International Development

The Rise of the Impact Economy

June 27, 2011

It’s not often when you can zero in on an inflection point right after it happens.  It’s remarkably rare when, in the moment, you can hit the mental pause button and recognize that you are standing on the edge of transformative change, when the path forward appears vastly different than the road thus traveled.  June 20 was one of those very rare days.

In collaboration with the Aspen Institute, the White House convened a historic meeting last week on the Impact Economy.  The term “Impact Economy” suggests something large, perhaps massive, but maybe not well understood.  It is certainly not a term like exports or education that evokes a very specific image or raises a particular set of associations.

However, I believe the phrase Impact Economy soon will be as well known as microfinance or charter schools, a trend that overturns an old order, shakes loose ossified ideas and spawns social benefit at scale as a result.

Impact Economy refers to the supply of capital and firms demanding the capital in pursuit of both profit and social impact. The Impact Economy represents the rise of a new set of market forces whose growth could reshaping our world in ways large and small. Whereas prevailing sentiment among economists and most contemporary scholars suggests that investors and entrepreneurs are motivated solely by profits, new evidence suggests something to the contrary.  In retail stores and on trading floors in the US and around the country, a fact pattern is emerging that challenges such long held assumptions.   In business school classrooms and corporate boardrooms, we are starting to see a new generation of individuals that explicitly seek to maximize profit and purpose in parallel.

These people certainly measure their performance along the classic model of dollars and cents. They suscribe to pro forma financials, but they also acknowledge that their performance has implications far off the balance sheet – and they proactively consider such externalities as a core aspect of performance. Such a perspective rejects the idea that there is a tradeoff between financial success and social impact.  Indeed, rather than ahering to the precept that the sole act of creating jobs and generating margin constitutes social value, the new breed believes that, while such results are critical, these are insufficient measures of true success. Such entrepreneurs and executives seek to build values-based value chains. These investors and philanthropists deploy financial capital that generates social capital.   In all quarters, these individuals and their firms endeavor to generatemore than earnings, but also impact.

In many ways, this story is not new.  People like Ben Cohen, Gary Hirshberg, Anita Roddick, Woody Tasch, and Paul Hawken  have been telling this story for decades.  Such pioneers built organizations like Investors Circle, Social Venture Network and BALLE to channel their collective energies and heighten their impact.  However, something dramatic has changed.

Last week, the White House convened more than 150 people, each distinguished in some manner, to discuss the Impact Economy and to consider its long-term scope and shape.  Many of these meeting participants traveled long distances on short notice to be present at the session and to take part in the discussion.  This day was momentous because, for the first time, senior executives at the highest level of the federal government both acknowledged and embraced the field.    The presence of White House Chief of Staff Bill Daley, let alone National Economic Advisor Gene Sperling and Domestic Polciy Advisor Melody Barnes affirmed this reality.  In their own words, each shared that the Impact Economy is a crucial tile in our emerging mosaic of 21st century competitiveness, perhaps even a cornerstore.

Nearly all of the attendees firmly understood this fact.  Many have spent the majority of their careers in this realm, working to raise capital, create businesses, scale companies, and serve customers, inherently accelerating and amplifying the movement.  However, elevating the issue to the White House agenda, gathering such a high profile group of practitioners together with policy makers from across the federal system, and doing so in such a public manner represented a significant leap forward. 

To be clear, I am sure that many impact investors and social entrepreneurs have benefited from smaller sessions with governmental officials on Capitol Hill or at various federal agencies.  Some have enjoyed sidebar conversations at conferences or fundraisers.  It’s not a political issue; both parties have embraced the accomplishments of pioneers in the field. 

Last Wednesday, however, President Obama shifted these discussions from the margins to the mainstream, bestowing a level of attention and priority that most issues, no matter how deserving, simply never earn.  

This did not imply recognition of the potential impact of the Impact Economy.  Rather, it explicitly embraced the realities of this moment, the fact that our capital markets are evolving in a new manner, attaining a momentum that is indisputable.  As many officials stated, the twin forces of impact investing and social enterprise represent transformative forces with the potential to propel a new wave of business, expand our economic landscape and strengthen our communities along the way.

Interestingly, many of the firms that drive such innovation might look like “green” businesses, but the vast majority will bear little resemblance to the darlings of Sand Hill road or the clean tech crowd.  In fact, they will be manufacturing companies in the Midwestemail marketing firms in the Research Triangle, apparel companies on the West coast, investment practices in the Southwest and telecom businesses based just outside the Beltway

These firms might not be “sexy” per se.  They might not win awards from the technocrati nor garner headlines in business magazines. But, brick by brick and bit by bit, they are the new wave, the next generation of companies that will create high-paying jobs, drive economic returns, satisfy investors and stakeholders, and all the while intentionally generate measurable social impacts along the way.  They are contributing to the creation of the so-called “Good Society”.  

I believe this is  an outcome without a partisan appeal, one that people from across the political spectrum can endorse, a cause every American should support.  As the Impact Economy takes hold, these businesses have a greater likelihood of success if we can ensure that government offers an appropriate mix of policies and programs to support these firms.  We need our leaders and their staff to create the conditions in which these firms simply can compete on a level playing field in an open and transparent marketplace.. 

And that’s why this meeting was not the end but only the beginning of a long-term process.  I am proud that the White House asked the Aspen Institute to serve as its partner to enable this event.  The Philanthropy and Social Innovation (PSI) program at the Aspen Institute long has worked in this area, but more recently, PSI’s Impact Economy Initiative has been explicitly tackling the very questions that we struggled with last week – how can our elected officials and policy makers develop the public policies to aid these businesses and spur the next wave of economic growth and social good?

Going forward, the Aspen Institute will be synthesizing the findings from this convening into a report.  It will be released later this summer.  It will attempt to summarize these discussions, detail our findings from the White House gathering, and lay out a roadmap to guide policy makers at all levels about how government can strengthen and scale the Impact Economy. 

But let’s set expectations. This initiative alone will not change the course of history, let alone assure a rational process of policy development in the months and years to come.  It will require relentless devotion and extraordinary effort.  We will need many to review our thoughts and participate in our journey.  We want to move forward in an accessible and inclusive manner, so I hope many of the people who participated in this meeting as well as those who were not present will join us.

Send me an email at [email protected] or feel free to leave comments below.  We would like to hear your thoughts.  I hope you will join us as we move forward together to build an Impact Economy that enhances our country and lays a bold claim to a prosperous future.