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Why corruption is a problem for impact investors—and what we can do about it

Money in pocketBy Marta Maretich, Chief Editor @maximpactdotcom

“Corruption is a disaster for development. It wastes the resources that can build sustainable economies, guts confidence in government, and fuels inequality and conflict. So common sense dictates that massive global efforts to end poverty must find a way to fight corruption, or they will fail.”  —Dana Wilkins

So writes Dana Wilkins, an analyst for Global Witness, the anti-corruption campaigning organization, in her recent blog on the corrosive effect of corruption on global efforts to fight poverty. Her remarks highlight the problems corruption creates for development aid, but every word of it should set alarm bells ringing for impact investors, too.

Because, if corruption is a problem for the development aid sector, it’s twice the problem for impact investors. Here’s why:

Corruption strikes simultaneously at both of impact’s stated aims: profit and benefit. It cripples the growth of business and drains investor returns while it chokes off the possibility of creating social and environmental benefit. Sustainable, socially beneficial businesses are unlikely to thrive in corrupt contexts. Impact investors who put money into them run risks they may not initially see or understand, including reputational risks. Impact measurement and reporting, too, can be tainted by corruption, making it impossible to assess the real effects of an investment.

All this makes corruption fatal to the success of impact. Worse, by investing the wrong way, in the wrong places, investors could actually harm the communities they want to help.

Far from fostering economic development, careless investing actually makes corruption worse by propping up a sick system. As Wilkins told us during a recent conversation, “Investing blindly in corrupt contexts can exacerbate the political and economic conditions that undermine long-term development”. And, by pouring good money into corrupt systems, impact investors can come to be seen by local people as part of the problem rather than part of the solution.

Steering clear of rotten deals

So what can impact investors do to avoid getting caught in the corruption trap?

Due diligence is key, according to Wilkins, and should never be stinted on when making an investment. Careful due diligence processes that take account of corruption activity and provide insight into local conditions will help investors steer clear of rotten deals and find healthy ones. “Impact investments must be informed by due diligence and an in-depth understanding of the political economy of corruption in the country,” she told us.

This holds true for investments anywhere in the world, not only those in countries that are infamous for crooked dealing. Although many high profile corruption cases have come out of the developing world, like this one involving Nigeria, it’s important to remember corruption is a global scourge that taints developed economies, too.

Global Witness’s current campaign focuses on getting western economies, especially the US and the UK, to ban anonymous companies, the unaccountable entities often used to launder money stolen through corruption. And, as Global Witness founder Charmian Gooch points out in her award-winning TED talk, theft on such a massive scale is impossible without the collusion of reputable banks and multinationals.

For impact investors, this means taking a hard look at any investment before committing capital to it, regardless of the size, stature or location of the business. By making it a practice to look beneath the surface of deals—a thing all investors would be wise to do—they can choose investments knowledgeably and avoid putting money in the pockets of criminals.

Providing anti-corruption leadership

Avoiding bad deals is one thing, but what else can the impact sector do in the fight against corruption?

Driven by a dual commitment to good business and social and environmental benefit, our sector could (and should) take a leadership role in the anti-corruption movement. Establishing good governance and reporting practices across the impact investing industry will be key, but the first step is to embrace the principle of transparency, according to Wilkins.

“Impact investors should be 100% transparent about the way they do business and who they do business with,” she told us. “This can have a knock on impact of helping improve transparency and accountability more generally, and save investors being seen as complicit in the corruption that is bleeding so many developing countries dry.”

Beyond this, the sector can do more by supporting the work of anti-corruption campaigners like Global Witness and other groups, like Global Financial Integrity. Global Witness is now pushing for anti-corruption to be embedded in the UN’s Sustainable Development Goals, the post-2015 successor to MDGs, a move that could catalyze change across the development sector and give support to wider efforts to end corruption.

Joining the conversation about anti-corruption policy, like this one lead by the US government, is another way the sector can exert influence. Finally, supporting change from within industries through careful investment combined with vocal support for internal anti-corruption activists is another way to help. This will be crucial in industries where the instance of corruption is high—forestry, land, oil, and minerals top the list.

The world is sick of corruption. This survey of millions of people identified “honest and responsive government” as priority #4 out of 16; that means one free of graft, bribery, nepotism and fraud. And it implies a clean operating environment for business, too. The impact investing sector now has an opportunity to respond to this call for fair dealing and put its growing influence behind global efforts to bring change.

Read blogs by Dana Wilkins

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One thought on “Why corruption is a problem for impact investors—and what we can do about it”

  1. Hank Beasley says:

    This is a economic structure designed for impact investing that grows through transparency and accountability. Building a model of this structure presents an example to an amendment to the House Resolution H.R, 576 to allow re-patriated off-shore dollars to invest in this structure.

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