Mobilising Impact Finance to Fix the World–before it’s too late
Designing new capital ecosystems, together, is one way in which we can unlock and catalyse our extraordinary collective potential in extremely pragmatic ways.
The Sustainable Development Goals (SDGs) describe the list of global challenges that need to be addressed, and fast, if all life on this planet is to thrive. Updated estimates suggest that the price tag for achieving the SDGs has risen from $50 trillion to $195 trillion in just 5 years.1 Global capital flows must become a whole lot more coherent, cohesive, and coordinated to rise to the challenge.
Global stocks of liquid capital stand at around $450 trillion,2 more than double the current estimates for mitigating the polycrisis represented by the SDGs. In the face of our shortening time horizon to 2030, and the increasing severity of the climate calamities and their attendant environmental and social crises raging from California to China, the problem is evidently not the availability of capital, but how we channel it towards solutions at the necessary volume and velocity.
Current capital markets: Not fit for purpose
Unsurprisingly, global capital markets and their various financial instruments are not fit-for-purpose, rooted as they are in an extractive economic model that prioritises financial over ecological and social benefits; yet the majority of liquid capital is bound up in these mechanisms. This means that significant innovation is required if we are to mobilise capital to the places it can do the most good, the most quickly.
This is a fundamental failure of systems design. The principal value and purpose of most western economies is unfettered growth, as measured by financial returns. It should come as no surprise therefore that domestic and global economic strategies, grounded in large part by externalising the ecological and social costs of economic activities, have failed to meaningfully advance a better economic model that places human wellbeing and planetary health at its foundation.
Creating a better system is complex, but not unachievable. New economic models that factor in ecological and social values continue to emerge, and gain more widespread championing, regardless of how well operationalised they may currently be.3 The field of ‘impact metrics’, while frustrating for many due to its overarching lack of coherence, and funder-centric methodologies, has continued to advance, with a variety of both novel and reliable ways in which beneficial outcomes can be more universally measured.4 And the field of meta-currencies has exploded, as people the world over seek ways to liberate themselves from an economic system that they rightfully experience as oppressive (irrespective of the enormous gap between current reality and future potential).5
But all of this innovation will not ladder up to an almost $200 trillion systemic intervention without significantly more work being done to address the very practical problem of creating incentives and mechanisms for working together at planetary scale.
Whether you’re on the demand or supply side of the impact finance market, or sitting somewhere in between facilitating connections, it’s obvious that capital is moving too slowly, at too meagre volumes, and frequently in the wrong direction. Further, it is neither colour nor gender-blind,6 remains largely inaccessible to people and communities most adversely impacted, and is equally inaccessible to those working on solutions—most of whom fall outside the parameters of traditional venture capital, bank lending and even impact investing.
While lending to small and early stage enterprises had reached a recent high thanks in large part to favourable interest rates and the COVID-19 measures undertaken by many governments,7 the financing gaps persist and are likely to worsen in the current recessionary global climate. The United Nations Conference on Trade and Development (UNCTAD) puts it well:
Inadequate access to finance remains a major obstacle for many aspiring entrepreneurs, particularly in developing countries. As recent studies confirm, the global financing gap for micro, small and medium-sized enterprises remains enormous. Entrepreneurs of all types and sizes require a variety of financial services, including facilities for making deposits and payments as well as accessing credit, equity and guarantees.8
To make matters worse, not only are global financial markets not designed to direct financing toward the SDGs, they are also extraordinarily fragile. The demise of Silicon Valley Bank and four other technology and VC focused regional banks in the US vividly illustrates this point. Taken together, these bank failures put close to $550B in assets at risk, or almost double the assets of the over 1,000 Community Development Financial Institutions (CDFIs) whose mission is to serve economically disadvantaged communities—and the small and early stage enterprises created within them.9
The concentration of wealth and assets in a small number of banks who are susceptible to investor irrationality and market dynamics put at risk a considerable amount of financing both for venture funded enterprises and, because of contamination and the interlinkages of the banking sector, for enterprises that rely on community banking institutions. Bank failures exacerbate the pressures on people already locked out of mainstream finance, as stressed banks over-index on “creditworthiness” and other underwriting measures that are inherently biased against many entrepreneurs.
Designing capital ecosystems for collective impact
There is a great deal of capital innovation at the community level, with investment cooperatives, relational and trust-based lending, and community owned real estate emerging as new vectors for local wealth creation. A recent report commissioned by the Kresge Foundation identified dozens of community-centred investment models that are creating intergenerational wealth and community health in the US, for example. But what makes these innovations so powerful is also what makes them self-limiting. By virtue of contextual and geographic specificity, community capital solutions tend to be too small and fragmented to create scalable systemic solutions.
This points to a need and opportunity to use a systems design approach to leverage on-the-ground experience and ingenuity, and find interstitial and intentional ways to connect multiple stakeholders in a capital ecosystem such that we can create leverage and supervenient effects, and increase both the volume and velocity of capital.
At their core all societies function as ecosystems—a complex interdependency of organisms seeking ways to thrive within the ecological constraints of their context. Where human societies differ, however, is that we have permitted indefensible mathematical models to extract enormous value from the natural world, while ignoring the very real costs to current and future generations by doing so. By returning to the roots of our biology, and deliberately architecting mutually-beneficial, self-supportive, thriving ecosystems, we soon see that capital is the greatest tool at our disposal for facilitating flows of value within them.
Capital ecosystem design is an essential discipline for creating a new, more just, equitable, and sustainable society. A capital ecosystem occurs at the intersection of sector, geography, and community—where the latter can be communities of practice, of demographics, and / or of place.
