Wealth Inequality and The Fallacies of Impact Investing
This article was originally published by Business Alliance for Local Living Economies. BALLE connects and supports a growing movement of local leaders, entrepreneurs, investors and funders who are building local economies that work for all.
In 2015, Ford Foundation president Darren Walker penned a powerful essay arguing that formal philanthropy achieve not only generosity, but justice, calling for a new charter of philanthropy, a 21st century “Gospel of Wealth” that would accomplish what Andrew Carnegie’s proselytizing could not: address the root causes that perpetuate human suffering, wrestling not just with what is happening in the world, but also with how and why.
We live in deeply troubling times. Then again, most of us always have. According to Credit Suisse, the wealthiest 1 percent now own 50.1 percent of the world’s wealth, up from 45.5 percent in 2001. In comparison, the wealthiest 1 percent of American households own 40 percent of the country’s wealth.
According to a 2017 study, “The Road to Zero Wealth,” by Prosperity Now and the Institute for Policy Studies, median wealth for African Americans will fall to $0 by 2053, if current trends hold. Median wealth for Latino-Americans will hit $0 nearly two decades later. By 2020, white American households are projected to own 86 times more wealth than African American households, and 68 times more wealth than Latino households. And based on studies by University of Oxford economist Robert Allen, there are 5.3 million Americans who are absolutely poor by global standards, more than in Nepal (2.5 million) or Sierra Leone (3.2 million), and the same as in Senegal (5.3 million).
The problems are glaringly obvious, but as Mr. Walker eloquently notes,
"Our self-awareness — our humility — shouldn’t be limited to examining the problems. It should include the structures of solutions, like giving itself. As the Rev. Dr. Martin Luther King Jr. said not long before his assassination, “Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary.” It is, all, an offspring of the free market; it is enabled by returns on capital.
And yet, too often, we have declined to question our own circumstances: a system that produces vast differences in privilege, and then tasks the most privileged with improving the system.
Whatever our intentions, the truth is that we can inadvertently widen inequality in the course of making money, even though we claim to support equality and justice when giving it away. And while our end-of-year giving might support worthy organizations, we must also ask if these financial donations contribute to larger social change.
In other words, “giving back” is necessary, but not sufficient. We should seek to bring about lasting, systemic change, even if that change might adversely affect us."
Foundations play a unique role in the impact investing sector, driving innovation, catalyzing new partnerships, and ensuring there is a real focus on impact. We share our members’ vision that by bringing together money and meaning we will make bold progress toward solving the social and environmental challenges facing this generation and the next."
Following Mr. Walker’s call for a 21st Century Gospel of Wealth, Ford Foundation committed $1 billion of its endowment over 10 years to impact investing, hoping to create both market-rate financial returns and social benefits. The commitment was justifiably applauded, for both its ambition and intent, and served as an inspiration to foundations, philanthropists, and investors across the world.
Ford Foundation boldly set the mark, putting its “money where its mouth is,” as Mr. Walker commented upon the announcement. Despite Ford Foundation’s remarkable influence, I wonder if mainstream impact investors will truly adhere to its new Gospel of Wealth. As I find myself increasingly disillusioned with mainstream impact investing, I continue to be inspired by Mr. Walker’s admonishment that “we should seek to bring about lasting, systemic change, even if that change might adversely affect us.” Mainstream impact investing, however, is preoccupied with “doing well by doing good.” Or as The Economist recently noted it is “not enough to make investors feel good about themselves; they also want to make money” — which deliberately avoids addressing the root cause of so many of our social ills: extreme concentration of power, wealth, and privilege.
In fact, mainstream impact investing could become the latest example of “inadvertently widen[ing] inequality in the course of making money.”
The mainstream approach to impact investing not only continues to task the most privileged with improving the system, but in the pursuit of doing well by doing good, it maintains the established order of privilege, power, and wealth.
If mainstream impact investing continues to operate within the culture of the “free market” and prioritize capital returns, by definition it will promulgate economic injustice.
Is it not perverse that Ivy League-educated white men from predominantly white male dominated institutions are able to accrue wealth by investing in African American women entrepreneurs — now that diversity is considered an asset, and the latest example of doing well by doing good — while the majority of African American women are excluded from building wealth through impact investment vehicles?
