Impact Investing at the Base of the Pyramid – Effective Investment to Combat Poverty
Impact investing refers to a form of investment that seeks to achieve a social impact alongside a financial return, whereby the social impact must be both intentional and measurable. The Foundation has been addressing issues relating to impact investing for some time now.
The model has now also found its way into the field of international development cooperation. In this context, impact investing is frequently promoted for the socio-economically lowest segment of the global income pyramid, the so-called ‘Base of the Pyramid’ (BoP) – based on the assumptions of the economic theory of the same name. This approach posits that people at the BoP can be involved as consumers and producers in profitable business models specifically dedicated to the BoP market segment (see also: Social Entrepreneurs at the Base of the Pyramid).
In practice, this often gives rise to a tension between social and financial objectives, which is interpreted differently depending on the investing actor. The intervention context, characterised by vulnerability stemming from poverty, particularly exacerbates the question of the ethical risks involved in generating profit from poverty alleviation.
As part of a qualitative case study, the BoP impact investing programme of a European government development agency was examined. Drawing on financialisation theory, the study investigated the extent to which financial motives, as opposed to development policy motives, determine the programme’s strategy.
In the case studied, financial motives dominated the logic underpinning the impact investing programme. This financialisation of poverty reduction was manifested primarily in the following observations:
- Poverty is conceived in a one-dimensional manner as a purely economic problem: it is understood as a lack of access to income and goods and encompasses no socio-political dimension whatsoever. Poverty reduction is thus a technical intervention taking place in a political vacuum.
- The measurement of investment volume is treated as an end in itself rather than a means to an end: the growth of the impact investment market is regarded as an indicator of success, irrespective of social impact.
- The target group of the intervention (BoP) is not involved as a programme stakeholder: the supposed target group of the investments – that is, people at the bottom of the income pyramid – are not included as key stakeholders in the programme and have no representation or channels for feedback.
Overall, in the case under examination, profitability motives cause development policy objectives to take a back seat. Through a simplistic conception of poverty, poverty reduction becomes a purely technical and potentially profitable intervention. There is a lack of safeguards to ensure that no more value is extracted from the BoP than is generated for this group through the investments. Given the unequal power relations between poor sections of the population and financial market actors, it is important that state actors who promote impact investing as a new model for poverty reduction, understand and address the ethical risks of BoP impact investing in order to safeguard the BoP and ensure the approach benefits them.
Nevertheless, the financialisation of poverty reduction in development cooperation does not preclude a simultaneous process of socialisation of the financial market (in the sense of more inclusive growth and the channelling of capital into enterprises and sectors with a broader impact). Both processes can take place at the same time. An academic study of their interactions would be desirable in future.