but rest assured that I will post at least once every two weeks this summer – my job requires it. I hope to post more frequently though, so check back soon or subscribe for updates!
Filed under: International Affairs Tagged: aid, base of the pyramid, development, impact investing, Nairobi, patient capital, social enterprise 
