Why profit is essential to sustainability

What’s the difference between a social enterprise and an NGO? Among many things, social enterprises set out to make a profit alongside social goals, while NGOs are non-profit by nature.

Typically, NGOs look for funding, carry out projects, and submit a project report, but the donors are almost never looking for a return on their “investment”. Often this is because programs run by NGOs are inherently non-profitable (medical programs, water sanitation are two good examples), but many activities carried out by NGOs could be profitable. That’s where social enterprises come in.

There are several companies solving social problems, while also making a profit. Selling electricity to those who previously couldn’t afford it by providing solar panels (like Fenix International), loaning out small sums to entrepreneurs who are unable to find traditional finance (like Kiva), supporting prisoners get back to into employment through building a profitable business (like Redemption Roasters). There are thousands of social enterprises taking an innovation approach to solving long-term problems affecting the most vulnerable people in society.

In contrast, NGOs solicit funds from donors (development banks, government institutions, other NGOs and private donors) to finance their projects. Having worked with non-profits in a place where there are more non-profits than corporations, I see two main issues with this.

1. Funding is competitive. This means that you are more likely to tailor your project towards what you think will get you the most funding, rather than provide the most relief for those most in need. Instead of having the right resources for the right project, NGOs are forced to change and adapt to the funding available.
2. Donor money comes with stipulations. A donor will often have to answer to their own stakeholders, and because of that will direct the money towards certain projects. Of course, most companies are held accountable by an external board, but charities are not explicitly looking for a profit, and most often they use metrics that centre around the number of people affected, rather than the monetary success of the project.

Social investment is a new place to find solutions for long-term problems. While NGOs certainly have a role to play, social investors have already begum to show that they are able to solve difficult problems.

If you disagree, let me know why. Similar if you agree and are involved in impact investing, let me know what you are doing!