Impact investments describe a type of investment that seeks to generate social impact as well as a financial return. Investments need to display both a clear intention of achieving social impact, as well as a strong commitment to measuring the social impact appropriately. The foundation has been working on the topic of impact investing for some time now.
The model has also gained increasing popularity in the international development community. In this context, the goal of achieving social impact through impact investing is translated into reducing poverty at the lowest tiers of the global income pyramid; the so-called “Base of the Pyramid” (BoP). According to BoP theory, poor people in developing and emerging economies can be included in profitable business models at the BoP as producers, suppliers, and consumers, creating win-win situations for businesses and beneficiaries. (see also: Social Entrepreneurs at the Base of the Pyramid).
BoP impact investing thus combines the power of capital markets with the dynamism and innovative potential of social enterprise to reduce poverty and achieve sustainable development, whereby social and profit-seeking motives positively reinforce each other. Yet, these proclaimed win-win situations may be characterised by significant tension between financial and social objectives, and their respective prioritisation. In light of the vulnerability of the intervention context at the BoP, it is crucial to consider the potential ethical risks of profit-generation from poverty reduction.
Based on financialization theory, the impact investing programme of a European development agency was examined in an in-depth qualitative case study. The study focussed on how financial and social motives are balanced against each other and how they influence the overall programme orientation.
In the case under examination, financial motives dominated the intervention logic of the BoP-impact investing programme. This financialization of poverty reduction manifested itself in the following observations:
- Poverty is conceptualised as a unidimensional problem: by understanding poverty singularly as the lack of access to income and products and excluding any social or political dimensions, poverty reduction is portrayed as technical intervention that takes place in a political vacuum.
- Overall investment volume is considered the central indicator of success: the growth of the impact investing market is prioritised over ensuring that the market delivers on its social promised, thereby indicating that the recipe for successful poverty reduction is already in place and poverty reduction only an issue of funding and scale.
- The target population (the BoP) of the programme is not included as key stakeholder: there is little to no representation or feedback mechanisms for the main beneficiaries of the programme, thereby creating selective visibilities and minimum programme ownership for BoP population.
In conclusion, it was found that financial motives dominate social objectives in the strategic orientation of the programme, whereby profitability becomes the defining criterion of effective development cooperation. At the same time, there are no sufficient mechanisms in place that ensure that the economic value is extracted from the BoP does not exceed the value created through investments for this target group. In light of the unequal power relations between BoP-populations and financial actors it is thus crucial that development agencies understand and address the potential ethical risks of BoP impact investing to guarantee the overall positive impact of this poverty reduction approach.
It shall be noted, however, that the financialization of poverty reduction in the development sector does not exclude a simultaneous process of socialization of financial markets (in the sense of more inclusive growth and the channelling of more capital into inclusive businesses and sectors). These processes are in fact taking place at the same time and their reciprocal effects should be researched further to understand the overall value of impact investing for pursuing global development goals.