Across the social sector, impact investors are assessing the grave threats posed by COVID-19 — both the existential risk to the global economy and to the companies and funds in which we have invested. More than anything, we are aware of the need to listen, learn, and adapt to this moment.
Philanthropic funds have been investing for social impact since at least the 1990s, but it is only recently that the idea has caught on in the wider world. A 2019 report by the Global Impact Investing Network (GIIN) found that some two hundred and fifty institutions, mostly in the United States, Canada, and Western Europe, manage more than $239 billion in social impact investments around the world. At the end of 2018, GIIN estimated the full impact-investing market at $502 billion.
That's a lot of money, but who determines how it gets invested?
While the modern development-aid community places a premium on consultation with those who receive aid, impact investors do not necessarily do the same. Yes, most of the GIIN survey respondents link their declared objectives to the United Nations Sustainable Development Goals, but conspicuously missing from their responses is any exploration of the question: How are affected workers, communities, and consumers involved in deciding where and how investments are made, in implementing the process, and in assessing the results? In other words, can impact investing be made more democratic?
Currently, it is impact investors themselves who control the decision-making process, and the linchpin of their approach is an often-untested assumption that the benefits of the investment will trickle down to workers, communities, and/or consumers. That approach needs to change. While impact investing, with its profit imperative, is not the same as development aid or conventional grantmaking, it still seeks to deliver and measure social good. That's why we believe impact investors could take a few cues from philanthropic funds.
An effective participatory approach, which some call "user-design" or "co-design," could be integrated throughout the life-cycle of an investment — and the Open Society Foundation's Economic Justice Program has been supporting research by the Institute of Development Studies at the University of Sussex to map out how it might be done.
Our research team identified four key stages in which a participatory approach can make a difference:
Sourcing and approval: A number of impact investments made by OSF's Soros Economic Development Fund are testing out a participatory approach. In some cases, we have supported workshops, focus groups, and surveys through which the targeted community can outline its hopes and concerns. Impact investors can also require that assessment of community members' perspectives be included in all investment recommendations, while investment committees at funds focused on particular geographies or issues can include members of the community.
Managing: Impact investors can require that community members sit on an investee's board; or that communities be given some ownership of the investment through mechanisms such as "golden-share" arrangements (which come with enhanced voting rights); or that employees be offered stock ownership plans that give them a meaningful stake in both the operation and governance of the company. Investors could also consider adopting a participatory budgeting strategy that allows the targeted community to democratically allocate a portion of the intended investment.
Monitoring: There's a wide array of participatory methods for monitoring projects, including approaches involving "participatory statistics," in which local people generate their own data, or the "Most Significant Change" technique, which regularly asks those targeted by a program about its impact on their life. Such methods can be a complement to more traditional monitoring methods such as consumer surveys, town hall meetings, and focus groups.
Exit: The potential positive social impacts of an impact investment can easily be lost when an investor decides to pull out. To ensure the sustainability of an investment, investors should take steps to build a decision-making process that involves community members during a major transition such as a sale, an acquisition, or the bringing in of new investors. They can also think about offering the target community a say in any changes to the by-laws and/or a veto over any sale of the enterprise.
Many of these ideas are untested, but the field is changing fast. One of the most developed examples is the global Buen Vivir Fund, which was founded in 2018 by Thousand Currents, a nonprofit in California. Among its innovations, the fund invites local grassroots leaders to serve on the board with fund members and gives them equal voting rights in the fund's governance and management.
Clearly, a participatory approach can add costs and time for those on both sides of a deal. And it often makes an already difficult task even harder. We also understand that even in fields where it is standard procedure, community participation, when executed poorly, can amount to little more than expensive and time-consuming consultation. On the other hand, when done well it can leverage local knowledge in ways that benefit the investment process at every stage.
Despite the recent proliferation of environmental, social, and governance (ESG) funds, the potential costs of a participatory approach mean we should not expect the for-profit investment world to take the lead. But if philanthropy can show that such an approach actually generates positive impacts, we believe it's only a matter time before private funds take notice — and a participatory approach to impact investing becomes a differentiating factor they cannot afford to ignore. After all, isn't that what happened with social impact investing itself?
Sean Hinton is co-director of the Economic Justice Program at the Open Society Foundations and CEO of the Soros Economic Development Fund. John Gaventa is a professor at the Institute of Development Studies (IDS). Background research was provided by Peter O'Flynn, now with New Philanthropy Capital, and Grace Higdon, IDS.