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Making Sen$e

Opinion: Smart investing can drive social change

Every generation lives on the cusp of major social transformations. Ours is witnessing revolutionary changes in the role of capital in society, with trillions of dollars migrating toward positive social and environmental purposes. It would be a tragedy to let this moment pass without attempting to maximize its potential as conscious consumers of impact investment. In my new book “Real Impact: The New Economics of Social Change,” I offer a framework that I hope will inspire and guide us to real, world-changing impact.

Social change is a process in which people — perfectly imperfect as we are — work together to create better outcomes. Though our efforts often fall short, we are still responsible for doing the best we can. Real Impact is my attempt to do my part by providing a roadmap for people who are interested in engaging in the practice of impact investment with integrity and accountability— and in a way that really solves problems for the long term.

I have spent the past 15 years working at the intersection of finance and social justice, building four leading organizations in the field. These experiences have given me a unique perspective on the practice of impact investment — but I by no means claim to have all the answers. The approach we take at Transform Finance, the organization I cofounded to build a bridge between social justice and impact investment, is to focus predominantly on making sure the industry asks the right questions, knowing that it will take a broad community and the lessons of experience over time to answer these questions effectively.

So, what will it take to make impact investment truly transformative? One of our greatest resources is our own intellectual capital. On the one hand, we have frontline communities and activists who share a deep understanding of the costs of doing business as usual and a vision of what social and environmental harmony might look like. On the other, we have experienced practitioners in the investment community who know how to bring together large amounts of capital and effectively leverage it toward a goal.

If we put these two forces together and develop new structures to ensure that they share power equitably, we will have a much better chance of building an economy that is generative and just.

Impact investing is at an inflection point. It is quickly growing in scale and popularity, and as investors focus on growth, they’re increasingly in danger of replicating the same mistakes of traditional charity and finance that impact investment was designed to correct. And without the right guiding principles, it has the potential to do more harm than good.

But we have an opportunity to get impact investing right. I propose a new model for impact investment and three key principles that might enable it to actualize its potential not only to create wealth, but to produce systemic economic, political, and social change:

  • Engage communities in design, governance and ownership. This principle is a response to seeing communities being treated only as inputs — that is, labor — or as consumers, rather than being given an opportunity to participate in all stages of enterprise development and management as well as in long-term value creation through ownership.
  • Add more value than you extract. This principle is perhaps my favorite, because it’s the most heart-intuitive: Who really wants to extract value from the poor? It was inspired by Brendan Martin, who had pioneered the concept of non-extractive finance over the previous decade.
  • Fairly balance risk and return between investors, entrepreneurs, and communities. Too often, I have seen investment terms that implied, essentially, that they were “good enough for those people.” The terms might have been better than they would have been if impact were not an objective, but they were still fundamentally extractive, rather than reflective of a true acknowledgment of the contributions of all involved.

If we are going to ensure impact investment gets on the right path, it’s going to take some hard work from activists and investors alike. Indeed, it’s going to take collaborations between two communities that rarely come together, with structural innovation to facilitate joint efforts and the effective sharing of power. It is possible to rebuild the economy from the ground up, and for individuals from all class backgrounds to be leaders in this transition.

Not all of us have access to a large portfolio of investments, of course. But there are ways that everyone can participate in impact investment, by leveraging their connections to resources, no matter how big or small, by launching a project, or by holding impact investment accountable as it scales.

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