The formula is always the same:
Where C = Community; G = Geography; and S = Sector
The Inclusive Capital Collective (ICC), for instance, emerged from our work with a group of predominantly BIPOC community fund managers and entrepreneur-support organisations in the United States since 2019. The now nearly 300 members of the ICC are all responding to the chronic and systematic discrimination that entrepreneurs in their communities are experiencing in financial markets (as elsewhere) by creating innovative products and programs that are designed to create wealth in communities from Atlanta to Seattle, and from San Diego to Baltimore. Over the course of a 12-month participatory multi-stakeholder process (at the height of the pandemic!), participants identified two critical issues affecting their capacity to serve the needs of their communities, that were not addressable by any one individual organisation.
The first of these was technical assistance, the process by which capital providers and capital intermediaries ensure that entrepreneurs seeking funding are effectively ‘investment ready’, most notably providing support with general financial literacy, business and financial modelling, legal compliance and other factors that could adversely impact both an organisations successful funding and utilisation of capital to achieve its outcomes. While most ICC members have some version of technical assistance, this work is typically under-resourced, and a cost-centre to the organisations providing it. But with shared experiences, and more effective sharing of what’s working across different sectors and communities, ICC members are able to level up their technical assistance support, and invest less time on this essential work, liberating more resources to meet the capital needs of their communities.
The second issue was credit enhancement, to help them mitigate the risk perceptions that mainstream investors, including so-called ‘impact’ investors, have about the ICC capital innovators’ models, and the risk profiles of their borrowers. More often than not, these perceptions are direct results of the systemic racism that’s hardwired into US financial markets: For example, as described in the ICC’s Black Paper “Shifting Power and Capital in Real Estate Finance”, developers focusing on commercial or mixed use projects in historically marginalised and red-lined communities suffer from lower valuations that change the math of the terms they can get from commercial lenders. A catalytic and transformative financial product in this case is a credit enhancement facility that the innovative real estate developers of the ICC can draw on to “de-risk” their projects, unlocking 10x in mainstream commercial capital in the process. The goal of capital ecosystem design is to identify these sorts of leveraged opportunities that build bridges to and create leverage from mainstream financial markets–essentially transforming them from within.
Another example of a such a transformative capital product, in a different sector and geography, is the Trade Finance Vehicle instantiated by Red Hat Impact in the Pacific, “an award-winning whole of ecosystem, market-level intervention in the menstrual health sector in the Pacific that works by financing the supply of input materials for locally owned and operated enterprises that make and distribute reusable pads for women and girls.” This vehicle takes a well known financial tool, trade finance, and applies it to a frequently overlooked industry, menstrual health, and uses extensive partnerships and networks to make it work across a highly distributed, disaggregated set of enterprises. It’s another example of a financial product that is both legible to mainstream capital markets, and transformative in the volume of capital it can help direct to an important sector.
There are a number of other capital ecosystem design projects we’re aware of, addressing Islamic finance, rural livelihoods in India, startup finance in Germany, Puerto Rico, and East Africa, and ocean conservation in Latin America, all in varying stages of planning. As with the Inclusive Capital Collective, each of these ecosystems is designed to ensure that all stakeholders have an equitable voice in defining their collective requirements, with ownership and governance of any emerging institutions or financial instruments baked in from the outset.
Conclusion
When we published our concept paper From Billions to Trillions in 2018, we explored the barriers to mobilising capital at planetary scale, and proposed a number of incentives and mechanisms that could support more rapid and effective capital deployment across the SDGs, and the planetary issues they encapsulate. In the last five years, while there has been (at least!) a four-fold increase in the capital required to address the SDGs, there has been a commensurate explosion of innovations intended to tackle them, as well as funds, foundations and initiatives to finance them.
And yet ….. As The Notorious B.I.G. rapped in a posthumous release back in 1997 “It's like the more money we come across / The more problems we see”.
When it comes to tackling the multiplicity of challenges playing out at all scales in our communities, there’s simply no defense for bad math and magical thinking—and the hard yet simple truth is that there is simply no effective or equitable way to address these issues in isolation.
Together is the only way forward, and designing new capital ecosystems is one way in which we can unlock and catalyse our extraordinary collective potential in extremely pragmatic ways.
What are some of the most exciting initiatives that you are seeing, that seek to mobilise capital at the volume and velocity we need?
ibid.
James F. Smith, Harvard Kennedy School, February 16, 2022, Wanted: New economic models for a post-globalization world
The Impact Investor, February 5, 2023, How to Apply Impact Measurement and Metrics.
Tonantzin Carmona, Brookings Institute, October 26, 2022, Debunking the narratives about cryptocurrency and financial inclusion.
Sara Silano, March 6, 2023, Women Founders get 2% of Venture Capital Funding in U.S
OECD (2022), Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard, OECD Publishing, Paris
Ryan Glasgo & Sandhya Nakhasi, 30 March 2023, How an Equitable Financial System could Increase Stability in Banking
Wonderful post and thanks for the link to the new Kresge study!
If we take perhaps the most vulnerable sector of the real economy--that of social care--it may also offer the greatest potential for innovation in both the areas of social finance and infrastructure-building. This sector also points toward the larger ecosystem of a social economy more typical of Southern Europe or the global South. The dynamics of a social economy suggest the need for a social market which facilitates replacing transactional relationships (which have brought us to a crisis of care) with relationships of reciprocity.
It's become clear, based on two decades of data, that we know how to create a system of localized, co-created care which is much superior to neoliberal, technocratic models.
We at the Solidarity Workshop have a team currently writing the first U.S.-focused feasibility study on this topic, utilizing cross-cultural comparisons from Emilia Romagna, Quebec and South Korea.
When published this fall, our research will likely suggest that a new inclusive capital collective can and should address the way an ecosystem approach to social care has delivered high levels of well-being for several decades now, if not longer. It's hard to think of a better or more needed initiative around which to mobilize impact finance.