If the goal is to get at root causes, then disrupting the concentration of power, wealth, and privilege is the solution we ought to set our sights on. Shouldn’t the aim be to do good by giving up more? Less privilege. Less wealth. Less power.
After all, wealth redistribution is central to our shared story, from the very moment we plundered from the Native people and built an empire literally off the backs of slaves and indentured servants. We only quibble about redistributing wealth when it’s transferred from the wealthy and powerful to the poor and marginalized — while the day to day plunder and extraction from the least among us to the wealthiest goes largely unexamined.
“As more lives and communities are destroyed by the system that creates vast amounts of wealth for the few, the more heroic it sounds to “give back.” It’s what I would call ‘conscience laundering’ — feeling better about accumulating more than any one person could possibly need to live on by sprinkling a little around as an act of charity. But this just keeps the existing structure of inequality in place. The rich sleep better at night, while others get just enough to keep the pot from boiling over.”
— Peter Buffett, The Charitable-Industrial Complex
We need to call into question the very concept of doing well by doing good. Pierre Omidyar once said he hated the idea of “giving back” because it implies that before philanthropy you were taking away. Except that, for so many philanthropists, from the robber barons of yesterday to today’s tech billionaires, they either directly took away from others— for example, mid-twentieth century philanthropists who derived their wealth from real estate tied to redlining, racial covenants, and blockbusting — or directly benefited from a social arrangement that systemically confers privilege to some, while marginalizing others.
The tech sector is a great example of how this works: In 2017, all-women founded startups received just 2 percent of venture capital, while all-male teams received nearly 79 percent, or approximately $67 billion compared to $1.9 billion for all-women teams. The data is just as bleak — if not worse — for racial minorities.
This doesn’t yet take into account the other adverse social and economic consequences of tech’s massive wealth: In the Bay Area, where I recently moved, out-migration has hit its highest level in a decade, with more people leaving the Bay Area than are coming in, largely attributed to the high cost of housing. Left unexamined here is how rising housing costs in the Bay Area adversely impacts working-class, poor, and people of color communities.
And as the wealthiest man in the world, tech entrepreneur Jeff Bezos, contemplates his philanthropic strategy, the economic engine for his wealth, Amazon, has launched a bidding war among mayors and governors to determine what city will offer it the best tax incentives and amenities.
We need a new capital consciousness.
“I’m really not calling for an end to capitalism; I’m calling for humanism.” — Peter Buffett
I am not a radical, anti-capitalist, or even post-capitalist. Many of my colleagues — Emily Kawano, Kali Akuno, Elandria Williams, and Aaron Tanaka, to name a few — are far more sophisticated, thoughtful, and knowledgeable critics and thinkers on the destructive consequences of capitalism and corporatism. But I am pro-people. And more often than not, economies deliberately work against people. To end wealth inequality we must build economies for ordinary people, not the rich and powerful. By so closely modeling conventional economic paradigms and investment thinking, the scope and promise of impact investing is being squandered.
As a sector, mainstream impact investing applies the same rules of finance that created the systemic wealth inequalities Darren Walker’s charter for philanthropy works to undermine. How often do impact investors claim that prospective investees are simply “uninvestable” or unprepared for investment? That’s conventional thinking rooted in traditional paradigms, power, and privilege.
“The impact-investing industry is mimicking the structure and presentation of institutional finance — the culture of Wall Street. “ — Don Shaffer
If we’re truly motivated to deconstruct the enormous wealth inequalities that have ravaged and extracted wealth from rural, indigenous, and majority people of color communities — and we must interrogate if this is even the aim of mainstream impact investors, including and especially those within philanthropic institutions — then we must rid ourselves of the power dynamics, biases, and culture that got us here in the first place.
The best impact investors I know don’t even view themselves as investors; instead, they see themselves and act as community organizers, activists, and social justice warriors, working on the frontlines with and behind the communities that they serve — capital is simply the vehicle of privilege they activate to advance a social, environmental, and economic justice agenda.
Leaders in institutional philanthropy have an opportunity to inspire and shift the direction of impact investing.
Rather than being concerned about preserving endowments, what if foundations maximized the collective wealth of the communities they serve?
