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Impact Capitalism is coming to save the world… a little bit
I am supposed to be a poster-child for Impact Capitalism, the offbeat idea that business can be a force for good. But the role of evangelist makes me uneasy. The reality of impact is too nuanced for simple saviors.
I thought it would be appropriate to kick off this newsletter with a reflection about this field that has become my professional home – a field that is growing massively and rapidly; a field that has enormous promise and real strengths; a field that has clear shortcomings.
With an honest acceptance of our limits comes true confidence about our capabilities.
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Impact Capitalism as seen from space
Humanity has about $100 trillion in financial investments, counting all of the world’s pension funds and sovereign wealth funds, the coffers of big companies, the hedge funds and private equity shops, and all of the individual investors with their retirement funds and Robinhood accounts.
About 30% of that wealth, around $30 trillion, is invested in “negative screen” impact investments. Sometimes this is called ESG investing, but there are dozens of terms for it. The principle is to avoid investing in things that are bad for the world, like companies pumping greenhouse gases into the atmosphere with abandon, or manufacturing with child labor, or selling weapons to folks who shouldn’t have them. Everything else is fair game.
There is a second kind of impact investment called “positive screen,” which means investments that proactively try to make the world a better place while also making money. According to the latest numbers, about 0.7% of all wealth, $715 billion, is invested in “positive screen” impact. Just one year ago, it was $502 billion. So even though it’s a minuscule slice of the pie, it is growing by hundreds of billions of dollars per year.
Definitions of “positive impact” vary, but a majority of professionals who work in the field use the UN’s Sustainable Development Goals (SDGs) as their reference. I’ll write about this in the future, but suffice to say that I think it’s a useful definition: 17 goals, broken down into 231 specific indicators, that provide a widely-accepted collective definition of positive impact.
Of that $715 billion in positive-screen impact, most of it is invested in real-estate and business loans to developing nations, disadvantaged communities, and carbon-neutral infrastructure projects. Some of it is invested in the stock market. A minority, something like $100 billion, is invested in private equity and venture capital.
This is the holy-of-holies of capitalism, the core of the reactor, where we find the direct investments in projects that promise growth, innovation, and outsized profits. This is where I work, and this is the part that interests me.
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What I’ve seen with my own two eyes
I was the leader of a small group of revolutionaries who created Good Eggs in 2011, a new kind of grocery store that only carries local, sustainably made food. Today Good Eggs sells hundreds of millions of dollars of local food, and as a direct result there are clear, positive repercussions for climate change, human health and local economies.
These past years I have been working on Imagination Machine, my “startup studio for good” here in France. We use profit-driven innovation in the service of social and environmental impact. The results are unequivocal: in three short years we’ve created 10 positive-impact businesses that now employ hundreds of people. Each business has a clear and quantifiable impact on a specific SDG indicator. Beem creates user-friendly solar panels: each time a customer installs a new panel, a clear amount of greenhouse gases avoid entering the atmosphere. Les Mini Mondes creates toys and magazines for small kids that teach them to be open to new people and cultures, all while diverting dollars away from plastic toys made from petroleum. Jho sells tampons and pads and funds, with every purchase, a set of NGOs working on women’s health in poor nations.
Placing business in service of impact certainly appeals to my rational brain. Why not install the powerful engines of capitalism in a positive impact vehicle? Sure, business can be a dirty, morally-compromised sport, but so can politics and NGOs to the same or even worse degrees. It is still possible, in business like in any other domain, to play the sport with integrity and a personal moral code.
But even though I’ve seen it work, sometimes the premise feels like a scam in my revolutionary heart. Save the world and get rich in the process – isn’t that a bit too good to be true? I remember the great line that Joseph Stiglitz wrote in a book review some years ago, that the elite using business to save the world is “like the dieter who would rather do anything to lose weight than actually eat less.” If we play by the rules of modern-day consumerist, finance-first business, aren’t we just perpetuating the status quo that is urgently in need of revolution or reform?
When I look at the SDGs, it seems obvious to me that business is a tool in our arsenal, yes, but it is an insufficient tool for the challenge.
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Let’s get specific about impact
I did the following exercise: for each of the 231 indicators that make up the SDGs, I asked whether for-profit business could play a role in reaching humanity’s goals. (It took a while.) I tried to be generous to the Impact Capitalism case. For example, indicator 3.9.1, “Mortality rate attributed to household and ambient air pollution,” is almost certainly an issue to be addressed by better government regulation of cars, industry and appliances, or nonprofit programs that replace open-fire indoor cooking with modern appliances in developing nations. But it is possible that some company could create an air-filtering technology that could make a difference, so I marked “yes” for whether business could address that specific indicator.
There are many other SDG objectives in which business has no role to play at all. SDG objective 16.1, for example, “Significantly reduce all forms of violence and related death rates everywhere.” It seems implausible to me that a business can make a meaningful difference.
I found 74 of the 231 indicators that could be addressed in any small way by a for-profit business, about 32%. The remainder, 157 of them, seemed to me only addressable by nonprofit work, advocacy, lobbying, political campaigns, and cultural change. Business has no role to play. My analysis is accessible here.
