Social Investing: time to scale up

Never in history have the world’s rich been positioned to do so much for the world’s poor. The wealthiest 20 percent of the population has 72 percent of the world’s purchasing power, while the bottom 40 percent has a mere 4 percent. So why don’t we do more?

At FAI, we’ve been giving this a lot of thought lately. It’s a complicated question, and no one factor is to blame. For starters, we’ve been at the aid game for a long time, with disappointing results; clearly, no one really knows what works. What’s more, when accountability for results is limited, we lack incentive to fix inefficient programs. Then there’s the fact that we don’t want to create dependency via handouts. And finally, there’s the sheer size of the problem. When the need is so very large, how can we do anything more than scratch the surface? Sometimes it’s hard not to feel that our efforts are futile.

One popular suggestion has been to leave economic progress to the market. But while market-based solutions can be very effective, markets are not magic in and of themselves. Sometimes we need to deliberately direct market forces to the right places. This is what “social investing” does. And we think this is an idea whose time has come.

A social investor is someone who invests to create public or social benefit, willingly giving up financial returns to achieve social returns. And the world needs more of them. While some call for the redistribution of wealth – a rather lofty goal – we think social investment is a practical strategy that’s ready to go right now: to build strong institutions that serve the poor, without depending on a solution to the distribution of wealth issue.

Ultimately, this is what microfinance is trying to do. It isn’t waiting for people to “magically” become bankable: it’s creating and strengthening institutions that reach them where they are, right now. Social investing pioneers like BlueOrchard and Triodos Bank help microfinance institutions increase outreach to the poor, while generating profits for their investors. 

Philanthropy is absolutely necessary to help improve the lives of the world’s poor. But it is not enough. A win-win solution like social investing might seem like the Holy Grail, but it really is in our grasp. And when it comes to fighting poverty, we need as many tools as we can get.

* This post is based on a lecture given by Jonathan Morduch at the University of Scranton, May 6, 2010.