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Catalytic Investing: a Theory of Change

 I have written a number of blogs criticizing the direction taken by those who drive the “impact investing” narrative.

Its time to move on and write about what we should be doing instead.

First a declaration:  This article is addressed to those who wish to invest in making real changes in the world and are willing to lose money in the process.   

This is not addressed to those who want to “do well (financially) by doing good”, nor those who want to “solve the world’s most intractable problems” which invariably means other people’s problems.   It is not addressed to those who believe that “market failure” is the root of poverty and inequality, and that the solution is therefore to mobilise “trillions of dollars” to extend the market to those who the market has marginalized. It is explicitly not addressed to those who seek “The Fortune at the Bottom of the Pyramid.” 

Rather than continuing to debate the meaning of the words “Impact Investing” I prefer to spell out a framework for a different approach, which I choose to term catalytic investing. I am sure I am not the first to use the term, and I don’t claim ownership of, or originality for, the ideas.   I am simply spelling out here in brief a framework for thinking about what catalytic investing can do. This is a LinkedIn blog, not a full-length treatise, so not every argument can be fully canvassed. I would be delighted to debate the points at greater length (and to learn and change my thinking in the process.)

The global context

In a previous blog I quoted an article by 15 prominent economists including three Nobel Prize winners in the Guardian See reference at end) identifying that addressing the structural roots of poverty “requires changing the rules of the international economic system to make it more ecological and fairer to the world’s majority. It is time we devised interventions and accountability tools appropriate for this new frontier.” (1)

I start from their premise that poverty and inequality are rooted in the structure of the global economy, of the international economic institutions and the political power that supports it. The global economy as it has evolved is the source of inequality not its solution.  This is as true of the unemployed and the working poor in the United States, as it is of slum dwellers or subsistence farmers in Africa, Asia and Latin America.  It is therefore the global economy itself that needs to be fundamentally changed.

This is hardly a small challenge, but it is important to acknowledge the long-term goal and be thoughtful about how our work is contributing to the long-term goal.

The change we need in the world

The struggle (and we should not call in anything else) to transform the global economy has local and global dimensions. There need to be changes to global taxation and trade policies and practices;   In particular, The power of multi-national corporations to avoid/evade tax through their global operations must be curbed, as should their ability to pay near starvation wages, ignore the health and well-being of their workers, and externalize the environmental and social costs of their operations.  At the heart of all of this is the need to challenge the dominant view that companies and their management exist to maximise profit for shareholders – a notion that has really only held sway for about four decades.

Over the same period has come the evolution of finance as the dominant source of profit extraction in the economy. Banking, venture capital and private equity have come to shape the way we understand money and profit, and the loud sucking you hear around the world is the noise of wealth flowing upwards to the financiers and executives of the companies they “own”.

These are global, national and local issues and need to be contested at all levels. The contest involves political movements, local community organisations and trade unions. It also involves intellectuals and academics, seeking to penetrate and fracture the still powerful idea that the economy we have is the only one we can have.

The implication for catalytic investors

The current rhetoric of the impact investment community is that a trillion or so dollars of impact investing (very) broadly defined, will lead us to attaining the SDGs. (Apparently, we are $305 billion in, so we should be seeing the impact any time now).

Those foundations, philanthropists and others wanting to contribute to genuine change should be looking to do different things. My first thoughts:

1.      Forget about “solving the world’s problems” with your money and your investments. Rather locate yourself as part of a global movement challenging the roots of inequality.

2.      Most of what needs to happen is political and organizational. Movements fighting inequality need grant money. Find those who are best at this wherever you want to contribute and fund them. Forget about short term “projects. Impact, outputs, outcomes and the log frames that document them”. Stop insisting on “sustainability” – it inhibits organisations’ ability to work. 

3.      If you want to invest in economic activity there is plenty to be done. Invest in enterprises that either:

a.      Strengthen community organisations and resilience (Community Development Trusts, community owned enterprises) or which help to strengthen worker organisations

b.      Invest in enterprises that help to model the economy of the future. This can include various sorts of co-operatives, companies that bring worker representatives onto their boards and/or have share ownership or profit sharing schemes to benefit workers, companies that put a cap on CEO to worker income ratios; finance the purchase by communities or workers of companies that are at risk.

4.      Equally important: be, or invest in, the kind of financial institution that is committed to the success of its investees because they are changing the world; and which helps to achieve that by turning the risk return ratio on its head. Be willing to finance at low cost because of the social value or potential of the enterprise, not because of the low risk. Be willing to take equity returns way below the risk adjusted rate, and to return to workers or the community equity in the enterprise as it becomes profitable.. Be willing to make interest free loans where it allows an enterprise that you value to gain traction.

This is not a model for all financial institutions. It is a model for catalytic investors whose goal is to begin to support grass roots activism, and enterprises that at least begin to sow the seeds of a different kind of economy.   You will need to up-end the logic that has led to the financialization of almost everything and use your money to contribute to a movement which you don’t control. 

Catalytic investing will see itself as one tool among many needed to change the world, not as a pot pourri of investments that will solve other people’s problems. It will see itself as an ally of social justice activists, not an “asset class” that will make omlettes for all of us without breaking any eggs.

And it will commit itself to creating a new investment logic.

(1)“Buzzwords and tortuous impact studies won’t fix a broken aid system” Statement by 15 Economists: The Guardian 16 July 2018