Impact Capital

By Alan Wagenberg.

Two decades ago, Forum for the Future, a think tank, proposed a model to understand sustainability taking into account 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 can maintain or enhance these capitals.

In practice, this is difficult to achieve given that many organizations do not have sufficient information that enables them to manage their resources with this holistic view in mind. For instance, a company may manage its financial capital well but be unaware of 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 the others. For example, many enterprises prioritize profitability over the environment. In fact, the third sector usually places greater emphasis on human, social, or natural capital than on financial capital. For this reason, many social organizations end up abandoning their projects.

Fortunately, we are increasingly seeing how investors are integrating other dimensions of capital—such as social, human, and natural capital—into their financial analysis. And we are also seeing how philanthropists are beginning to experiment with financial instruments that allow them to reinvest and increase their capitals. This is a first step, but we have to be more ambitious.

Prior to the pandemic, Latin America and the Caribbean had made significant progress in achieving the Sustainable Development Goals (SDGs). However, these 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, one that will test its stability and ability to solve its own problems by itself. Let us consider the state of each of the capitals in the region.

Financial capital

Historically, a large share of social investment in Latin America had been made through international cooperation. Nevertheless, as our countries have achieved a higher GDP, international assistance has ceased to prioritize Latin America and has focused its efforts on Africa and other regions. Compared to 2016 and 2019, Latin America received 21% less international aid funds. For their part, the countries of the region had a 7.7% reduction in GDP as a result of the pandemic and received 37% less foreign direct investment. In addition, ECLAC estimates that climate change could have a cost of between 1.5% and 5% of regional GDP .

Natural capital

Natural capital refers to all the resources offered by nature, including soil, biodiversity, minerals, petroleum, water, air, etc. They are necessary for life and for the production of goods. Although the region has approximately 60% of the planet’s biodiversity, a recent report on the progress made in Latin America and the Caribbean towards achieving the environmental SDGs warns that ecosystems are deteriorating and biodiversity is declining at alarming rates.

Social capital

There is increasing political instability in the region and more mistrust of institutions. According to the Latin American Public Opinion Project, trust in democracy has been declining every year since 2010. Trust in leaders, media outlets, and non-governmental organizations has also been dropping in most of the countries of the region.

Human capital

Lack of education in Latin America is having dire consequences for its future. The World Bank estimates that the share of 10-year-olds that are not able to read and understand a simple text could rise to 62.5 percent. For its part, productivity in the region has been decreasing steadily compared with the rest of the world since 1960.

Manufactured capital

This capital refers to manufactured objects that are used to produce goods or provide 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 accounts for approximately 2.5% of the GDP. The IDB report highlights that this gap hurts mainly the poorest sectors and estimates that households in the lowest 40 percent of income distribution will lose 11 percentage points of real income over a 10-year period.

In summary, difficult times for the region are drawing near, marked by a context of fewer resources and more volatility. For this reason, it is necessary to rethink how to address these challenges in a more efficient and strategic way.

What to do?

The study Social Investment and Impact: Trends and Cases in Latin America analyzes 37 Latin American organizations and how they deploy their resources more effectively in order to optimize social and environmental impact. One of the main lessons learned from this study was that the social investors and philanthropists that have achieved the best results prioritize impact and, additionally, they take into account important factors such as:

Identifying solutions that are able to develop new markets or transform sectors. One of the case studies describes how, through a network of clinics (Clínicas del Azúcar), Mexico has been able to reduce diabetes in low-income populations by offering them low-cost services for which they did not have an appropriate offering before.

Directing different types of capital towards addressing these issues. The deployment of financial capital goes hand in hand with human and social capital. Mentoring, training, and consulting ensure that finance is used ad