By Andrea Mónaco, Senior Technician in the Social Policies Area of EUROsociAL+
Perú. Foto: Jeison Higuita
The outbreak of the COVID19 pandemic during 2020 exacerbated many critical factors that for years were shown as the main shortcomings of the current development model: a model that puts economic growth and increased wealth at the centre and does not consider the negative externalities that the production system can generate at the social level or in the environment.
Indeed, although wealth in the world continues to increase, according to the United Nations World Social Report 2020[2], inequalities have increased in the world since 1990 and, apart from some advances in a few countries, the countries of Latin America among them, income and well-being continue to be concentrated in the highest segments of the population: the world’s richest 1% of people have, since 1980, come to own twice the wealth generated through growth compared to the bottom 50% of the population[3]. These figures generate concern and further emphasise the need to rethink the fairness of the economic system. On the other hand, we are already experiencing the effects of the climate crisis due to the unbridled emission of CO2 in the atmosphere and the unchecked exploitation of the earth’s resources derived from our productive activities.
Before the arrival of the pandemic, a large number of governments and institutions worldwide had already taken the first steps towards building a more equal and sustainable development model. However, it has been the current emergency that has accelerated the awareness of political institutions and society about the importance and need to further incorporate the concept of environmental and social sustainability, even prompting thoughts about recovering from the current economic and social crisis in an almost exclusively green and socially equitable sense. Has the time come to consider that the sustainable development model, so often talked about in recent decades, has gained the necessary strength to establish itself? Is it feasible to adopt a development model which allows us to enrich ourselves while taking care of the environment and building societies which are more equal?
For some years now, a new economic approach has been spreading that represents a clear example of how economic growth, environmental sustainability and social equality can be part of the same strategy: it is the so-called “impact business” sector or “Triple impact business” or, in the English terminology, “social impact business or investing”.
Impact businesses are those economic activities that seek to generate a positive impact at a social and environmental level without neglecting economic profitability. They must not be confused with philanthropic activities, as these rarely pursue an economic objective. They are also different from Corporate Social Responsibility (CSR), which rather represents a strategy, on aspects related to socio-environmental sustainability, complementary to the core business and the different operational activities of a company[4]. In the case of impact businesses, the objective of the company or investment is the social and environmental impact itself, in addition to the economic return.
This approach originated in Anglo-Saxon countries (mainly the United Kingdom) but in recent years it has spread throughout the world as an example of a new economic model capable of responding to current demands for sustainable development. For example, financial activities in this area are well known, such as Social Impact Bonds (SIB) or Green Impact Bonds, financial liabilities that provide for the payment of returns upon reaching a pre-established result in a social or environmental project whose financing has been enabled by the investment: for example, the reduction of recidivism in crimes by ex-inmates who have participated in a social reintegration project financed by the SIB; or the reduction in carbon dioxide emissions thanks to the establishment of a photovoltaic power plant financed through a Green bond.
In addition to the most notable activities with a financial impact, many companies are spreading throughout the world which can be considered impact businesses. In many cases, we also speak of type P companies, where P stands for “profit”[5]. This category sometimes borders on the world of social enterprises, that is to say, those entities which see their core activity as the achievement of a public good without seeking a profit. Accordingly, they cannot be considered impact businesses in the full sense.
This entire area, and in particular financial impact activities, represent a modality to finance, with the participation of the private sector, activities of public interest of a certain complexity and of a certain cost that the public sector alone cannot always guarantee. In other words, it represents a scheme in which collaboration between the public and private sector turns out to be advantageous for both sectors, at the same time enabling the provision of public goods and a return for private investors. In addition to SIBs, for example, there are other forms of impact businesses that represent a clear public-private collaboration such as Outcome funds or triangular funds. These funds involve the collaboration of private investors (who finance), public entities (that define social or environmental objectives) and actors from the social sector (who execute the project)[6].
As we said, this model is gradually expanding throughout the world, although for the moment it is more confined to a niche, to a very restricted sector of the economy, almost to pilot areas. Despite this, in many places this model has shown itself as a new frontier for more sustainable development. Could the post-covid recovery represent the time in which, in the economy, impact businesses prevail as mainstream?
A key factor in making this leap is the role of public policies in having to concur in creating a system of tools and incentives so that impact businesses can proliferate. There are already several cases of policies that foster impact businesses, such as tax breaks for companies, providing a legal definition of what an impact business is, even the case of the United Kingdom that for social enterprises and investment businesses has regulations on public procurement.
In recent years, from the European Union Programme EUROsociAL+, we have been assisting some of the first public policy initiatives in Latin America aimed at promoting the development of activities of this type. In Brazil, thanks to the exchange of experiences with European countries, we have supported the strengthening of the National Strategy for Business and Impact Investments (ENIMPACTO), the first true national strategy at the Latin American level. In Argentina, we are currently supporting the development of rules and practices for the generation of triple impact ecosystems in the country.
Certainly in the coming years, initiatives by governments in this regard will proliferate. As we said at the beginning, impact businesses can represent a clear example of a new and desired development paradigm, a paradigm in which human well-being, rather than GDP, is considered the essential indicator to define the degree of development of a society.
[1] The author thanks Cristian Peña Álvarez for his support in the search for sources and information
[2] https://www.un.org/development/desa/dspd/wp-content/uploads/sites/22/2020/02/World-Social-Report2020-FullReport.pdf
[3] World Inequality Report 2018: https://wir2018.wid.world/
[4] Definition acquired from UNIDO: https://www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-capacities-and-corporate-responsibility/corporate-social-responsibility-market-integration/what-csr
[5] For more information on type B companies in Latin America: https://www.sistemab.org/
[6] Human Foundation, 2019: Progettare l’innovazione sociale: Impact Investing e Fondi UE e https://www.humanfoundation.it/un-outcome-fund-contro-la-poverta/