Others may judge the business potential of each indicator differently. To be clear, this is not a statistically meaningful exercise, for many reasons. For one, even the indicators open to business solutions likely also call for non-business initiatives. Good Eggs was a for-profit business that clearly had an impact on objectives 2.3 and 2.4 of the SDGs, related to sustainable food production and small-scale food producers. If we really want to achieve those objectives as a global society, we’ll need to invest in businesses like Good Eggs, but also nonprofit programs that train farmers in developing nations; nonprofit community foodhubs in rural areas around the world; academic research into agricultural productivity; and we’ll need to fund advocacy, lobbying, and political campaigns that change government rules to favor local and sustainable food practices. For the 32% of SDGs with business solutions, business is one piece of the puzzle.
Second, the indicators are not equivalent in terms of effort or impact. It could be that one of the indicators is ten times harder and ten times more important for humanity than another, and that indicator might be business-friendly or not at all.
Yet despite those caveats, the exercise confirms something that seems intuitively obvious: to achieve the SDGs and do good for humanity, the large majority of the work will be unprofitable. Business can play a small, minority role.
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A tidal wave of money is coming soon… but only for business
This analysis does not, of course, prove that Impact Capitalism is a bad use of money. It does imply, I think, that if you want to use $100 to have a positive impact in the world, then at least $68 of those dollars, probably more, should fund nonprofits and political projects.
A quick aside: I have been obsessed, for years, about the idea of a new startup that lets people use their money for good. I’m convinced that there’s something to invent. At Imagination Machine we have tested dozens of ideas related to the theme: a bank that uses interchange fees for charity, a credit card that automatically rounds up your purchases for charity, an investment account that biases towards positive impact. But every time we run one of these tests, we learn the same thing: most people think separately about their finances and about their positive-impact, and they find it strange to mix the two. When they choose a bank, they mostly want low fees and fast customer service. When they choose a credit card, they want wide acceptance by merchants and easy management of their expenses. If they want to have a positive impact, they will volunteer or give charity.
I suspect there is a similar cognitive framework at play when investors choose where to place their money. Either they are looking for a positive financial return first and foremost, or they are looking for a positive impact, but it is unnatural to think of both at the same time.
If an investor is primarily looking for a financial return, it is unlikely they will invest in Impact Capitalism. Impact funds have an extremely narrow constraint on the investment opportunities. There are very few who argue that positive-screen impact funds will inherently overperform as investments.
But there are many investors who are primarily looking for a positive impact. Wealthy philanthropists and individual investors may be genuinely motivated by impact as a primary objective for their capital. Endowments of nonprofits and universities are structurally motivated by financial return, but face increasingly loud calls to use their endowments for impact. Funds with some kind of public oversight, banks and corporate funds are increasingly required by regulation and governance to devote a minority percentage of their funds to impact.
A recent World Bank report estimates that there is $26 trillion of potential demand for positive-screen impact investments. This may be a high estimate, but it seems clear that the current $715 billion invested is only the beginning of the phenomenon.
All of this brings us to one of the riddles at the heart of impact investing: if you are an investor looking at the options for impact, you can choose to fund nonprofits, political projects, or Impact Capitalism. If you rationally start with the impact itself, as defined by the SDGs, you would allocate the large majority of your money to nonprofits and political projects. But the capitalist investments have one big advantage over the others: you get your money back! And then some! Imagine you are shopping and comparing three products, each one promising to have a roughly equivalent level of positive impact; two of them are extremely expensive, one of them pays you. And of course you can then use some of that money for charity in the future. For many actors it’s a no-brainer.
So from a societal perspective, money for impact should be allocated in a certain way, with a minority going to business investment. But from the perspective of any individual managing capital, business investments have a major advantage by being free, so will likely receive an outsized share of the dollars. The $200+ billion of new investments in the past 12 months starts to make sense, and it won’t be long before that annual number dwarfs the annual worldwide charitable contributions.
This isn’t a problem for any individual investor, or project, and it does not mean that charitable contributions will go down. All evidence points to an increase in worldwide charitable contributions over time. But from a macro societal perspective, it is a suboptimal allocation of our collective impact dollars.
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As an entrepreneur, business is a good deal
These arguments look at Impact Capitalism first from the perspective of society-at-large, then from the perspective of an investor. What about an idealistic entrepreneur like me?
I want to use my working hours and my entrepreneurial energy to make the world a better place. I can work in politics, in a nonprofit or an NGO, or in business. I recognize that all of those domains are messy and present ethical hurdles, that there is no pure path. It is likely the case that there is more to do in politics and nonprofit than in business, but there is nevertheless plenty of impactful work to do in business.
Business has two big advantages. First, there is a massive amount of positive-impact capital already in the market and even more coming. There is more capital than there are good investment opportunities, so it’s an entrepreneur's market. Second, success as a business entrepreneur is rewarded with financial wealth, which is a fungible resource: it can be converted into power in politics and nonprofits. The same is not true for the rewards gained in nonprofit or political work.
If there is a punchline to this reasoning to me personally as an entrepreneur, it’s that business for good, despite the limited size of the playing field, presents the clearest path to impact.
This reflection about Impact Capitalism leaves me with motivation and ideas, not despair or confusion. I am motivated more than ever to create for-profit businesses that funnel money to charity and activism. To create for-profit businesses that train ten times more impact entrepreneurs and investors to meet the demand. To create new investment vehicles that can deploy positive-impact capital in a competitively differentiated way.
We are early in the Impact Capitalism storyline. It is natural that there are contradictions and caveats. Being clear-eyed about those caveats is the only way to move forward.
The reality is that no matter the insufficiency and impurity, positive impact can be achieved, and quickly. The reality is that no matter what we think, the wave of capital is coming fast.