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Ideas & Debate

Firms must get idea of sustainable capitalism right

Last week I was mentoring businesses with Unreasonable East Africa, an organisation that works to accelerate the growth of businesses that have positive social impact built into their models.

The main reason I signed up to be a mentor is that as a development economist I have long been committed to the notion that the way money is made has a positive or negative impact.

In economics-speak, this impact is referred to as an ‘externality’. A negative externality is a cost that is suffered by a third party as a result of an economic transaction; third parties include any individual, organisation, or resource that is indirectly affected.

Modern society is well aware of the negative externalities generated by some business activity that range from environmental pollution and degradation to worker exploitation and gender-based unequal pay.

However, businesses can have positive impacts such as improved service delivery, wealth creation and environmental protection.

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The main concern I had is that capitalism and business entities operating within often did not integrate impact concerns into strategy and action related to profit generation.

Indeed, the default position was often to deal with negative externalities that had impact on profit first, and then perhaps deal with the other concerns.

For companies that had a stronger moral thread running through them, positive social impact concerns were handled through corporate social responsibility (CSR) initiatives, much like charity, and came across more as marketing than impact-focused activities.

Recently, however, the way in which money is made and the systems, processes, strategies and activities related to profit generation have come under more scrutiny.

Consumers and populations want negative externalities to be limited and mitigated while positive ones are amplified.

Hence, the birth of impact investment in which investments are made into companies, organisations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.

According to a report by the Global Impact Investing Network last year, East Africa is one of the centres of global impact investing.

More than Sh930 billion ($9.3 billion) has been disbursed in the region by more than 1,000 direct deals by development finance institutions (DFIs) and other impact investors.

At least 48 impact fund managers have staff in Nairobi, which is more than three times as many local offices as in any other country in the region.

Almost half of the $9.3 billion in impact capital disbursed in the region has been in Kenya.

Impact investment tends to generate a divide in terms of whether it is a credible strategy to make capitalism sustainable.

On the one hand are organisations and people committed to making capitalism genuinely more socially and environmentally responsible and organise to try and ensure that the capitalism operates in a manner that mitigates all negative externalities and amplifies positive effect.

Thus, impact investment to them is a way to engender structural change in the way profits are generated. On the other hand, are those who are not committed to augmenting positive and mitigating the negative unless there are clear profit benefits.

Corporate social responsibility for them is a rebranding tool that legitimises their bottomless appetite for profit-making.

They engage in impact investment initiatives because they are cognisant of the fact that using such branding increases the appeal of their product to consumers all over the world in the age of responsible consumption.

My view is that any effort aimed at making capitalism more sustainable is positive.

Were is a development economist; [email protected]

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