July 15, 2023

The doing good spectrum.

In 2023 there are dozens of different ways to do good. Different mechanisms each suited to a different kind of impact. Is your brand taking advantage of them?

Sad looking kids waiting for my dollars to save them on World Vision commercials.

This is, as far as I can tell, the first memory I have around the general idea of “doing good”. The first time it seriously occurred to elementary school me that, just maybe, some people didn’t have it as good as I did (sitting there in my Canadian living room watching TV) and that, if the commercial was to be believed, I both could and should do something about it.

Although the ask to donate some dollars to the cause was likely a bridge too far for a kid with a limited allowance at the time, the narrative stuck with me. The world has problems. You’re privileged. You can help. We have the solution. Give us your dollars.

It seemed genuinely hard to turn on the TV growing up without seeing impassioned pleas for my help with some cause or another. Hell, just hearing the first few bars of In the Arms of an Angel by Sarah McLachlan instantly brings to mind the thought of abused animals thanks to a single heartbreaking 2006 ad by the SPCA. For individuals growing up in the West charity is pervasive. Inescapable. The only game in town for a game (doing good) that genuinely does matter.

I’ve now spent about ten years in and around the impact industry (a term chosen purposefully) I can pretty confidently say that charity is far from the only game in town for doing good. Charity suffers from “only tool in the toolbox” syndrome. We, because it defines our “doing good” paradigm, tend to use it regardless of whether it’s appropriate or not. We use it everywhere because, well, it helped over there so why shouldn’t it here? We use it because we simply don’t know what else we could (or should) be doing. Charity is our doing good dogma.

In reality charity can range from, for any kind of good we care about, the best (and in some cases only) way to do it to, in some cases, actively worse than doing nothing. This shouldn’t surprise us. Doing good is a massively complicated undertaking with every impact challenge (poverty, climate, justice) being fundamentally unique. The idea that one tool — charity — might be (or even could be) the solution in every case is, if you stop to think about it for a second, actually a bit absurd.

Not to get all political, but we have a name for people who, for example, hold this kind of dogmatic single solution belief about markets: libertarians. Sorry to the two libertarians who are reading this but frankly there’s a very good reason we don’t see more of you running around: a massive pile of empirical evidence about the failure of markets in many cases (giving us terms like “medical bankruptcy”).

Although comically wrong about markets always being the solution, they certainly aren’t out to lunch that markets are sometimes the solution. Think about your own life and everything that makes it good — how much of that would you chalk up to charity? Why is charity our go-to solution for bringing prosperity to the impoverished when it played little to no role in creating our own?

I bring up libertarians and markets here to serve as more than just the butt of a few easy jokes. Libertarians genuinely believe that the way to maximize good is to maximize markets in a nearly analogous way to how many of us believe the best way to maximize good is to maximize charity. Both are misguided. Although markets and charity can equally do good they can equally fail to do it or, worse, actively do harm.

When it comes to do doing good, pure donation-based approaches (charity) and pure investment-based approaches (markets) are actually the two endpoints of a vibrant spectrum of options. Maximizing any kind of good we care about almost necessarily involves a blend of approaches along that spectrum. Let’s talk about those approaches.

Doing good without donating: the options.

I spend a lot of time talking to people about the idea of investing to do good. Mostly it results in blank stares (whether the topic or me, I can’t quite tell). Sometimes people perk up and say that they do a bit of impact investing, mentioning that they chose a few ethical ETFs for their 401(k) (i.e: that they hold some stock of so-called “ethical” companies). Occasionally people will mention that they do some direct impact lending (microfinance) on a platform like kiva.org. These are both stops on the doing good spectrum.

This doing good spectrum, from donating to investing, is really characterized by an increasing return on deployed dollars. A donation represents a 100% loss of capital by definition — an investment has the ability to pay your capital back (with, often, a nice little bonus). Here’s a (very) simplified look at some of that spectrum:

  1. Donations, grants, and other pure cost-based approaches. Whether it’s a donation to the SPCA or the purchasing/retiring of carbon credits, this is the literal one-way transformation of dollars into impact (minus a charity’s expenses). Spend a dollar, create a unit of impact. Want to create another unit of impact? Spend another dollar. Cause selection: unlimited. Return: -100%.
  2. Recoverable grants. A relatively new concept in impact, a recoverable grant is fundamentally a donation that can, if the receiving organization accomplishes some goal, actually be paid back to the donor. Example? Imagine you’re a successful non-profit that is running low on capital before the year’s biggest fundraising season. A recoverable grant could help bridge that gap — supporting fundraising and paying back out of fundraised funds if successful. Cause selection: limited. Return: -100% to capital repayment.
  3. Impact bonds. Another new concept in impact finance where investors fund an independent impact project and they, if that project hits certain impact goals (as evaluated by outside professionals), have their capital repaid by the local government. Cause selection: limited. Return: highly uncertain and variable.
  4. Non-profit impact lending. Simply the idea that we can lend money at below market rates to individuals and organizations to create impact. Imagine a successful non-profit clinic that serves a vulnerable population, charging just enough to cover expenses, wants to open a second location and double their impact. Whereas a traditional bank isn’t going to give a project like this a second glance something like the 7,000+ CDFIs in the US happily will on an impact basis alone. The upshot? The clinic gets funded to expand, the second location pays back the loan out of operations, the lender gets to use repaid dollars to go fund another project. Cause selection: good. Return: capital repayment.
  5. Microfinance. The lending of small amounts of money (at often higher rates than the above) to impoverished individuals to support their development. Imagine you’re a small coffee farmer in Guatemala who needs to buy supplies for the next growing season. An MFI (microfinance institution) will lend you those dollars, taking repayment after you harvest and sell the year’s crop. Cause selection: good. Return: capital repayment+.
  6. Impact investing. Here we’ve graduated from lending as in (4) and (5) to equity investing. Impact investing largely involves the purchase of equity in companies (from startups and beyond) that can provably and measurably create certain kinds of impact. Have a brilliant new technology that sinks carbon that you want to commercialize and scale? Impact investors would be your go-to source of capital. Cause selection: good. Return: sub-market.
  7. ESG investing. Like (6) but with less of a focus on the “provable” and “measurable” parts. This is the purchasing of equity in companies with active ESG (environmental, social, governance) programs. Put simply? I want my 401(k) in companies that don’t actively suck. Cause selection: limited. Return: market.
  8. Market investing. Either debt or equity investing at market rates into standard companies with no particular impact focus. Only does good in the very broad sense of supporting an economy that underpins or increases shared prosperity. Cause selection: none. Return: market.

