Human Capital, Sustainable Social Enterprises, and Fossil Fuel Subsidies
The BoP Summit organized by William Davidson Institute last month focused on creating an “action agenda” to help build better enterprises serving the global poor. In both breakout and plenary sessions, human capital emerged as a core challenge. Specifically, many social enterprises struggle to attract, develop, and retain talent – especially in rural markets that lack infrastructure and the big-city vibe that appeals to young entrepreneurs.
A number of social enterprises focus on livelihood training and have developed hybrid models. GSBI alum Anudip, for instance, provides market-aligned skills training for marginalized women and youth in rural and peri-urban India. Graduates can compete in the open market, or if they wish to remain in their communities, work at global “smartsourcing” firm iMerit, a for-profit in which Anudip holds a significant stake. Digital Divide Data, another GSBI alum, provides higher education opportunities and impact sourcing employment to youth in Kenya, Cambodia, and Laos.
Many social enterprises provide other goods and services that governments and markets fail to deliver – safe drinking water, clean and affordable energy, therapeutic foods, agricultural inputs – to name a few. While these enterprises frequently result in dignified livelihood opportunities that fuel local economies, the paucity of proximal talent can impede their rate of scaling. Experienced managers know that the cost of turnover is high: it takes time to recruit and develop; institutional knowledge, often not centrally stored is lost; and relationships that drive revenue aren’t instantly transferable. Harris and Kor recently reported on the role of human assets in scaling of social enterprises.
The human capital challenge spans every level of the enterprise including entry-level positions, mid-level management, senior leadership, and more often than not, governance. Proportionally, there simply aren’t that many experienced, successful business people who can serve as leaders or mentors in frontier markets, particularly not in rural areas. Moreover, entrepreneurial ecosystem services that catalyze formation of appropriate human capital are underdeveloped, including a paucity of institutions of higher education, credentialing programs, and enterprise incubators and accelerators.
A “$1:$1:$1” recommendation emerged from the BoP Summit working group on Enterprise Support. It goes like this: for every $1 invested directly in a social or BoP enterprise, there is a need for $1 in capacity development or technical assistance to the enterprise, and for another $1 in ecosystem development. The dollars don’t all need to come from the same source. Still, the burning question is, where is all this money going to come from?
In September, the World Economic Forum assessed the impact investing sector from the supply side, citing various estimates of growth to the $400 billion to $1 trillion range by 2020. However, WEF noted the current market size is around $25 billion. Whether the growth estimates are unrealistic or not, the estimated $41 trillion upcoming wealth transfer from Baby Boomers to Generation X and the Millennials is transforming asset management paradigms as younger generations express enthusiasm for double or triple bottom line returns. Once reliable financial and social returns are demonstrated, it is reasonable to anticipate that investment capital will become much more abundant.
But human capital is a different matter. Among the more than 200 social entrepreneurs with whom we’ve had the honor to work, a significant fraction are Western educated. As they scale their ventures, their compelling visions for a more just and sustainable world attract young talent, whom they train and groom. These ambitious young managers forsake high-paying jobs with benefits that enable them to plan for their own futures. After several years, however, many feel they are “falling behind” – servicing student loans, saving for a home, creating a foundation for their own families are simply not possible on the salaries social enterprises are able to pay them, even if they enable quality lifestyles in Kenya, India, or elsewhere in the developing world. In the developed world, social sector salaries present many of the same challenges and often preclude quality lifestyles, especially in big cities; the human capital gap is not limited to BoP markets.
Providing reasonable compensatory benefits to Western educated talent would encourage more to devote their careers to building and leading social enterprises; this of course only a partial solution: ecosystems services must evolve to generate sufficient local talent to build and lead impact enterprises globally. In parallel, however, encouraging well-educated Western youth to pursue careers in social entrepreneurship can help close the human capital gap.
It seems ironic that choosing vocations devoted to poverty eradication and planetary sustainability should consign some of the most talented young leaders of our generation to relative poverty themselves, at least compared to their peers. Providing compensatory benefits, such as contributions to a 401(k) and student debt service, would further tax the financial returns of social enterprises, or reduce the surplus available to invest in scaling. So, what, then, is a possible solution?
The Overseas Development Institute identified a potential source in a report released last week: redirect fossil fuel subsidies to support human capital for social good. Shockingly, the International Energy Agency found that fossil fuel producers received over $500 billion in subsidies in 2011. These subsidies distort both energy and carbon markets. Off-grid clean energy solutions created by social enterprises around the world are less competitive, as the full cost of extraction isn’t reflected in market prices for fossil fuels. Carbon prices are artificially low as a result of these subsidies, limiting incentives for innovation that slow global warming. Energy accounts for a disproportionate share of household expenditures among the poor, and global warming disproportionately affects the poor, a fact that not only causes significant harm to those nations, but is disrupting international relations around the world. As ODI indicates in the title of its report, time for change: let’s shift subsidies to sustainable energy solutions and to closing human capital gaps so that social enterprises can scale more quickly.