The nature of capital and other threats to impact

 

Farahnaz Karim

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Human nature and its constructs

Capitalism is arguably our triumphant ideology, a foundational construct that orders our lives and societies. It fuels an entire system where private profit (and ego) stimulates creativity, innovation, complex systems, efficiencies and productive things like competition and collaboration, oiled by money – a trust enabling tool.

But capitalism is morally agnostic.

In our era it increasingly appears that the ‘production of inequality’ is capitalism’s default setting.  

According to Oxfam, the eight wealthiest individuals in the world – all men – have the same wealth as 3.6 billion of the world’s poorest citizens: a fact to teach our children, not because were they poor or poorer, the world would be a better place. But because that remarkable statistic is a stark reminder of the nature of the system we operate and live in.

So, can we change its default setting?

Can we tweak capitalism so that it serves us? Not just a few. Not the investor nomenclature. Not the aspiring ultra-consumerist middle classes. But us as one human species, us who are temporary guests of this planet.

Impact capital and its threats

Some are unconvinced we can, ‘unless we edit greed from the human gene pool’. Proponents of ‘impact capital’, on the other hand, believe that we can. New narratives around ESG, impact investing, catalytic philanthropy and responsible business practices are ubiquitous, and a dizzying variety of new standards, metrics, reports, best practices, guidelines, and principles abound.

And yet, two risks are emerging.

First, that of an impact backlash. While the impact narrative is emerging from, and gaining ground in, ‘the West’, many important players in emerging markets of all sizes, from large VC firms to entrepreneurs, are now proudly announcing ‘we are not impact focused’, meaning ‘we are just seeking profit’. And perhaps the backlash is justified: without a viable business model, there cannot be impact. Also, while building a sound business, who needs to add a complex layer of impact planning, monitoring, reporting, verification, classification, authentication, and auditing? While understandable, the impact backlash is of concern. Capital allocations will naturally flow towards lucrative markets, further widening the poverty gap.

And second, a herd mentality. The growing awareness of global poverty (UN SDG 1) is clearly ‘trending’, and yet the bulk of capital allocations tend to follow the same well-trodden paths. For instance, investments in sub-Saharan Africa tend to focus on four countries: South Africa, Nigeria, Kenya and Ghana – a staggering 80% of capital, some say. Similarly, a focus on Diversity Equity Inclusion (DEI) through ‘Black’, ‘Brown’, ‘Female-led’ funds, or BIPOC (Black, Indigenous and People of Color) funds while positive, may not be the answer, and certainly not a panacea, particularly if they are only applied within a national focus (i.e. US) and often de-contextualized from a global perspective.

Mitigating threats

First, the impact backlash can be mitigated by a sharper focus on the demand side of the equation. If the supply side of the economic system – the allocators of capital – cannot all be convinced of the new impact narrative through a top-down approach using standards, regulations and metrics, perhaps the consumers need to be made more aware of their agency. In particular, the 3.6 billion people left behind. The emerging and/or growing middle classes in South Asia and sub-Saharan Africa can create the demand for products and services that create inclusion and a sustainable economy. Emergent consumers hold the key to create ‘Good Capital’. Investing in intelligent consumption now, and through education from an early age onwards, may be part of the answer. After all, how many more companies must we see receiving VC funding to sell fitness advice to obese-prone populations, thanks to capital from companies largely creating the problem?

Second, the herd mentality can create unintended consequences. Labelling matters – especially when it is clearly top-down. The 3.6 billion poorest people are in fact ‘Black’ (although no one is actually ‘Black’) or ‘Brown’, and every shade in-between. And perhaps they will be tempted to build ‘White’ funds one day. So, if we truly want to ‘build better’, post-Covid, we need to question who is controlling the impact narrative of the day? We need diversity to shape capitalism for the greater good and perhaps this requires more inclusive teams in capital allocation, but not just in reductive terms of colour or gender, but also in education – historians and ethicists, scientists and humanists, and across sectors – private, non-profit, public, working together to create the necessary co-investment vehicles, linkages, continua, and global financial/legal innovations required. The answer may therefore not lie in further ‘segregated’ funds, mono-lenses or in ‘checklist capitalism’, but in pluralist capitalism – truly inclusive and innovative approaches and structures to bend the system to serve us.

Farahnaz Karim is the founder and CEO of Insaan Group, a boutique impact investment entity that allocates philanthropic capital to tackle poverty.


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