The growth of impact investing and social enterprise is a promising addition to the social sector but few organizations focus on what may be the most substantial type of investment: public goods.
Today, the growth of social entrepreneurship and social business is changing the face of philanthropy by integrating successful business models into social organizations. With a view taken increasingly towards the value of for-profit enterprises as engines of doing good, this shift has contributed to a mushrooming of organizations and individuals investing funds and building the capacity to transform traditional philanthropy into a more effective and investment-friendly model for change.
The key word for this new class of social investors and entrepreneurs is sustainability. There is an emphasis on developing models that do not require a constant stream of income from donations or in many cases, models that generate their own income.
This thinking has helped shift the focus throughout the sector towards measuring impact more concretely and valuing sustainability in dollar terms. While these changes are helping to bring greater sophistication to measuring results, as well as bring in talent and funding from the private sector, many organizations may ignore investments in public goods because of the difficulty in measuring long term impact or returning funds invested.
The balance between emphasizing impact and generating financial returns is the most important consideration to make in achieving sustainable change through investment. In cases where an investment is made into public goods, financial returns may be substantial, but never captured by investors and are nearly impossible to measure, especially in the short-term.
The concept of a public good has been described by economists since the 1950’s and theories and writings related to public ownership go back much further. In essence though, a public good is something that that is available to everyone and the benefits are shared equally. This means investments in shared resources like air quality, education, or health offer returns that are dispersed across the entire population. There is no possibility of financial return for the investor but the benefits, both social and economic, are huge. For example, investing in vaccinations contributes to global public goods by helping to eradicate diseases that can potentially harm everyone, not to mention damage a country’s national economy. Secondly, investments in education lead to new ideas and inventions, greater productivity, and a number of benefits that affect both individuals and societies.
In wealthy countries, governments invest in public goods as a way to support economic growth and minimize costs to the state related to health care, encourage transportation and knowledge sharing, and promote public education. In poor countries, international aid organizations, charities, NGOs, and the social sector have attempted to fill the void. The need is growing as funding from international sources is shrinking and organizations are shifting focus from traditional service delivery to enabling systemic change through innovation, social enterprise, and self-sustaining models. The social sector’s ability or desire to address these needs, especially on the scale necessary is depleting.
For social entrepreneurs and impact investors, problems arise because some areas cannot be addressed through social enterprise and the returns they generate take the form of public goods, with dispersed benefits that are nearly impossible to measure. The impact made by organizations working to reduce basic social gaps such as education, health, and human rights cannot be easily measured. Quantifying, and in many cases, measuring, the long term impact of efforts to mitigate these problems presents a range of challenges for investors and organizations. In many cases, social business models have much to add to these areas but focusing solely on whether a model is sustainable in terms of revenue can ignore what in the end is the most sustainable way of addressing social problems: changing the systems that create poverty and injustice.
Organizations like LGT Venture Philanthropy are the exception. Their portfolio shows a range of investments, including in organizations like Educate Girls, a non-profit that will never generate revenue, but has the potential to help add $400 billion to India’s GDP by enrolling out of school girls to harness what the World Bank calls, the “Girl Dividend.”
In many cases, a social business model may be the most effective way of creating jobs, incentivizing environmental stewardship, managing waste, and addressing a range of other critical social problems. When the goal is to expand access to education or healthcare, the question of incentives is more complex. Ultimately though, these broad areas can make the greatest difference. Access to social resources like healthcare and education will greatly improve a community’s ability to contribute to their own economic and social wellbeing. Access to social resources is better thought of a system that must be changed through innovation and investment in public goods than through piecemeal programs that may effectively address the symptoms but do not necessarily target the roots of poverty or marginalization.
An emphasis on short-term sustainability leads social investors increasingly towards enterprises that create social business models and provide economic measurements of their impact and generate revenue. However, failing to invest equally in efforts to address issues such as healthcare, women’s rights, and education that offer dispersed, long-term, and hard to measure returns, makes a crucial error in understanding and rectifying some of our most pressing problems, not to mention spurring economic growth.
Social entrepreneurs and social businesses offer a new way of looking at some of these same problems, with a vision of how to make a lasting change. Just as the emphasis on sustainability and innovation has overshadowed traditional charity, an over-reliance on quantifiable metrics and organizational sustainability, has the potential to ignore the sustainability that makes a real difference: whether an organization makes a lasting impact in the community in which it works.
Sustainability should always be a question of impact not return. By working together in parallel, social business and purely impact driven organizations can meet both the immediate needs of poor communities while altering the systems that have led to a lack of opportunity and the critical health and environmental problems that they face. It’s not an either/or approach, but the current trend that may lead to a preference for social business because of its tangible financial returns and will fail to make the adequate investment in what will ultimately address our world’s perennial social ills: investing in change.