Over the past decade, the financial industry has been the subject of harsh criticism — and not without cause. Disillusioned by the abuse of esoteric financial instruments and repeated examples of corporate malfeasance, large numbers of Americans have grown tired of Wall Street and what they see as the financialization of the economy. Finance, however, is only a tool, and as with any tool, it can be used for good or ill.
Georgia Levenson Keohane, executive director of the , professor of social enterprise at Columbia Business School, and author of , makes the case in her new book, , that traditional financial tools can be used to innovate solutions to some of the world's greatest social and environmental challenges and urges readers to regard finance not as an instrument of exploitation but rather as a force for good.
Central to her argument is the distinction between financial innovation — the creation of new, increasingly complex instruments of financial engineering — and innovative finance — the use of existing tools to overcome market failure and meet the needs of the poor and underserved. Divided into five thematic chapters, the book explores how innovative finance can be used to fund solutions to environmental, healthcare, financial inclusion, and disaster relief challenges around the world, as well as problems in the United States.
Revisiting Adam Smith's theory of the "invisible hand" in the context of public need, Keohane shows how financial techniques previously used in the pursuit of private interest can be adopted across sectors to benefit the common good and provide economic opportunities for those at the bottom of the wealth pyramid. "When markets fail to produce a set of broad-based and sustainable public goods," she writes, "we need a more visible hand: concerted efforts by governments, multilateral agencies, philanthropies, and, increasingly, socially minded investors to meet needs and solve problems." It is a perspective rooted in the power of agency, the core of which she describes as "aligning incentives in ways that encourage people — individuals and government leaders — to make decisions that both are in their own self-interest and benefit the society." The logical extension of this argument is that many negative externalities (e.g., CO2 emissions) can be internalized by the market with the judicious application of the right tools — for example, cap and trade — while certain failures of the market can be redressed by the deployment of hybrid incentive models such as pay-for-success bonds.
Throughout the book she argues that solving the world's greatest challenges will require the partnership of all sectors — government, social, and for-profit. Whether it's climate change, poverty, or a humanitarian crisis, the problems we face in the twenty-first century are too complex to be tackled through the application of a single mind- or skillset. The examples she gives on that score suggest that answers do not always have to be complicated — and that often lessons from other contexts are helpful. "[F]acilitating exchange, reducing risk, and allowing for intertemporal transfer," she notes, are some of the core uses of finance. Insurance helps spread risk. Debt frees up resources today in exchange for regular payments in the future. And access to markets — say, with the help of a microloan — can lead to participation in a regional or even the global economy. While in the past such tools may have been ignored or impugned by social sector leaders working to address intractable problems, Keohane argues that they are indispensable today to achieving impact at a level commensurate with the challenges we face.
In often painstaking detail, Capital and the Common Good shows that financial tools, when used properly, can save lives and improve livelihoods for the poorest among us. Keohane declares, for example, that "[b]etter cash-flow management would go a long way toward meeting short- and long-term health needs" — and then shows this to be true beyond the healthcare sector. Citing various practices in innovative finance, she shows debt to be a basic yet invaluable tool when trying to raise capital for public goods. And she notes that while they are still in the early stages, social impact and green bonds both hold great promise. (Indeed, coffee retailing giant Starbucks just recently issued $500 million in green bonds in support of efforts to source its coffee beans sustainably.)
Throughout the book, Keohane engages with the evolving concept of impact investing, a subset of innovative finance focused on generating private capital for social enterprise. Impact investing does not, however, capture the entire story of the new ways in which innovative finance is being applied to address social ills, even though they both "share the same ultimate goal: a more equitable world in which we all have a role and stake." (For the reader interested in a more focused primer on impact investing, check out , by Anthony Bugg-Levine and Jed Emerson [Wiley, 2011]).
Despite its modest size, Capital and the Common Good covers a lot of ground, eschews financial jargon (for the most part), and is accessible to interested readers wanting to learn more about the evolving nexus of finance and social good. As Keohane reminds us, the ultimate goal of innovative finance is to bring more resources to bear on efforts to solve our greatest challenges. Some of those experiments will succeed and some will fail; along the way, lesson will be learned. As Keohane admits, "[t]his book is neither the last nor the definitive word on innovative finance." The field is moving too quickly for that. It is, however, a valuable addition to the global development conversation and a useful resource for leaders in all sectors seeking to make, one innovation at a time, the world a better place.
Michael Weston-Murphy is a writer and consultant based in New York City. For more great reviews, visit the Off the Shelf section in PND.