Why not relinquish the idea that foundations need exist for perpetuity and instead act as catalytic capital for perpetual community wealth building — non-extractive venture capital for equitable economies?
We are far from that path. Today, investment committees work overtime to limit their risk exposure when investing in communities devastated by systemic racism, economic dislocation, and corporatism. While millions are being made diverting wealth from immigrant, urban, and rural communities through predatory practices like merchant cash advances, foundation investment committees, advisors, and boards of directors are preoccupied on evaluating whether or not a transformative investment in their own backyard will match the return profile of public equities.
And as philanthropies and their fund managers question whether their investment translates to capital additionality or displacement, innovators such as Tomás Durán, Aaron Tanaka, and Jessica Norwood — who drive innovations like worker ownership to preserve quality jobs in low-wealth communities, community-controlled capital, and investment vehicles that directly address the racial wealth gap — receive little to no investment at all: traditional, impact, or philanthropic. A significant delta exists between what mainstream impact investors deem as investable and the cash-strapped innovations coming from communities throughout the country.
The questions we ask today are too narrowly focused on technocratic concerns like “How do we get more deals done?” instead of “How do we foster equality, transfer power, and enable community wealth through our capital?”
“We are called to be architects of the future, not its victims.” — R. Buckminster Fuller
Despite the normalization of mainstream impact investing that perpetuates the false construct of “doing well and doing good,” there are several exemplars in philanthropy and impact investing who prove that alternatives exist and another path forward is not only possible, but plausible.
In the town of Wisconsin Rapids, Wisconsin, Kelly Ryan has transitioned a small, $31 million community foundation from a traditional grant-making institution into a catalyst for building a thriving local economy by including residents in the foundation’s decision-making and leveraging shareholder activism to influence local businesses to prioritize Wisconsin Rapids’ well-being. And in Jamaica Plain, Deborah Frieze invests in enabling racial and economic justice through her Boston Impact Initiative, a place-based impact investing vehicle that has partnered with Boston Ujima Project to organize local residents, workers, business owners, and investors to establish a community controlled economy in Greater Boston.
In fact, there is growing interest and movement toward the type of place-based impact investing practiced by Kelly Ryan and Deborah Frieze. Their approaches acknowledge and redress the economic, social, and racial injustice wrought by the “free market” that makes formal philanthropy possible.
Of course, there are many who effectively model how capital can help bend the arc of the moral universe toward justice, such as Andrea Armeni and Transform Finance; Kesha Cash and Stefanie Thomas of Impact America Fund; Stephen DeBerry, Founder and Chief Investment Officer of Bronze Investments; Elaine Rasmussen and Susan Hammel, co-founders of ConnectUP! MN, an innovative approach to closing the capital demand gap for women, LGBTQ, people of color (POC), and rural entrepreneurs in Minnesota; Brendan Martin, Founder and Director of The Working World; Don Shaffer, most recently CEO of RSF Social Finance; and Sarah Williamsand Katya Levitan-Reiner at Propel Capital, to name a few.
As Heron Foundation President Dana Bezzera remarked at a recent BALLE gathering of foundation leaders, we must both tinker at the edge of our broken economic system — one that fuels systemic injustices — and lean into an emergent future economy that will work for all of us. Through this lens, impact investing is a necessary and commendable stopgap to a new paradigm.
If philanthropists and impact investors continue to overlook and perpetuate the structures of economic injustice that plague us, we will never be whole, and human suffering will surely endure.
This need not be the case. At BALLE, where I am fortunate to serve as Executive Director, we have the privilege to immerse ourselves in the emergent, because the trailblazing leaders in our network prove that the future is already here. There is no shortage of servant leaders — people of color, women, LGBTQ leaders, the poor, and the working class — with the vision, tenacity, and generosity of spirit to model new paradigms and subvert long-standing systemic injustices. Unfortunately, these leaders are wildly under-resourced, exhausted, and depleted.
And this is where the conceit of doing well while doing good falls short. If philanthropists and impact investors are unable to invest in the most promising, transformative leaders at the forefront of economic change — what else is more deserving?
A new Gospel of Wealth really is needed — one that espouses shared prosperity and conceding power, while building a more just society.