Sean Hinton, Co-Director of the Economic Justice Program, CEO of the Soros Economic Development Fund
Please give us a bit of background on how your organization plays a leadership role in the impact investing space.
SEDF was founded by George Soros around twenty years ago, and we’ve since become integrated with his wider philanthropic efforts at the Open Society Foundations. We invest around US$60 million a year specifically at the intersection of where economic development promotes and bolsters social and political rights – something that is unusual in the impacting investing space. In the coming years we will be widening our mandate to invest in more businesses that address the inequalities of the global economic system – and tackle economic justice more generally. We try, where we can, to be a constructive contrarian, and focus attention on issues and approaches in a way that others may not.
What will you be discussing at The Economist's Impact Investing event in New York on February 12?
In 2017, George Soros, our founder, pledged US$500million to address the needs of refugees and other forcibly displaced people around the world through investments – I feel that investing in refugee’s and migrants, and the host communities they live in, is one of the most powerful investments we can make at this point in history, so I’ll be talking further to this theme.
In what ways is impact investing making headway, and where is it lagging?
This depends very much on what you mean by impact investing. If you mean it broadly, say, you expect to achieve some good beyond financial return (as many are increasingly defining it), then it is making headway… growing, scaling. And that’s broadly a good thing. It can make people at least consider the social consequences of their profit seeking financial investments. If that acts as more than a road bump, a kind of ESG+, then great. But it’s hard not to find some positive social impact in investments in emerging markets. And so there is a risk it can become a fairly low bar to be considered an impact investment.
To invoke Robert Burns, our reach should aim at least for our grasp if not beyond. Meaning, and I suspect even the most ardent cheerleaders for the industry would agree, we can do better. The more substantive conceptions of impact—the kind that reaches into lives outside of market exchange into the household, into society and even the polity—are hard to measure and therefore hard to practice. And deep impact on social problems, impact that isn’t just tinkering around the margins of fundamental issues, is both more difficult and more risky than most investors, even the most impact-oriented, are willing to accept.
Asking difficult questions about how much of a say the populations we seek to impact have in these investments and these interventions, we feel is important. And being clear about the outcomes, not just the outputs is crucial – it’s important that even if people’s lives are made better off, we aren’t still worsening inequality in aggregate. So taking all this into consideration I’d say we have a lot of work still to do to justify the hype.
Can you really tell when businesses are “being good”?
It’s tempting to say that the answer hangs on how are we conceptualizing “being good.” We can think of it as “acting ethically,” “doing right,” and set aside the question of the consequences of our actions. Or we can conversely think of it not just as not doing harm but intentionally seeking and generating positive net consequences that are equitably distributed in society. So – is “being good” about intentions or consequences?
Intentions have not gotten us very far. Despite unprecedented overall economic growth, inequality increases apace. Downside risk for the bottom tiers of the income ladder and for marginalized groups remain substantial. The voice of the workforce is weak, despite full employment. And the relationship between government and business is complex and rife with conflicts of interest at best, and corruption and state capture at worst.
But on the other hand, if we take simple measurable outcomes as our definition then we can justify as “good” much of the economic development in, say, China, that has inarguably contributed to elevating hundreds of millions out of poverty but has at the same time had significant negative impacts on the environment, human rights, community resilience and the progress of open societies.
So the answer is…it depends.
What we can say is that in order to really tell when businesses are “being good” we need a far more sophisticated definition of “good” that takes into consideration not just simple impact, or basic economic development even, but that focuses on economic and social justice and considers real consequences not just good intentions.
What are the payoffs and costs associated with impact investing for all parties?
There are many types of impact investors of varying sizes, investing across asset classes, all participating in this impact economy. By allocating capital on the basis of risk, return and impact, some aim to avoid doing harm, while others are trying to address some of the root causes of economic or social injustice that we see today. Similarly, the payoffs and costs associated with impact investing for the investor, the business and society at large, entirely depend on where on the spectrum an organization determines to participate and how successfully it does so. We have seen Goldman Sachs and JP Morgan move towards impact investing, and we have seen commercial companies like Unilever and Tony Chocolonely lead the way in making an impact by contributing towards building a world in which there is a sustainable global client-base for their products, and we have seen investors like the Bill & Melinda Gates Foundation, Accion and Leapfrog Investments aiming to improve access to financial services, each in their own way with their own financial return expectations and financial instruments.
What we believe very firmly is that there is a tradeoff between impact and financial return. And that shouldn’t surprise or concern a thoughtful investor. We all know that one has to strike deals that balance various imperatives – the aspirations and needs of a talented management team, the expectations of capital providers and the demands of consumers, balancing short-term profit and long-term sustainable competitive advantage, for example. Making an impact investment is the same – it just requires us to make a choice about what we optimize for, and be honest about the tradeoffs that we make. It is naïve and dangerous to pretend that we can have our cake and eat it and that the deep-seated social and economic inequities that a majority of the world’s population have been grappling with for decades can yield to the magic of the market, spontaneously and unaided. None of this is to suggest that there aren’t impact investments that can deliver on both dimensions. But their existence is not proof that all impact investments can or should perform in that way. The necessary risk tolerance, patience, and / or return expectations (the financial costs and payoffs from the question) required to have real impact and address these deep social and economic problems are not the same as those for profit-maximizing investments. But the social payoffs are huge and the impact that can be achieved when capital is deployed in service of society in an integrated and thoughtful way is more than worth the costs involved.
Where have you seen impact investing make the biggest strides in recent years?
An old idea, but a new development that both excites me and has made strides in recent years, is the use of systems thinking as a crucial tool in impact investing. Some of the leading impact investors have realized that despite their best efforts, and despite the title of the session I am contributing to at this conference – “The Power of Money” – making a positive impact through investing alone does not adequately address the root causes of these deep-rooted societal problems, but often merely addresses their symptoms. This has given rise to a recognition of the need to understand how the system within which the investment operates, works, and the vital roles that other actors and institutions play in this system. These actors include government, civil society and, most crucially, individual citizens, the so called “beneficiaries” of these interventions, who can and must be active participants in any successful effort. For example, understanding the self-reinforcing mechanisms that result in our agriculture and food systems exploiting smallholder farmers operating at the bottom of its pyramid and subsequently identifying levers that could change this dynamic, of which private sector investment is necessary but not sufficient, is a good example of systems thinking applied to impact investing. This approach requires a certain humility on the part of impact investment, which is a movement that has had to make strong claims to get attention in the private sector. This kind of thoughtful systems-led approach, can be applied to any area in which we seek to invest. The increasing realization that through the identification of these levers, as well as collaboration with other stakeholders to combine tools as well as capital, we can better address some of the root causes of the economic injustices we see today, is really exciting to me.