Impact Investing Is Never Going To Fix Global Inequality
The world is, unfortunately, a very unequal place with certain countries very wealthy and others have very low standard of living. Even within countries, GINI indicators are showing that the gap between the rich and the poor are widening in most regions except Latin America, whose base was very low anyway. Zooming in on the poor communities, there are racial, caste, and gender equality issues that deny access to resources for some members of these communities.
Impact investing as a nascent sector is thrown right into this complicated mixture of inequalities. While it is impossible for a sector that is today commanding such a minuscule amount of resources¹ to even think about eliminating these global inequality problems, it should be in the frontier in the fight for a better world.
However, there are some complications here. Impact investing itself is a product of today’s unequal world. It is an awkward hybrid of aid+philanthropy endeavors with modern finance industry (both inventions of the Western world) and carries with it the legacies of their best and worst practices, hence the urgent need to consciously get rid of (unconscious) biases and prejudices of its origins. Impact investing cannot even try to eliminate inequalities when its internal workings are full of inequalities itself. Specifically, there are five kind of inequalities that we need to identify and make an effort to eliminate.
1) Stop using terms that perpetuate inequality
Language matters, even more so when several cultures are thrown together and have to learn to communicate with one another. Take the word “beneficiary” as an example. It is a very common word in the circle of donors and philanthropists, but it actually does not have much meaning in impact investing, when everyone is supposedly doing business with each other. The term “bottom of the pyramid” is also problematic, albeit less so than “beneficiary”; in business relationship, there is no top or bottom. There are several other examples, but my personal itchy point is the use of the term “Third World” to categorize the poor countries as a group. Third World used to be a badge proudly worn by people in independent countries that did not want to be dominated by those from the First World and the Second World. Today it has poverty connotation.
2) Stop disproportionately favoring those with closer access to capital
(Financial) Capital is an important aspect of the global impact investing ecosystem, but it is not the only one. There are many grassroot intermediaries and entrepreneurs who have good ideas, know-hows, and execution skills, but do not understand how the world of modern finance operates. If point (1) above is the fault of the aid/philanthropic world, this one is the fault derived from the finance industry. In Africa, this inequality is the most apparent as majority of impact investors operating there are Europeans/Americans, and the entrepreneurs they have funded are mostly having the same racial and education breakdown.
3) Stop treating outside knowledge as inherently superior to community knowledge
The most commercially successful impact business models to date by far is microfinance, and it was invented by a Bangladeshi (albeit with an American higher education background) supported by Bangladeshi villagers. There are actually many stories about failures or ineffectiveness of projects set up by foreign organizations, like the disastrous mega-dam projects in Africa sponsored by the World Bank or even exaggerated accounts of “foreign saviors” like the infamous book Three Cups of Tea, but these organizations and individuals are either influential or savvy enough to promote their work so that they would look good to the global audience.
4) Stop blindly applying same social and environmental standards in all places
Not all cultural practices need to be respected as some of those, like female genital mutilation or discrimination of the Dalits, are indeed deplorable. But the world is not the same everywhere and impact investing should be able to tolerate (while gradually improve on) some practices like child labor and sweatshop factories. These are complex issues that cannot be eliminated in an instant without providing viable alternatives, and saying no to making investments in companies that are still practicing them will paradoxically contribute to prolong such practice. Today’s rich get richer by, in part, polluting the world and exploiting global resources, and it does not seem fair to completely deprive the poor from the opportunity to catch up by asking them to follow exactly the same environmental standards. Another example of unequal standards is in the fishery sector: Most European supermarkets today accept only seafood products with MSC (Marine Stewardship Council) or similar certifications. These certifications are expensive to get and maintain by small fisheries in the poor countries. While the intention is good, but there is a far-reaching impact often not realized by those making the policies.
5) Stop ignoring the link between global politics and poverty eradication effort
WHO, FAO, and other international organizations, especially WTO, are hugely influenced by the rich countries. These countries, in turn, have their own internal politics, massively influenced by corporations and other interest groups. For example, the rich countries provided food aids to Ethiopia during famines of 1984 and 2003, but they (especially USA) did not buy the grains from Ethiopian farmers but brought grains all the way from North America. To date, there is still dispute on usage of water from the Nile River as Western powers do not allow Ethiopia to use the river for large-scale irrigation in order to appease downstream Egypt. No matter how hard impact investing sector is at work, there is no way it can make real breakthroughs without any structural changes in the economy. While impact investors and entrepreneurs are resourceful enough to find opportunities to thrive despite the structural issues, but they, especially impact-driven organizations based in the rich countries that can exert some influences on their governments and politicians, should not ignore the political inequality issues between countries that are often the bottleneck of the impact sectors.
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The sector must reform itself while it is still small, nimble, and flexible to adopt better standards. Impact investing has to be built on a foundation of mutual respect and equality because the sector is created with the main purpose to use the power of capitalism to fight inequalities. After all, the benefits are now supposedly flowing both ways: the poor can increase their living standard and the rich — who provides the capital — have the opportunities to realize positive financial returns while absorbing the knowledge from diverse cultures to enrich and curb the excess of capitalism itself, and finally prove that a fairer world is possible.
[1] Latest statistics compiled by IFC in 2020 show that “Impact Intent” Funds raised USD 133 bn betwen 2008–2018 or ~2.6% of total capital raised by all Funds
