November 6, 2015
There is perhaps no more powerful dynamic in economics than compound interest. Albert Einstein called it “the eighth wonder of the world” and Warren Buffett has said “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
In business, compound interest can be thought of as interest on top of interest — the way that a principal deposit or investment grows exponentially over time as money is reinvested.
But in social change, compound interest can be thought of as the exponential, scaled growth of solutions to global problems as money invested in a sustained way.
I propose that we call this “compound impact.”
Ask any nonprofit executive director what their biggest problem is and they will tell you it’s the question of whether funding is sustainable and as a result whether interventions are scalable. Government appropriations and philanthropic donations are critically important but are often unpredictable in their timing. Solely depending on either of them requires short-term thinking — which is the wrong approach when one is trying to solve global problems.
So why has no one in impact investing embraced the very same theory that made Warren Buffett the most successful investor in history? Why have we not developed a theory of compounding social interest and compounding social impact?
Part of the reason is that we have had a simplistic, limited view of the role of business in social change.
This comes from the old silly assumption that profit and purpose can’t really be aligned in a fundamental way. Even some within the impact investing community view impact investing as a little niche of the world of investing but not what could eventually become the majority of all investments made.
We need to think bigger. We need to embrace the notion that capitalism is one of the most powerful forces on the planet, and if we build and invest in businesses that have an explicit social purpose, we can create sustained funding of a type we’ve never imagined.
Impact investing should not be seen as a niche — it should be seen as the norm. We need to assume that all investments can have a positive social impact — and move away from those that don’t.
In addition, impact investors should consider the limited long-term impact of funds and embrace the compound interest and compound impact of operating companies who have highly strategic plans for both profit and social impact.
With the exception of the true innovation that can come from groundbreaking technologies the fund model is often a flawed model for social impact. With the exception of those with a long duration, funds by their very nature encourage short-term thinking and limit the long-term influence and social impact investors can have.
It’s time for permanent capital and permanent change. It’s time for a long-term view. The first step in creating “compound impact” is actually believing we can achieve it.
By Trevor Neilson
CEO, i(x) Investments
Co-Founder, Global Philanthropy Group