Private individuals, particularly wealthy investors, have a potentially significant role to play in reducing poverty, through a combination of sustainable and impact investing, and philanthropy according to a new white paper ‘Furthering the fight against poverty’, produced by UBS Wealth Management.
Impact investing offers an opportunity to finance poverty reduction and other social projects that may otherwise go unfunded. But many investors feel it generates lower returns than listed assets and argue that their fiduciary duties prevent them from embracing it. This perception is not necessarily fair. Many impact investments occur in areas where markets have failed, and where outsized returns can be made. It is not a revolutionary idea that companies run in the interest of all stakeholders, including suppliers, clients, and employees, should perform more sustainably or fight counterproductive social phenomena, poverty included.
Nonetheless, impact investing clearly needs to offer extra incentives to potential adopters if it is to join the financial mainstream and help improve the lot of the world’s poorest.
The white paper recommends new structures for investors such as social impact bonds, the introduction of franking credits for employment-creating impact investments and greater participation from mainstream intermediaries. To incentivize businesses to pursue impact-aligned objectives, it recommends stronger policy and tax incentives for impact-type corporate investments, as well as education-related initiatives that can boost productivity, incomes, and employment.
Private philanthropy is very small in the context of government or corporate spending. Therefore, we should recognize that philanthropic attempts to fight poverty are most effective when funds are invested sustainably, and when spending is made in partnership with government or corporations. The white paper notes how government partnerships in advanced economies can help improve education, while in the developing world corporate partnerships can improve health and financial inclusion.
Deploying capital effectively is at least as important in the social sphere as it is in the everyday business of investment. As Warren Buffett once said, “Making money is much easier than giving it away effectively.”