This article first appeared in my weekly column with the Business Daily on July 24, 2016
Last week I was mentoring businesses with Unreasonable East Africa which is an organisation that works to accelerate the growth of businesses that have positive social impact built into their models. The main reason I signed up to be a mentor is because as a development economist I have long been committed to the notion that the way money is made has an impact whether that’s the intention of the operating body or not; and that impact can largely positive or negative. In economics speak this impact is referred to as an ‘externality’. A negative externality is a cost that is suffered by a third party as a result of an economic transaction; third parties include any individual, organisation, property owner, or resource that is indirectly affected. Modern society is well aware of the negative externalities generated by some business activity that range from environmental pollution and degradation to worker exploitation and gender-based unequal pay issues. However, businesses can have positive impacts such as improved service delivery, wealth creation and even environmental protection.
The main concern I had is that capitalism and business entities operating within often did not integrate impact concerns into strategy and action related to profit generation. Indeed the default position was often to deal with negative externalities that had a negative impact on profit first, and then perhaps deal with the other concerns. For companies that had a stronger moral thread running through them, positive social impact concerns were handled by Corporate Social Responsibility (CSR) initiatives that were very charity like and came across more as dressed up marketing than impact focused activities.
Recently however, the way in which money is made and the systems, processes, strategies and activities related to profit generation have come under more scrutiny. Consumers and populations want negative externalities to be limited and mitigated while positive externalities are amplified. Thus Impact Investment was born in which investments are made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. According to a report by the Global Impact Investing Network last year, East Africa is one of the centres of global impact investing. More than USD 9.3 billion has been disbursed in the region through by more than 1,000 direct deals by development finance institutions (DFIs) and other impact investors active in East Africa. At least 48 impact fund managers have staff placed in Nairobi, which is more than three times as many local offices as in any other country in the region. Almost half of the USD 9.3 billion in impact capital disbursed in East Africa has been in Kenya.
Impact investment tends to generate a divide in terms of whether it is a credible strategy to make capitalism sustainable. On one hand are organisations and people committed to making capitalism genuinely more socially and environmentally responsible and organise to try and ensure that the capitalism operates in a manner that mitigates all negative externalities and amplifies positive externalities. Thus impact investment to them is a way to engender structural change in the way profits are generated. On the other hand, are those who are not committed to augmenting positive and mitigating the negative unless there are clear profit benefits. Social responsibility for them is a rebranding tool that legitimises their bottomless appetite for profit-making. They engage in impact investment initiatives because they are cognisant of the fact using such branding increases the appeal of their product to consumers all over the world in the age of responsible consumption.
In short, parties which pursue the implementation of managing externalities have different relationships to capitalism and different motivations. This makes the activities in the social responsibility and impact investment space multi-layered and complex. Which of the two motivations you think preponderates is a personal choice perhaps informed by one’s cynical bent. As a development economist my view is that any effort aimed at making capitalism more sustainable is positive. Motives be what they may if it leads to structural change in economic dynamics for the better, it’s a step in the right direction.
Anzetse Were is a development economist; firstname.lastname@example.org
This entry was posted in Africa, Development economics, Economics, frontier markets, Political Economy and tagged CSR, Externalities, impact investment, Social enterprise, socially responsible consumerism.