Doing good without donating: the defense.

I can hear your inner monologue now. “If there are so many viable options for doing good, then why I have never heard of any of them? Why are we still mostly donating?”

Well, we’re not actually still mostly donating. Many of the world’s largest organizations (governments, NGOs, charities, banks) are already either in the process of shifting to investment-based approaches or have already completely done so. In 2020 over $2T (that’s right, trillion) dollars were impact invested. Donated to charity? Numbers are tough to nail down but we’re likely looking at under a trillion (with a huge chunk being donated to churches). We’re likely impact investing two or three dollars for every dollar being donated.

It’s no accident that investment has come to define the modern approach to doing good in the impact world. I think there are two main trends powering this shift:

First, donating can create a kind of moral hazard through interventions that are often provably worse than simply handing people cash.

When TOMS Shoes ran an impact study on their famous one-for-one model (donating a pair of shoes to an impoverished person for every pair sold) the results were more than a little unfortunate: it often did more harm than good. Getting shoes to the people who needed them was notoriously difficult. The recipients often wouldn’t wear the shoes. If they did wear the shoes there was essentially no demonstrable positive impact. Local shoemakers were sometimes put out of business by the influx of cheap, foreign shoes, draining money and opportunity out of these poor communities. Most damning? Receiving shoes actively created counterproductive attitudes of dependence. When surveyed, recipients were far more likely to indicate that “others should provide for my family’s needs” vs the more typical “my family should provide for its own needs” of non-recipients. Handing poor people free shoes did nothing more than create more people who needed and expected free shoes. Ouch.

This failure has been mirrored over in Africa, where the massive influx of donation-powered NGOs have created an entire industry around attending their seminars. The story? NGOs take your donated dollars to go provide education to impoverished communities. There are so many NGOs doing this that they start paying “sitting allowances” to overwhelmed locals to actually show up to their seminars. Attending seminars becomes a full-time job for some, stocking every seminar with the same people deriving precisely zero value from the seminar. When we talk about creating meaningful jobs this is very definitively not what we mean.

Also, and this is still definitely a conversation in progress, but it seems like simple cash transfers (i.e: just giving poor people money directly) is the most reliable way to actually create impact in those populations. The upshot? The charity you’re donating to is likely consuming a huge chunk of your donated dollars in their overhead (paying themselves and their expenses) only to spend the remainder on interventions that are actively less good than simply doling out dollars. TOMS? Just handing erstwhile shoe recipient cash would have avoided the stack of negative externalities their one-for-one model created. The African NGOs? Saving money on the seminars and simply handing out cash would get significantly more money into the hands of the impoverished all while freeing up their time.

Second, repaid impact dollars can be re-invested to do more good again, and again, and again.

Even if dollars donated to charity do more good dollar-for-dollar (and this is… questionable) it can only ever do it once. That trillion dollars we donate every year? Every year we need to come up with a new trillion dollars. We need to spend vast amounts of money fundraising (marketing to people) for them to donate more dollars to feed the impact machine. Every marginal unit of impact we want to create requires a new marginal dollar, the associated costs to acquire it, and is tempered by the cost to turn that dollar into impact.

We’re now impact investing far more than we’re donating largely from the simple fact that these dollars represent a growing rather than a strictly diminishing fund. Every new dollar raised to impact invest? Increases the number of dollars in the fund. Every dollar repaid (often with interest)? Increases the numbers of dollars in the fund. Through doing good via investment we actually build an increasing ability to do good over time — unlocking an impact multiplier on every dollar we put towards good.

How are you doing good?

As individuals (and, as an extension, the brands we create) our “doing good” paradigm is still donation-based. We pick causes, we make donations. We buy carbon credits to offset our personal (or company) carbon footprints. We do these things because they’re the default — they’re what’s easy and what’s expected. A lot of the impact world (and now including brands like Starbucks and the 1% For The Planet org among others) are moving on and are using increasingly sophisticated tools to do more and more good. Why haven’t we joined them?

In some sense I think this is mostly a case of we don’t know what we don’t know. The impact investment world is nerdy, opaque, a regulatory night, and so, today, largely targeted at investors with Scrooge McDuck vaults full of money. We’re still donating because the impact investment industry has historically looked at the $100 in my wallet and the $50B in Goldman Sach’s and decided that one of us is just maybe a little more worth talking to than the other.

That needs to change. We need to live in a world where everyone — every company — does the most good possible. This is happening as we speak. We’re finally starting to see solutions built for the mainstream. Kiva.org will let you lend (and get repaid) directly to vulnerable people around the world. My company +Purpose (yeah yeah, shameless product placement) lets brands and their customers come together to invest in the world’s highest impact causes.

Excited about doing good and not sure what to make of all these new options? Shoot me an e-mail at taylor@addpurpose.com and I’d love to chat about it.