By Alan Wagenberg, Director of Knowledge Management at Latimpacto.
Two decades ago, Forum for the Future, a think tank, proposed a model to understand sustainability, considering five capitals: social capital, human capital, natural capital, financial capital and manufactured capital. The model aimed 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, as many organizations do not have sufficient information to allow them to manage their resources with this holistic view. For example, a company can manage its financial capital well, but it does not know how much natural capital, such as biodiversity, it uses to produce its goods. Organizations also frequently have mandates that pressure them to prioritize one capital over others. For example, many companies prioritize profitability to the detriment of the environment. Even the third sector generally places greater emphasis on human, social or natural capital than on financial capital and, for this reason, many social organizations end up locking in their projects.
Happily, we are seeing more and more 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 increase their capital. This is a first step, but we need to be more ambitious.
Before the pandemic, Latin America and the Caribbean had made great progress in the Sustainable Development Goals (SDGs). However, these achievements have regressed, 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 problems on its own. Let us consider the state of each of the region's capitals.
Financial capital
Historically, a large percentage of Latin America's social investment has been made with international cooperation. However, as our countries reached a higher GDP in the last decade, and international organizations stopped prioritizing the region and concentrated their efforts in Africa and other areas. Comparing the periods of 2016 and 2019, Latin America received less 21% of international aid funds. At the same time, the countries had a GDP reduction of 7.7% as a result of the pandemic, and received 37% less foreign direct investment. In addition, ECLAC estimates that climate change could reduce the region's GDP by between 1.5% and 5%.
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 the progress made by Latin America and the Caribbean in achieving the environmental SDGs warns that "ecosystems are deteriorating and biodiversity is decreasing at worrying rates".
Capital stock
There is growing political instability in the region and more distrust in relation to institutions. According to the Latin American Public Opinion Project, confidence in democracy has been falling every year since 2010. Trust in leaders, media and non-governmental organizations in most countries in the region is also declining.
Human capital
The poor quality of education services in Latin America is having serious consequences for its future. The World Bank estimates that the percentage of 10-year-olds unable to read and understand a simple story could be as high as 62.5%. Productivity in the region 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 rendering 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% of GDP. The same report highlights that this gap mainly affects the low-income population, and estimates that "families among the poorest 40% will lose 11 percentage points of real income over the next 10 years."
In summary, the region is facing difficult times in a context of fewer resources and more volatility. For this reason, it is necessary to rethink how to face these challenges in a more efficient and strategic way.
O que fazer?
The study Social and Social Investment: Cases and Trends in Latin America analyzes 37 organizations in Latin America and how they use their resources in the most effective way to optimize socio-environmental impact. One of the main lessons learned from this study was that the social investors and philanthropists that achieved the highest results prioritize impact and take into account important factors, such as:
- Identify solutions capable of creating new markets or transforming sectors. One of the case studies relates how, through a network of clinics (Sugar Clinics), Mexico managed to reduce diabetes in low-income populations by offering low-cost services that were not adequately offered before.
- Direct different types of capital to solve these problems. The use of financial capital goes hand in hand with human and social capital. Mentoring, training and coaching ensure that finances are used in a more appropriate and disciplined way. Building social capital also facilitates learning, collaboration and access to resources. For example, Co_ Capital, a Mexican impact investment fund, has been instrumental in scaling up impact businesses through funding and contacts with accelerators, consultancies and other investors.
- Leveraging resources and networks to raise capital. Through financial instruments and their own reputation, several organizations managed to convince and attract large investors to invest in markets that were not so attractive before (e.g., small producers, housing reforms for low-income families, etc.). An example of this is the case of Din4mo, a triple-impact company. This company articulated with its partners a financial vehicle to raise funds for the renovation of low-income housing in Brazil. The financial instrument was structured in such a way that it attracted private investors, offering an attractive return and reducing its risk.
- Encourage and support experimentation with solutions. Many foundations and social investors perceived that there is a need to look for new ways to solve problems. In this sense, they began to take on greater risks by: 1.) supporting organizations and social entrepreneurs that have the potential for impact, but need support to test their ideas and strengthen their organizations, 2.) developing partnerships with non-conventional actors, and 3.) rethinking their strategies and models of social investment. A great example was the Ford Foundation's issuance of a grant to increase its donations during the pandemic. Also the collaboration between the Lemann Foundation and the Brazilian private sector to build a vaccine factory for COVID-19, or the fundraising by the JuanFe Foundation in conjunction with the Colombian stock exchange.
- Scale and reward organizations that demonstrate real impact. There is a growing alignment between financial return and positive socio-environmental change. Social impact incentives (SIINC) are an example of this. These are financial instruments that reward companies with bonus payments for reaching pre-established impact targets. In Brazil, for example, Bemtevi offers loans whose interest is linked to the fulfillment of impact goals. The higher the impact, the lower the tax for impact businesses.
The above offers recommendations on how to make social investment more effective, but a horizon still 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 promotes the common good and rebuilds the social fabric.
The good news is that there are already several models and initiatives going in this direction. One of them is the so-called regenerative economy, which proposes to restore the relationship between the biosphere and the economy. For this to exist, wealth must cease to be associated with money, and social, cultural and environmental well-being must be seen as a priority.
The why, how and what for are clear. All that is missing are organizations and individuals to lead the new direction. At LatimpactoWe lead a community of philanthropists and social investors who want to support this purpose. It is time to unite and support the solutions that the region needs. The little capital we have left should have 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
