By Alan Wagenberg
Two decades ago Forum for the Futurea think tank, proposed a model to understand sustainability by considering five capitals: social capital, human capital, natural capital, financial capital and manufactured capital. The model sought to understand the relationship between the different types of capital and suggests that sustainability is only possible if organizations and societies manage to maintain or increase these capitals.
In practice, this is difficult to achieve because many organizations do not have sufficient information to enable them to manage their resources with this holistic view in mind. For example, a company may manage its financial capital well, but not know how much natural capital, such as biodiversity, it uses to produce its goods. In many cases, organizations also have mandates that push them to prioritize one capital over others. For example, many companies prioritize profitability over the environment. In fact, the third sector usually places greater emphasis on human, social or natural capital than on financial capital, and for this reason, many social organizations end up closing their projects.
Fortunately, we are increasingly seeing investors integrate other dimensions of capital such as social, human and natural capital into their financial analysis, and we are also seeing philanthropists begin to experiment with financial instruments that allow them to reinvest and grow their capital. This is a first step, but we must be more ambitious.
Prior to the pandemic, Latin America and the Caribbean had made great progress on the Sustainable Development Goals (SDGs). However, their achievements have been receding while at the same time there is less capital to address them. The region is about to face one of its greatest challenges that will test its stability and ability to solve its own problems on its own. Let us consider the state of each of the region's capitals.
Financial capital
Historically, a good percentage of Latin America's social investment has been made with international cooperation. However, as our countries have achieved higher GDP, international assistance has ceased to prioritize the region and has focused its efforts on Africa and other regions. Compared to the 2016 and 2019 periods, Latin America received 21% less in international aid funds. For their part, countries in the region had a 7.7% reduction in GDP as a result of the pandemic, and received 37% less foreign direct investment. Furthermore, ECLAC estimates that climate change could reduce between 1.5% and 5% of the region's GDP.
Natural capital
Natural capital refers to all the resources provided by nature including soil, biodiversity, minerals, oil, water, air, etc. They are necessary for life and for the production of goods. Although the region contains approximately 60% of the planet's biodiversity, a recent report on Latin America and the Caribbean's progress towards achieving the environmental SDGs warns that "ecosystems are deteriorating and biodiversity is declining at alarming rates".
Capital stock
There is increasing political instability in the region and greater distrust in institutions. According to the Latin American Public Opinion Project, confidence in democracy has been falling every year since 2010. Trust in leaders, the media, and non-governmental organizations has also been falling in most countries in the region.
Human capital
The lack of education in Latin America is having serious consequences for its future. The World Bank estimates that the percentage of 10-year-old children unable to read and understand a simple story may be as high as 62.5%. The region's productivity has been falling steadily since 1960 compared to the rest of the world.
Manufactured capital
This capital refers to manufactured objects that are used for the production of goods or the provision of services. This capital includes infrastructure such as roads, water treatment plants and buildings. According to a report by the Inter-American Development Bank, the infrastructure investment gap in the region is approximately 2.5 percent of GDP. The same report highlights that this gap mainly affects the poorest sectors, and estimates that "families in the bottom 40 percent of the income distribution will lose 11 percentage points of real income over 10 years".
In short, difficult times lie ahead for the region, marked by a context of fewer resources and greater volatility. It is therefore necessary to rethink how to face these challenges in a more efficient and strategic manner.
What to do?
In the study Social Investment and Impact: Trends and Cases in Latin America The study analyzes 37 organizations in Latin America and how they most effectively deploy their resources to optimize social and environmental impact. One of the main lessons learned from this study was that social investors and philanthropists who have achieved greater results prioritize impact and additionally take into account important factors such as:
- Identify solutions that succeed in generating new markets or transforming sectors. One of the case studies relates how through a network of clinics (Sugar Clinics), Mexico has been able to reduce diabetes in low-income populations by offering low-cost services to this population that were previously not adequately offered.
- Direct different types of capital to the solution of these problems.. The deployment of financial capital goes hand in hand with human and social capital. Mentoring, training and advice ensure that financing is used appropriately and in a more disciplined way. Building social capital also facilitates learning, collaboration and access to more financial capital. For example, Co_ Capital, a Mexican impact investment fund, has been instrumental in scaling social ventures through financing and facilitating contacts with accelerators, consulting firms, and other investors.
