Deciding Together: Flipping the Power Dynamics in Impact Investing

Three models for shifting decision-making to communities and entrepreneurs

Colorful Hands mural. Photo by Tim Mossholder on Unsplash
Dana Bezerra, Heron Foundation President

The bottom line: while impact investors focus on serving a broad set of stakeholders, they rarely include those stakeholders in investment decisions.

Impact investing needs to chart its own course away from traditional finance. That will mean a radical rethinking of who decides what’s investment-worthy, and what success looks like. As Common Future CEO Rodney Foxworth has put it, “If we truly want to live in an equitable society, those of us with power must give some of it up.”

Model 1: Community-Led Loan Funds

We’ll start with community-driven investment funds, which shift power over investment decisions — typically regarding local economic development — to community members. These models often have the dual impact of building wealth for their investors, many of whom are from marginalized communities.

Model 2: Peer-Selected Investment

Venture capital is a critical tool for scaling the next world-changing idea: VC funds have backed everything from mobile money apps that have given tens of millions of people access to bank accounts, to solar and wind technology. But right now, only a handful of VC investors in cities like New York and San Francisco are deciding which entrepreneurs get a chance to succeed. As a result, less than 15% of unicorns are directly addressing issues like health care, education, food security or climate change.

Photo Credit: Victor Murithi

Model 3: DAFs for Good

Donor-advised funds (DAFs) are a controversial topic in many philanthropic circles: while they’re the fastest-growing type of vehicle for charitable giving, critics point out that they can be used to hoard capital and evade taxes. There are models and advisors emerging, however, who are working to embed more participatory approaches, and utilize DAFs as a tool to help individual donors relinquish control over decision-making in their impact investing. The $40 million first round for the Olamina Fund, launched last year by Candide Group’s Morgan Simon, came from the donor-advised funds of two of Simon’s clients. Olamina lends to CDFIs and other financial institutions serving Black, indigenous, and low-income communities. More than 80% of their loans have gone to organizations and businesses led by women and people of color.

What’s Next?

The examples we’ve shared here are just the beginning. Transform Finance, which pioneered the concept of non-extractive capital when it was founded in 2013 by Simon and Andreaa Armeni, is currently developing a taxonomy for the field of “community-engaged” participatory investing to capture the full spectrum of participatory models and the type of capital they deploy. This will also include action steps for grassroots groups, philanthropies, and financial intermediaries to keep it growing. Stay tuned for the launch of this report later this fall.

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