Social Impact Economy: “Doing Good and Doing Well”

 

To some, generating high profits and helping society seem paradoxical, perhaps even impossible. However, one of the burgeoning areas of economics is social impact economy, which lies in the intersection of innovation, economy, and technology.  Social impact economy focuses on integrating positive social effects with economic benefits. Social investments differ from other types of investments because instead of being entirely profit-driven, they also consider benefits that can be reaped by society and provide solutions to public problems such as poverty, pollution, and recidivism. Thus, social impact economy injects philanthropy into the area of investment so that if executed properly, it can lead to not only profits but also charitable contributions to society. One may also argue that by internalizing the positive externalities that investments may produce, social impact economy is making the market more efficient.

Major organizations associated with this area include the Aspen Institute, which initiated the Impact Economy Initiative that focuses on how to use public policy to create an environment conducive to impact investing and social entrepreneurship. There are also social impact bonds, which are contracts with the public sector or the government that allow institutions to gain profits for investing in solutions for social problems. This new strategy of reconciling better social outcomes and profits for investors is still a new concept, and leaders in this field include Tracy Palandijan, the co-founder of Social Finance, Inc. and Scott Griffith, the Chairman and CEO of Zipcar from 2003-2013, both of whom spoke at the John F. Kennedy Jr. Forum on a panel entitled, “The Social Impact Economy” (11/21/13).

Social impact bonds are still a relatively young financial tool, but major banks such as Goldman Sachs are already purchasing them. In 2012, New York Times reported that Goldman Sachs invested in the city of New York by lending $9.6 million to pay for an anti-recidivism program for those who served their time at the Rikers Island prison. However, this action was not simply out of charity; rather, the interesting part was that Goldman only made money if the program worked. Thus, if the program reduced recidivism by 10 percent, then Goldman would recuperate their $9.6 million investment. If recidivism was even more reduced, then Goldman could gain as much as $2.1 million in profit. On the other hand, if recidivism did not drop, then Goldman would lose money.

The company Zipcar, which is the world’s largest car sharing and car club service that is an alternative to traditional car rental and car ownership, is a prime example of social impact economy in action. While still a company that generates a decent amount of profits, it also contributes to society as a whole by helping reduce congestion, ease parking demands, and lower communities’ overall carbon footprints. According to its former CEO, Scott Griffith, who grew the company from $2 million to nearly $300 million in revenue, companies should “do well and do good.” He added that social impact investments and actions may also help companies retain talented employees because while employees are attracted by stock options and high salaries, most of them ultimately stayed with his company because of the positive social consequences it produces, such as decreasing the amount of money households have to spend on transportation, alleviating the need for parking space, and reducing pollution.

While social impact economy involves “win-win situations” in which the companies and capital markets generate profit and enable social progress, obstacles still exist. These include the difficulty of non-governmental social service agencies of obtaining core-funding for their programs, the arbitrary nature of defining metrics that affect financial institutions’ return on investment, and the limits of using money as a way to value certain things. Transforming traditional social services and philanthropy to profitable solutions in which financial institutions can invest verges on idealism and hinges on a complex combination of factors. However, while still in their nascent stages, impact investing and social innovation hold much potential in the future and could ultimately help bridge the gap between for-profit investments and non-profit solutions.

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