Free market capitalism can allow for the end of poverty - Comment & Profiles -

Fighting poverty with entrepreneurialism means integrating social entrepreneurship and impact investing for a more inclusive capitalism, write academics from Swiss business school IMD.

Vanina Farber

Vanina Farber

Peter Wuffli

Peter Wuffli

Covid-19 will push hundreds of million people back into poverty. This means a massive setback to all the progress achieved in recent years regarding the first of the 17 UN Sustainable Development Goals, namely to end poverty by 2030. 

How can poverty be effectively fought? Practical experience and empirical research in recent years have shown that market solutions play a crucial role. They can help to open up new markets for poor smallholder farmers, provide affordable access to basic goods and services for underserved urban or rural people, or enable young adults to acquire relevant skills for employment. 

A quantum leap in the depth of knowledge about the root causes of poverty and an increasing impact focus has – to some extent – helped overcome the previous ideological antagonism between the public sector and free market capitalism. Current wisdom, as expressed for example in the work of the 2019 Nobel prizewinners Esther Duflo and Abhijit Banerjee, two empirical poverty researchers, points to factors such as the lack of knowledge, skills and expertise, as well as deeply held misperceptions and rigid norms that are often at least as important in perpetuating poverty as a lack of financial resources. Consequently, a combination of innovative business models and smart public policy responses is often the most productive approach.   

Defining impact investing

Central to making market solutions work is combining entrepreneurial energy and impact capital. During the past two decades, various platforms have emerged to identify, acknowledge, nurture and connect social entrepreneurs, Ashoka being one of the earliest and most powerful networks. In 2007, impact investing was defined as a new asset class with the intention of realising measurable environmental and/or social benefits, thereby combining purpose with profit. Meanwhile, the global impact investing sector has mobilised more than $500bn in committed capital.  

In 2006, the elea Foundation for Ethics in Globalization was created to fight absolute poverty with entrepreneurial means. As a professional philanthropic impact investor, it supports young impact enterprises from the post-start-up stage to their early-growth stage. It makes investments in the fields of agriculture, last-mile distribution and building employable skills. Its goal is to make these enterprises investable for impact funds, so that it is the last philanthropic investor on their development journeys. 

Together, we published a book, The elea Way – A Learning Journey Toward Sustainable Impact, which crystallises insights, lessons and recommendations for entrepreneurs, investors, executives, philanthropists and academic researchers, as well as all those engaged in the search for a more inclusive capitalism. 

Leading by example

From 40 investments undertaken since inception, we selected several examples to illustrate the main messages. One is Angaza, a company with a technology platform that reaches approximately 1.8 million people in 50 countries. It addresses the problem that poor people cannot accumulate cash savings and are therefore not able to acquire socially impactful goods, such as solar lamps. Angaza offers a pay-as-you-go solution in which consumers can pay mobile money in small instalments for consumption of energy to over time acquire ownership of the lamp. 

Another investment is Dharma Life, an organisation that built a network of 16,000 local entrepreneurs in rural India and reaches more than 40,000 villages and approximately 13 million people. It provides access to socially impactful goods, services and information, such as renewable energy devices, mobile phones, sewing machines or health and hygiene products. It is based on a commercial operation that sells and delivers goods and services through 13 states in India, and it also receives philanthropic donations from large global companies and development organisations to carry out awareness campaigns on topics such as hygiene or renewable energy. 

The most significant insight gained through the work of elea over 15 years is that entrepreneurship and capital must be closely integrated in an effective way to achieve sustainable social impact and innovation. Thereby profitability is not incompatible with social impact but rather a necessary condition for its achievement. Profit is the lifeblood of an enterprise to ensure its survival, allow for investments in growth and attract capital at scale. This integration is challenging and requires close personal collaboration between investors and entrepreneurs in a spirit of partnership that is underpinned by professionalism, relevant skills and deep expertise.  

For investment organisations this means a systematic effort to scout, analyse and evaluate investment opportunities based on clear and measurable impact criteria, as well as ongoing professional support at board level and through targeted initiatives during the investment period up to exit after seven to 10 years. To accomplish this, elea has built an operating model with three components that reinforce each other like a flywheel. At the core is philanthropic investment management (the process of finding and optimising investments). This is nurtured by a philanthropic investors’ circle, which refers to a group of personalities and organisations that enable elea’s activities through their financial and non-financial support. The third component is its professional development programme, which describes the way in which elea recruits and develops its impact investment specialists. 

Staying realistic

Financial return and social impact are created at the level of a single impact enterprise, where entrepreneurial talent, energy and momentum combine with both financial and non-financial capital. Designing, planning, building and running an enterprise is about leadership and its essential tasks, which include defining a purpose and setting directions, building a team and organising work, getting things done and navigating through ups and downs.

An important element is an ambitious yet realistic plan that includes both impact and financial goals, and provides a plausible path toward market success and financial sustainability while defining requirements in terms of leadership, organisation and other resources. Another key factor is building an effective team with the necessary execution capacity to realise the potential. Understanding the capability profile of the founding entrepreneurs with their mix of aspirations and motivational drivers, their talent and skills, their way of operating and their ethical values allows an appreciation of strengths and addresses weaknesses. While founders typically excel in their passion for impact, they tend to under-appreciate the essential role of financial abilities. An active investor can help encourage including a strong chief financial officer in the top team who ensures financial transparency, controls cashflow and creates suitable capital structures.  

While most of the integration of entrepreneurship and capital takes place within single enterprises, perspectives in recent years have broadened toward aligned impact-oriented ecosystems of various diverse organisations across private and civil society and public sectors. Examples are large corporations building alliances with social enterprises and civil society organisations to reach base-of-the-pyramid consumers, or public sector development finance agencies leveraging their resources with matched funding opportunities for impact investors.

This is an encouraging trend toward the vision of an inclusive capitalism under which diversity is seen as a source of strength rather than conflict, with a mindset that emphasises impact-oriented pragmatism rather than dogmatic ideology and pursuing a bridge-building partnership approach to overcome legacy silo structures and behaviours. 

Vanina Farber is a professor and the chair of elea Centre for Social Innovation at Switzerland-based business school IMD; Peter Wuffli is the founder and chairman of elea Foundation for Ethics in Globalization, honorary chairman of IMD and former CEO of UBS.

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