Catalyzing the growth of the impact economy PART II
Social entrepreneurs would undergo a radical change in composition:
away from the private-sector stars whom many investors and fund managers now
hope to attract into executive roles, and toward proven “public-sector
champions.” These are seasoned government officials and civil servants who have
firsthand experience dealing with environmental and social problems that are
rooted in market failures and therefore resistant to market-based solutions. As
executives and managers at social enterprises, these public-sector champions
not only commit to developing their own skills as leaders, they also assemble
capable teams to pursue major opportunities for both revenue and impact,
tapping into an expanding pool of millennials who are interested in
impact-economy careers.
Governments would make a significant change to their operating
model that sees them partner actively with private-sector organizations to
deliver social outcomes. Amid rising costs (government spending is more than
one-third of global GDP) and strained budgets (the global public-sector deficit
is nearly $4 trillion a year), governments’ longstanding approach to financing
and implementing public services appears increasingly unsustainable. In a
mature impact economy, governments would work with other stakeholders to
produce social outcomes that governments lack the capacity to deliver and to
boost the productivity of public spending on core services. This approach would
require policy makers and civil servants to first adopt the mind-set that
private-sector collaboration offers a means of increasing governments’
effectiveness. Governments will also need the ingenuity to finance the delivery
of social outcomes in a way that aligns the interests of private investors and
enterprises with the interests of citizens. That will mean reassigning their
most talented and creative people to engineer governments’ collaborations with
the private sector.
Just as importantly, governments would
enact public policies that favor the continued development of the impact
economy by providing incentives and reducing uncertainty for investors,
entrepreneurs, and other stakeholders about the viability of the social sector.
For example, the National Institution for Transforming India (also known as
NITI Aayog), a think-tank-style branch of India’s government, has mapped the
activities of various government ministries against the SDGs and tracks the
social outcomes they produce.
Social-sector organizations would pursue fewer innovations in cost containment
and excellence in donor management, and more innovations in scaling and
excellence in outcomes. This would represent a significant shift away from the
risk-averse mode in which many social-sector organizations now operate, by
which they adhere to such practices as keeping employees’ salaries low to avoid
criticism for excessive spending on administrative activities. Instead,
social-sector organizations in an impact economy would increase their spending
in research and development or use part of their long-term endowment to make
impact investments. These approaches would embolden impact investors and social
entrepreneurs to invest more in their own institutional capabilities and
people.
Intermediaries would move beyond merely explaining how to use
various impact measures and instead compile and publish impact ratings in a new
role as independent rating agencies. This activity would create greater
transparency across the impact economy and reinforce demand for consistent,
reliable ratings among asset allocators, investors, impact organizations, and
policy makers. Highly rated agencies would be rewarded for their work and
interventions, such that they would receive more or lower-cost funds. Taking
this activity further, intermediaries might develop and administer
professional-certification programs for fund managers and other impact-economy
participants, thereby acting as gatekeepers for the impact economy.
Consumers would shift out of their relatively passive roles,
in which they have weak affiliations with organizations that support progress
toward positive environmental and social outcomes, and adopt patterns of
actively consuming goods and services from social enterprises and sustainable
brands. This shift would represent the closure of the so-called
attitude-behavior gap that separates consumers’ stated preferences from their
spending habits. Consumers would also help drive the development of an impact
economy by engaging in local communities and political systems and expressing
their views directly to institutions through traditional media, social media,
and other channels.
Media organizations and analysts would take a more sophisticated approach to
appraising and documenting the impact economy and its stakeholders. As the
impact economy matures, media organizations would have less need to publish
stories about the market distortions caused by traditional capitalism and could
offer more stories about the positive outcomes produced by social enterprises
and sustainability-focused enterprises. Top-tier media outlets would offer
serious and high-profile coverage of the impact economy, as they do for the
rest of the business world—think of an “Impact 500” business ranking that
commands as much attention as annual rankings of the largest companies,
wealthiest individuals, and fastest-growing businesses. Similarly, analysts in
the financial and other sectors would reexamine their assumptions and make a
renewed effort to evaluate impact-economy organizations on their merits and
make their findings understandable to mainstream audiences. For their part,
impact-economy stakeholders have an essential part to play in setting
acceptable cultural and behavioral norms, demystifying concepts such as impact
investment, and challenging the myths that surround these norms and concepts.
Redefining
the impact economy’s potential
Among the impact-economy stakeholders we
have interviewed or spoken with, there seems to be general agreement on what a
mature impact economy will look like. There is also a broad consensus on this
point: the impact economy will not reach maturity until it develops policies,
practices, and standards to govern the social dimension of impact-related
economic activities.
Such norms are readily observed in mature
sectors of the service economy such as accounting and finance. For example,
when mainstream investors estimate their returns on potential deals and
managers make choices for their businesses, they can compare the financial
aspects of their options according to common accounting principles—norms that
have taken the better part of a century to develop. But when investors and
managers come to evaluating the impact-related aspects of their options, no
such norms exist. And while impact investors are supposed to maintain
professional certifications and abide by regulations in their roles as managers
of other people’s money, no such norms pertain to managing the social impact of
their clients’ investment holdings.
