Transforming the economy requires transforming our thinking
Fundamentally changing the dynamics of our economic system means asking hard questions. For starters: How can capital serve people, and not the other way around?
An increasing number of investors — individuals and institutions alike — are deploying capital in more socially and environmentally conscious ways. Under the present economic system, that’s a shift worth celebrating. Yet even impact investments rarely stray from the conventional investment approach that prioritizes capital preservation and profits. As impact investing matures, it’s worth asking: can we finance mission-driven enterprises in a way that shifts the core emphasis to environmental and social benefits?
This question is important because, as Rodney Foxworth of BALLE has written, current impact investing practice “deliberately avoids addressing the root cause of so many of our social ills: extreme concentration of power, wealth, and privilege.” The gospel of do well while doing good is enchanting, but the time is ripe to consider whether that approach solves or perpetuates the challenges impact investing seeks to address.
Fixing the system means breaking out of it
Martin Luther King Jr. once said, “Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary.” One could say the same of impact investing and social finance — it is incumbent upon those of us who steward and invest capital to both evaluate how we came into such a privileged position and consider the ways in which carrying out this role may perpetuate systems of extraction and inequity.
When capitalism is successful, money begets more money. And today’s vast wealth gaps and efficient resource extraction aren’t a sign that our system is broken; they’re a sign that the system is working as designed. Impact investors, unquestionably well-intentioned, have been eager to demonstrate that social value and competitive financial returns are not mutually exclusive. It is reasonable to wonder, however, if the challenges of capitalism can be meaningfully addressed through capitalist approaches.
Redefining ‘return on investment’
A growing chorus of voices is beginning to ask: How are our loans and investments affecting community wealth and well-being? How do investors and lenders ensure that we’re adding more value than we’re extracting? How can capital serve people and not the other way around? And embedded in these questions are deeper ones: What does it mean to earn a return? What is our shared understanding of risk? How much money is enough?
Through a triple bottom line approach, we’ve broadened the definition of return to encompass results beyond profit. But in practice, investors rarely pursue social and environmental benefit in a return-agnostic or even capital preservation-agnostic way. Even when foundations make program-related investments (PRIs), for example, they’re likely to expect more than 100 percent of that “philanthropic” capital to land back in their pockets. We typically conceive of risk as risk to principal. Even for impact investments, financial gains and losses remain our primary evaluative prism. The marriage of “doing good” and “doing well” remains a servant-master relationship.
My intention here is not to point fingers. As an impact-oriented capital intermediary, RSF faces these same questions and challenges. We’ve taken some important steps by shifting to a community model for setting interest rates and by innovating the Shared Gifting model. And yet, we realize that other elements of our work — such as our social enterprise loan fund’s collateral requirements, risk-based pricing model, and requirement for personal guarantees — may hamper our intention to create long-term social, economic, and ecological benefits.
Regenerative investing for a regenerative economy
One way we’re trying to address this dynamic is through a shared risk model that engages foundation and family office investors in conversation about what it means to earn a return, take risk, and pursue transformative impact. We launched the Regenerative Economy Fund (REF) to test the model and refine a suite of regenerative finance tools that employ non-extractive repayment terms and collateral positions, subvert the typical investor-investee power dynamic, balance the scales of economic control, and include more stakeholders in decision-making.
One of the first REF investments was a revenue participation agreement with software startup WattTime. With its machine-learning algorithms and software-as-a-service (SaaS) business model, WattTime resembles a Silicon Valley tech startup. And like an increasing number of startups, it is mission-driven: WattTime’s technology has the potential to drive major reductions in near-term greenhouse gas emissions and accelerate the transition of electricity grids from fossil fuels to renewables. WattTime has a different level of commitment to its mission, however: it incorporated as a nonprofit to focus its efforts on achieving the greatest possible environmental impact.
That decision meant WattTime also needed a different approach to raising capital. Through the REF, we collaborated with WattTime to design financing that allows the enterprise to retain control of its mission and applications of its technology. Under a revenue participation agreement, each dollar loaned earns RSF (and any other investors who participate) rights to a fraction of WattTime’s revenue from software and consulting sales over the next five years. These returns are capped, ensuring that any revenue in excess of the mutually agreed-upon repayment terms is reinvested in the organization and leveraged for impact.
Rethinking risk and return
Moving money in new ways is necessary but not sufficient. And for too long, the world of impact investing has oriented impact around investing when it should do just the opposite. As Ford Foundation president Darren Walker urges philanthropists to do, impact investors must confront the uncomfortable irony of our circumstances: “a system that produces vast differences in privilege, and then tasks the most privileged with improving the system.” We must come to terms with the fact that financing transformative impact may not be profitable by traditional standards. This should inspire us not to give up, but to question those standards and set new ones.
Foundations, for example, are well-positioned to take the lead in reframing notions of risk and return. From a standard returns standpoint, grants “target” a negative 100 percent return, PRIs and low-interest loans a 1 to 4 percent return, and traditional equity investments higher than that. This approach overlooks a huge band of potential returns between negative 100 percent and 0 percent. I’m not suggesting negative returns are the holy grail of transformative change, only that we should consider accepting some capital loss in exchange for higher social returns. As Rodney Foxworth asks, is it reasonable to expect a high-impact local investment to have the same risk/return profile as public equities or venture investments?
We’re clear that the answer is no, and the shared risk model is just one way to address that understanding. At RSF we draw inspiration from existing models of non-extractive, regenerative finance such as The Working World’s Financial Cooperative and Thousand Currents’ Buen Vivir Fund, among others. We also participate as a member of Shake the Foundations, a group of organizers and funders seeking to shift philanthropic and investment resources to support community wealth regeneration.
All of us with the privilege of deploying capital have the opportunity to begin weaving new, compelling narratives about money and investment. What if we redefined wealth not as how much capital you manage or gain, but how much you channel to democratic, community control? What if we shifted our idea of capital from a unit we transact to a movement-building tool? What if we thought of it as more than an end unto itself, but also as a means of engendering compassion, generosity, and interconnectedness? A different world is possible, one where impact investing solves problems without replicating the structures that created them.
