How Can Private Capital Best Serve the Public Good?

Batten professor Christine Mahoney offered some answers during the latest edition of Batten Expert Chats.

When we think about the organizations making a positive change in the world, nonprofits usually come to mind. But in the latest installment of Batten Expert Chats, Batten professor Christine Mahoney argued that if we consider the private sector as well, we can address today’s global problems much more creatively.

“While nonprofits and governments are super important players, they simply don't have the scale of resources we need to achieve our goals,” she said. To effectively combat issues like racial inequity, climate change, and forced displacement, policymakers should see the private sector as a key partner. In other words, Mahoney said, we need to find ways to “unlock private capital” to serve the public good.

There are many ways to do this, and one of the most important is an investing strategy called blended finance, which involves taking philanthropic donations or federal grants and “layering in” private sector capital. As an example, Mahoney offered the work of the Annie E. Casey Foundation under CEO Lisa Hamilton, a University of Virginia graduate. The foundation, which seeks to improve the lives and futures of American children, has historically used its philanthropic capital to support nonprofits. More recently, however, the foundation creatively used philanthropic dollars as a “loan loss reserve,” reducing the riskiness of lending in low-income neighborhoods, which in turn unlocked tens of millions of dollars to rehabilitate hundreds of homes and sell them at an affordable price to families.

“Instead of just using a $50,000 grant—which is incredibly generous and maybe could do some good—they used smart investing ideas and were able to unlock $80 million dollars of social impact,” Mahoney said.

Many for-profit companies have made it part of their mission to address larger social problems: Starbucks donates a portion of profits from its Ethos water bottles to digging wells in Africa, for example, and TOMS has donated nearly 100 million shoes to people in need.

Other corporations are taking it a step further. “There are many social entrepreneurs working in sectors that are critical to human survival and human thriving,” including transportation, access to clean water, and financial services, Mahoney noted. “These are the sectors we’ve been hearing so much about during COVID, so it's perhaps not surprising that environmental and socially responsible companies, especially on the public market, are actually faring better right now than some of their competitors.”

Overall, companies that are not socially responsible are more likely to fare poorly over time, she added: “If you're a company that's exploiting your supply chain, being disingenuous to your investors, or treating your employees badly, you actually wind up doing worse from a financial standpoint in the long term.” That fact supports the ideas of Ed Freeman, a professor at the Darden School of Business, she said. Freeman developed stakeholder theory, which posits that companies should make decisions based not just on their shareholders, but on all of their stakeholders: their employees, customers, supply chain workers, and neighbors.

Even if you personally don’t have millions of dollars to make higher risk investments, you can still consider how your money might be used to effect change, Mahoney said. She recommended looking into socially responsible investing (SRI) and environmental, social, and government (ESG) investing. The former involves divesting from causes that you might consider harmful—mass incarceration, weapons manufacturing, or mining, for example—and the latter involves investing in companies that are actively creating positive change.

Many people are interested in pursuing these forms of investing. Among millennials, 95% say they’re interested, though only 67% are actually allocating their money that way. “There's a huge interest [in socially responsible investing], and the products are there to meet that demand,” Mahoney said. “This is a $17 trillion market and growing.” She encouraged younger Batten alumni who might be setting up their first retirement accounts to consider investing in ESG funds.

“You can think about building your wealth for yourself, your long-term retirement, and your family, but you can also think about how that wealth plays out in the world as well,” she said. “How can it be a force for good?”