Certain other conditions, such as a
limited flow of funding, also limit the growth of the impact economy, although
targeted government interventions could correct these with relative ease. (For
example, the UK government used funding from dormant bank accounts and four
large UK banks to provide seed capital to new impact-investment managers.4 ) The lack of norms governing the
social dimension of impact investing, then, arguably stands out as the most
powerful constraint. As such norms are established, we anticipate that the
transition to an impact economy will accelerate and flows of capital, talent,
and knowledge will increase. Three activities can help establish the norms that
stakeholders say they need to devote more of their time and resources to the
impact economy.
Instituting public policies that provide
incentives and disincentives and create certainty for stakeholders.
Governments can consider instituting
policies that would encourage impact investments and the expansion of social enterprises.
One such policy is incentives—for example, tax deductions for social
investments that are similar to tax deductions for charitable donations. The
United Kingdom has had this kind of tax-relief scheme in place since 2014 and
expanded it in 2017. Incentives would also help attract wider interest in
impact investments and stimulate the emergence of investment products for
retail investors.
Other policy options include those that
level the playing field for social enterprises, such as regulations that permit
nonprofit organizations to earn revenues from the provision of services. Policy
makers can also consider additional ways of creating demand for
enterprise-created social impact. New approaches to contracting for public
services could let government entities act as “purchasers” of social outcomes
that could be funded with social-impact bonds or other impact investments.
Achieving a broad commitment to mutually
reinforcing operational, measurement, and reporting norms for fund managers,
social entrepreneurs, and impact-economy intermediaries.
As in other fields, professional
requirements and standards for conduct would help increase the quality and
consistency of services provided by fund managers, social entrepreneurs, and
other impact-economy stakeholders, just as they do in other fields. Industry
associations could help by defining the competencies that these professionals
must possess and developing programs to test and accredit those who wish to do
business in the field.
Widely accepted standards and norms are
especially needed for measuring and reporting impact. It is not uncommon for
impact-fund managers to track social impact with metrics taken from numerous
sets of standards. In a survey of fund managers, only 24 percent of respondents
said they use a set of standard metrics across all the investments in their
portfolios.5 The
overwhelming majority select particular sets of metrics for each investment,
sector, impact, or customer-specific objective. Social enterprises, too, have
multiple sets of impact indicators to choose from. These disparate approaches
to measurement impose administrative burdens: asset owners must figure out how
to compare the effectiveness of fund managers that report impact in different
ways, and fund managers and social entrepreneurs must spend time studying
different sets of indicators and deciding how to apply them. A single set of
indicators, covering the many sectors, themes, and contexts in which impact can
be tracked, would alleviate this burden and help promote accountability and
transparency. One recent idea of this kind, proposed by the Global Steering
Group for Impact Investment, is that of “impact-weighted financial accounts,”
which use multipliers to estimate a company’s social impact based on ordinary
financial measures.
Creating an industry body that promotes
policies and standards of excellence and moves all participants to adopt them.
Some impact-economy constituents,
particularly among asset managers and entrepreneurs, are relatively new to the
tasks of financing and creating social impact. It is also apparent that these
relative newcomers spend a lot of time developing the systems and processes to
operate impact-economy organizations. (Investors have picked up on this; some
have shared concerns that fund managers lack the skills required to deliver
social returns on investment.) Foundations and investors have done a great deal
to assist fund managers and entrepreneurs by setting up organizations where
they can exchange knowledge and ideas. A well-organized industry body could now
streamline the adoption of policies and standards by acting as a clearinghouse
for this kind of knowledge.
Given the extent of the world’s social and
environmental challenges, a major increase in the scale and reach of the impact
economy is urgently needed—and will be hard to achieve. Investors,
entrepreneurs, governments, and other stakeholders will need to overcome their
own practical constraints and prepare themselves to assume new roles. These
individual efforts will be complicated by the dynamics of convincing multiple
stakeholders to agree on the shifts that have to take place and compelling them
to work together rather than pursue individual agendas. An essential first step
will be to agree on a shared vision for the impact economy, along the general
lines proposed in this paper. With such a vision in mind, impact-economy
stakeholders can together start to carry out the three main tasks described
above and register initial successes that will provide motivation for a
continued, sustained effort. None of this will be easy, but as the impact
economy matures, it will bring new rewards to stakeholders while enhancing the
welfare of people worldwide.
By David Fine, Hugo Hickson, Vivek
Pandit, and Philip Tuinenburg
https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/catalyzing-the-growth-of-the-impact-economy?cid=other-eml-alt-mip-mck&hlkid=10a31f62ef46493893d9616341f8d822&hctky=1627601&hdpid=4d19f8e2-c2d2-4ea9-80cb-90cd01ea7500
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