Social finance is reaching a pivotal moment. From the non-profit sector to the corporate world, we’re hearing more and more talk of capital being used for a better purpose.
For example, in August 2019, 181 CEOs in the United States signed the Business Roundtable’s landmark statement redefining the purpose of a corporation to ‘meet the needs of all stakeholders’. In Canada, the public sector has taken the lead on social finance, announcing an $805 million fund.
“It’s a fundamentally different environment than it was 10 years ago,” said Jed Emerson, one of the visionaries of the social finance movement, and author of The Purpose of Capital. Emerson has spent the last two decades exploring how investors can find what he calls “blended value” – merging financial, social, and environmental good.
The exponential growth in the profile of impact investing is clear. But how much has actually changed in how we use capital – and as we look to the future, what tools are available to bring purpose into large-scale investments?
Over the past decade, there has been a significant move towards putting purpose in capital. The world’s impact investing market has reached approximately $500 billion (US), while more than $30 trillion (US) is invested in sustainable assets around the world.
“We are recognizing the shortcomings of traditional financial capitalism,” explained Emerson. “At the highest levels, people are really seeing that something else needs to be brought forward.”
He puts that down to three things: political and social pressure from society, the impending environmental crisis, and people’s concerns about how they’re contributing to society. Announcements like Shopify’s Sustainability Fund and BMO’s Impact Fund are demonstrative of how companies are listening to these concerns. “I’ve heard so many stories of financiers who go home at night and have to try to explain to their children what it is that they’re doing to the world,” Emerson explained.
Although he celebrates the mainstreaming of these ideas, Emerson says that we must hold institutions accountable to a higher level than we’ve seen so far. BlackRock CEO Larry Fink’s letter to CEOs may have been a public relations coup, but BlackRock’s “Impact U.S. Equity Fund” lists companies such as Amazon and Facebook.
The Impact Paradox
If we are to create genuine change, we need to think about capital far more broadly. Financial capitalism has set up structures with shareholder value as the primary aim. “A lot of the folks coming into this from traditional finance see this as a new opportunity to aggregate more capital. [They view social finance] within the traditional understanding of capital. What we’re missing is the perspective of using capital as a fuel for individuals in the context of family, community, and the planet. The whole game is up for redefinition and re-exploration.”
But Emerson highlighted one big caveat as we look to the future: “Traditional fund structures are not going to be adequate to redefine capital or community.” He calls this the ‘impact paradox’: attempting to promote positive impact with the very tools that contributed to the issues in the first place.
Anna Laycock, CEO of the Finance Innovation Lab, added: “It’s not a case of transplanting existing financial models and assumptions over to social initiatives. This is about questioning the very core of our operations and what we exist for.”
Real, Tangible Action
For mainstream institutions and investors to make purpose a genuine priority, Laycock explained, it’s essential that purpose-driven work is aligned with their business model. For example, Canadian banks are beginning to seriously evaluate their businesses for sustainability and impact. This has included measures like expanding support for people traditionally underserved by the financial sector, like Indigenous communities and women entrepreneurs.
Meanwhile, in order for impact investing to reach larger scales, financial institutions and investors are increasingly looking to public-private partnerships. Instead of having lots of impact investments with high transaction costs, private capital can be leveraged in collaboration with the government and the social sector. The federal government’s planned Social Finance Fund, for example, aims to leverage at least twice as much private capital as the federal government capital put forward.
Big Society Capital and Social Innovation Portugal are analogous examples of how public and private sectors have worked together in the past, and their approaches are illustrative of a new era of generating impact.
Finding New Pathways
As governments seek private-sector leverage, new structures of cooperation will have to be designed. These structures must take into account both the statements and actions made by associations like the Business Roundtable, while rooting these new designs in values of inclusion.
“What’s really important is who’s around the table,” said Laycock. “Rarely do we see enough respect being given to the expertise of the social sector.”
Another important factor to designing these new structures is time. Traditional fund structures tend to work towards quick pay-outs, increasingly via financial machines, but real social and environmental impact takes much longer.
“We’re desperate to prove social investment works and want to show it relatively quickly,” Laycock said, “which tends to draw people back to conventional models.” If we are serious about instilling purpose into capital, then we have to be patient with that capital.
Leaving a Legacy
The recent cultural shift, owed in part to leaders like Jed Emerson, is bringing us to the cusp of a new era of social finance, making it impossible for mainstream institutions to ignore the impact of their capital. Not only has the public conversation evolved, but workers from all sectors are demanding purpose in both their investments and careers.
Despite his warnings that we’re “skating on the surface” of putting purpose in capital, Emerson is excited for what could lie ahead. “All of us are trapped in these traditional understandings of meaning, purpose and value. We can free ourselves from some of the limitations of traditional financial capitalism. That’s incredibly liberating.”
There are very real ways to turn good intentions into positive change. “Ultimately, what we’re talking about is the meaning and purpose of our lives,” Emerson said. “What do we want to be leaving, not only as a financial legacy, but as a life legacy?”