Cornerstone Capital recently analyzed environmental and social issues facing extractive and mining companies in a new report entitled Extractive Company Values: Attention to Environmental & Social Issues as an Indicator of Companies’ Strategy Execution Potential. The authors argue that environmental and social issues require “longer term operational planning because they require proactive engagement with local, global and contextual stakeholders to assure passage”. The same came be true for investments across a spectrum of issues, especially when the investments are designed to create socially equitable outcomes.
In a recent report that I co-authored with Sarah L. Thomas, In Pursuit of Deeper Impact: Mobilizing Capital for Social Equity, we analyzed how the process of making investments that are designed to achieve social equity can be improved. In a critical area, our research affirms what many in the international development field and others have learned the hard way: there are financial and social costs to excluding the ultimate beneficiaries of investments. Not only is the process of engaging beneficiaries helpful in its ability to assure passage of regulatory hurdles, it also mitigates against costly mistakes that can be avoided by bringing beneficiaries into the impact investing process early and often.
For instance, the renewable energy industry is replete with examples of foreign investments gone awry due to negative community response. With early and authentic engagement of local communities, investors can better understand the true issues that communities face and thus the actual costs – financial and otherwise – that are involved in complex investments. One expert in the field, Chinesom Ejiasa, former managing director at the Overseas Private Investment Corporation (OPIC) puts it this way:
“It’s tough with investors who require a certain return and they don’t spend enough time thinking about the broader implications of the investment, particularly for the local community. For example, in terms of moving populations from ancestral land to clear ground for a renewable energy project, the investors don’t fully appreciate that the local residents will probably have to move from government-owned land, where they don’t have to pay rent, to privately-owned land where they will have to pay for rent they often cannot sustain. Better community engagement that uncovers the motivations and desires of a community would further mitigate the commercial risks of these sorts of investments and more importantly produce more broad-based benefits. To effect ideal change in a community, one has to consider the make-up of the community, otherwise one will employ an investment thesis that will benefit some, but generate unintended consequences that are adverse to the community meant to benefit the most.”
To understand how inequality works and how investment capital can help address the effects of inequality, it is critical that we do not just look at data. It is also essential to learn from people who are living with the effects of inequality in their daily lives. In other words, we have to develop more strategies to bridge the gap – or create greater proximity – between investors and those in whom they invest. When we acknowledge that the great majority of investment professionals (78 percent of whom are white and 65 percent of whom are male) do not come from the communities in which impact investments are made, we can also acknowledge the need for intentional engagement of communities. By engaging beneficiaries in the investment process, we can gain insights into key factors that drive impact investing success and increase our understanding of:
- The real social and economic issues and opportunities affecting people and communities;
- Contextual factors that may influence the ability to make social and economic change an understanding of the real risks involved with an investment;
- Whether their investments are actually resulting in the intended impacts that they were designed to achieve.
Impact investors spend a lot of time trying to determine how to measure impact. Perhaps one of the inputs we could consider alongside our determined effort to quantify impact is the perspective of those who know best what matters most: the beneficiaries of investments.
Katherine Pease is the principal of KP Advisors, a Colorado-based firm working with foundations, nonprofits and investors. She has worked with foundations, investors and nonprofit organizations for more than 20 years.