Diversity, Equality and Inclusion in Impact Investment
Tara Sabre Collier, Social Entrepreneur in Residence at the Skoll Centre for Social Entrepreneurship and Skoll Scholar alumna joins Chris Blues, Programme Manager for Social Ventures at the Skoll Centre, in examining inequalities within the Impact Investment industry.
Inequality is one of the greatest challenges of our time, hampering growth, spurring strife and instability and impeding human development.
Income inequality has been worsening across countries since the turn of the century and is likely to be tremendously exacerbated by COVID-19. The impact investment sector has been a powerful force for progress towards many SDGs but needs to take a critical look at how, as a sector, it is advancing or exacerbating SDG 10. In most of the world, income and wealth inequality are inextricably tied to race, ethnicity, gender, national/origin migration status but most impact investors have not fully interrogated their roles in fostering equity and inclusion across their organizations and portfolios.
There is no aggregate global diversity and inclusion data for the impact investment industry.
Data from the UK, one of the world’s leading countries for impact investment, show a clear discrepancy in the ecosystem, with people of colour occupying less than 7% and women outnumbered 2:1 in board directorships. While the UK does not necessarily represent the entire impact investment industry, it is an important global hub. Moreover, there are a number of global commonalities in terms of wealth distribution, private capital markets and philanthropy that indicate other Western impact investment markets will similarly fall short. The impact investment industry hybridises investment, philanthropy, and social enterprise traits; talent, staffing and leadership trends will reflect this DNA. A few global highlights from these sectors (across UK and USA) reveal less than admirable diversity and inclusion track record.
The United States is the world’s leading VC market. White men are 30% of the country’s population yet nearly 80% of VCs and 80-90% of leadership in venture-backed companies. This demographic disparity, is replicated in the European VC ecosystem. Furthermore, research shows that venture capitalists are far more likely to partner with people who share their gender or race, leading to far less funding for women entrepreneurs and founders of colour.
Women are about 56% of US philanthropic foundations CEOs, but people of colour only occupy 11% of said roles, despite a significant philanthropic emphasis on serving communities of colour in the US. There’s now evidence that this disparity is reflected in philanthropic funding for social entrepreneurs of colour, with a recent Bridgespan study showing Black-led social enterprises have 76% smaller net assets than white-led counterparts, mostly attributed to bias.
Just 3% of UK charity CEOs were of non-white backgrounds, despite the fact that a large share of the UK sector’s work likewise addresses communities of colour. On the international front, an older study indicated less than 10% of the largest international NGOs had African board members, despite Africa being the largest market for INGO grant funding and programs. Likewise, despite women comprising 70% of INGO staff, women are still vastly under-represented (i.e. approximately 30%) as CEOs and leaders of these organizations.
These select examples demonstrate a pattern of diversity paucity which contravenes the vision of impact investing.
If the impact investing industry replicates these disparities, there is a risk of reinforcing income inequality, instead of combatting it.
The representation gap also points to a possible market failure whereby impact capital is likely not being efficiently distributed to many promising ventures with potential to solve societal challenges because of a disconnect between primarily Western white male funders and under-represented social enterprise founders, especially in the Global South. Furthermore, the lack of representation in impact investment teams and portfolios would likely detract from the sector’s financial performance, given the proven linkages between gender/racial diversity and financial performance. There’s no dearth of evidence for the commercial benefits of representation but nevertheless a handful are mentioned below:
- Research by McKinsey & Co. found that public companies in the top quartile for racial and ethnic diversity were 35% more likely to have financial returns above national industry medians.
- Organisations with an above average gender and ethnic diversity on the management teams had innovation revenue that was, on average, 19% higher than companies with below average diversity leadership.
- A study by Boston Consulting Group found that if investors had invested equally into startups that were founded by women, an additional $85 million would have been generated over the five-year period studied.
While the corporate sector continues to rise to the occasion on diversity and inclusion efforts, the impact investment industry is yet to get on board with really advancing the inclusion agenda beyond gender. In the face of what we are learning from the COVID-19 pandemic, there is no time like now to decidedly develop diversity and inclusion initiatives that will improve financial/social returns. If impact investors are truly serious about the SDGs, including SDG 10, we must fight the hazards of inequality, starting with our own industry.