- Leverage your resources and networks to raise capital. Through financial instruments and their own reputation, several foundations have managed to convince and attract large investors to invest in markets that were previously unattractive to them (e.g. small producers, housing renovations for low-income families, etc.). An example of this is the case of Din4mo, a triple impact company. This company structured with partners a financial vehicle to raise financing for low-income housing renovations in Brazil. The financial instrument was structured in such a way that it attracted private investors by offering an attractive return and reducing its risk.
- Encouraging and supporting experimentation of solutions. Many foundations and social investors have realized that they need to look for new ways to address problems. In that sense, they have begun to take greater risks by: 1.) supporting organizations and social entrepreneurs that have the potential for impact but need support to develop their ideas and mature their organizations, 2.) developing alliances with unconventional actors, and 3.) rethinking their social investment strategies and models. A great example was the debt issuance by the Ford Foundation to increase its grantmaking during the pandemic. Also the collaboration between the Lemann Foundation and the private sector to build a COVID-19 vaccine factory in Brazil, or the fundraising by the JuanFe Foundation in articulation with the Colombian stock exchange.
- Scaling and rewarding organizations that demonstrate real impact. There is increasing alignment between financial returns and the achievement of positive social and environmental change. Social impact incentives (SIINC) are an example of this. These are financial instruments that reward companies with bonus payments for achieving pre-established impact targets. In Brazil, for example, Bemtevi offers loans whose interest is tied to the achievement of impact targets. The higher the impact, the lower the rate for social enterprises.
The above offers recommendations on how to make social investment more effective, but a horizon needs to be defined. A starting point is to integrate the impact within the five capitals to ensure that they are used for a purpose that favors the common good and restores the social fabric.
The good news is that there are already several models and initiatives moving in this direction. One of them is the so-called regenerative economy, which proposes to reestablish the relationship between the biosphere and the economy. For this to exist, it is necessary to stop associating wealth with money, and social, cultural and environmental well-being must be seen as part of its focus.
The why, how and what for are clear. All that is missing are organizations and people to lead the new direction. From LatimpactoWe are looking to create a community of philanthropists and social investors who want to join us in this purpose. It is time to come together and support the solutions the region needs. What little capital we have left must make a greater impact.
1. World Bank, Data. Available at: https://data.worldbank.org/indicator/DT.ODA.ALLD.CD?end=2019&locations=ZJ&start=2014&view=chart
2. ECLAC, "Social Panorama of Latin America", 2020. Available at: https://www.cepal.org/es/publicaciones/ps
4. ECLAC, "The Emergence of Climate Change in Latin America and the Caribbean", 2020. Available at: https://www.cepal.org/sites/default/files/events/files/19-00711_lbc_160_emergencia-cambio-climatico_web.pdf
5. UNEP, "The State of Biodiversity in Latin America and the Caribbean," 2016. Available at: https://www.cbd.int/gbo/gbo4/outlook-grulac-es.pdf
6. ECLAC, "Building a Better Future: Actions to Strengthen the 2030 Agenda for Sustainable Development, 2021. Available at: https://repositorio.cepal.org/bitstream/handle/11362/46682/S2100125_es.pdf?sequence=6&isAllowed=y
7. Zechmeister, Elizabeth J., and Noam Lupu (Eds.), The Pulse of Democracy. Nashville, TN: LAPOP, 2019. Available at: https://www.vanderbilt.edu/lapop/ab2018/2018-19_AmericasBarometer_Regional_Report_Spanish_W_03.27.20.pdf
8. Edelman, "Edelman Trust Barometer, 2021. Available at:https://www.edelman.com/trust/2021-trust-barometer
9. World Bank, "Act Now to Protect Our Children's Human Capital: The Costs and Response to the Impact of Pandemic COVID-19 on the Education Sector in Latin America and the Caribbean, 2021. Available at: https://openknowledge.worldbank.org/handle/10986/35276?locale-attribute=es
10. OECD, "Latin American Economic Outlook 2020: Digital Transformation for Building Back Better", 2020. Available at: https://www.oecd-ilibrary.org/sites/e6e864fb-en/1/3/3/index.html?itemId=/content/publication/e6e864fb-en&_csp_=e33bc8db34df1751560efb06f7daeea7&itemIGO=oecd&itemContentType=book
