Taking Off the Goggles - SVT on Impact

The world’s leaders have convened the world’s top economists and financial engineers to come up with a solution to the global economic crisis. Unfortunately the tools economists and financiers use are, in a nutshell, designed to create an economy that generates short-term financial value. Yet in our derivative-and debt-laden world, short-term financial value creation has increasingly been divorced from the underlying basis and drivers of financial value. So, truly solving the current crisis is very unlikely to happen unless we add some new tools and adjust some of the old ones.

The underlying drivers of value the conventional economic system has left behind include trust, integrity, and the ability to sustain the creation of financial value; these are also interwoven with the health and well-being of the people who are employed by the business, buy its products and are affected by its operations, as well as with the natural resources within and upon which the business rests. These sources of value—trust, health and well-being of stakeholders, environmental resources, and sustainability—are, ultimately, assets. But none of these assets are directly accounted for in the financials on which the global markets trade, nor are they adequately defended by corporate law, or protected by market regulation.

Those charged with correcting the economy’s problems are attempting to find the rainbow… but they’re wearing infrared goggles.

Take the management accounting issue. The experts working on solving our crisis are surely very smart about how the current financial system works, and hopefully about the triage that will help us get the credit markets and all that rest on them operating again. But when it comes to wisdom about the tools that create the conditions needed to support investment in and management of businesses that grow financial, environmental and social returns simultaneously, the expertise is not to be found within academia or on Wall Street quite yet. It is to be found among the doers- the managers and investors at work in the social capital markets.

There's a ton of knowledge out there. Development finance, environmental management and social marketing are becoming increasingly established fields with university curricula and faculty to boot… but out in the field there is a growing group of experienced social entrepreneurs, impact investors and even impact analysts who know quite a lot now about how the multiple kinds of value are managed within individual businesses, venture funds, and funds of funds. There are emerging marketplaces with lessons to offer that broker opportunities to invest in debt and equity that deliver not only financial return but also poverty alleviation benefits; to buy carbon credits with or without co-benefits of the underlying projects; and even to fund social return on investment itself. And while we haven’t seen “impact derivatives“ yet, we are seeing an increasing number of financial engineering innovations particularly in microfinance, like credit guarantees that leverage the risk tolerance more so than the capital of guarantors to make more capital available to MFIs, and securitizations that offer investors choices about risk and return so that ever larger pools of capital can be brought to bear.

While most of these microfinance innovations are still based fundamentally on the ability to predict financial cash flows, rather than on integrated analysis of the underlying social benefits that drive the success of microfinance, this is beginning to shift. Take for example the Grameen Foundation, which has just launched ProgressOutofPoverty with a section aimed at educating investors about the importance of social performance and impact metrics. Why?

Consider that from a financial standpoint, one of the most attractive things about microfinance is that it is countercyclical, meaning it does not seem to be affected by the ups and downs of the global capital markets. At the root of this is the fact that the very poor (microfinance’s customer base) have to make ends meet every day, or they and their families go hungry. They also trust their microfinance lenders not to rip them off the way the alternative lenders often do. This combination of customer drive and goodwill—which are essentially key performance metrics—translates into sustainability of both microfinance’s social returns and of its actual and potential financial return. They are intertwined: without the social assets, microfinance would not be its marvelously countercyclical self. Therefore, to properly manage investment in microfinance or any security derived from it, we must also manage the social assets.

The field of social entrepreneurship is behind in the codification of management tools and institutionalization of knowledge. Right now this is a bottleneck hindering us from moving out of the global economic crisis we face, and into the sustainable economy we need. The good news is, this crisis will help us close that gap.

Social Venture Technology Group advises investors, companies, and mission-driven organizations, enabling them to measure, manage, and communicate their social and environmental impact. Visit our website at www.svtgroup.net or for more related blogs visit www.socialedge.org