What Role Can Impact Investors Play in the Fight Against Corruption?

In the Financial Times, “Impact investors look to soften Trump aid blow,” Simon Mundy writes that while impact investment “cannot plug all the holes left by the slashing of international aid, it may at least be able to offset some of the effect”. What of the numerous canceled anti-corruption and good governance programs? Can or should impact investment fill that gap? How do impact investors think about their role in the anti-corruption ecosystem? To explore these questions, I spoke recently with Founder and Managing Partner of Total Impact Capital, Ambassador John Simon. 

Ambassador Simon emphasized that given their mission orientation, impact investors should care deeply about issues of integrity. First, this is just good business sense. “Companies that pay bribes don't care about creating value,” he points out. “Companies that engage in corruption are likely to be poorly managed, inefficient, and may have labor problems.” But moreover, achieving the non-financial returns that constitute impact means not only investing in various climate, health, social, poverty or other solutions, but also steering clear of negative externalities. Considering the detrimental effect of corruption in emerging markets in particular, impact investors must avoid contributing to the problem.  

However, Simon notes, most impact investors will likely not advocate to foreign governments about the need to eliminate corruption, as USAID or the State Department might have in the past. The impact investment sector is rooted in an ethos of using private sector approaches to fill critical social service or other gaps in the context of weak public sector capacity. Most impact investors – and their portfolio companies – prefer to operate “outside the system.” But eventually, as Simon stresses, at some point, “if you want to grow the business, you have to engage with government.” Investors looking for pipeline will tell companies they need to formalize to be investable, which means dealing with the legal system – but many firms in emerging markets want to avoid the inevitable demands for payment. 

This is where the unique impact investment model comes to the fore. The first step is to identify risks through due diligence, as well as compliance training and monitoring. But because impact investments are often small scale, there might not be sufficient funds to pay for robust compliance programs. Instead, impact investors can mobilize their local understanding and connection with their investees to ensure open communication and to navigate day-to-day risks. Simon says he advises portfolio companies to “refuse to acknowledge, refer to the law relentlessly, use local lawyers, communicate that your investor won’t allow it.” Officials often realize it’s not worth their time. While this approach may be costly, the alternative is worse; a bribe paid once is an invitation to keep demanding payment. 

From this point of view, Simon notes, having public sector funds in the impact investment mix has been critical, as it was well-known that US Government funds cannot touch corruption. When Simon worked at OPIC, he says, major multinationals approached him not for financial backing, but for the reassurance of the USG imprimatur. This reinforced the “refuse to pay” approach. Now, Simon fears, even the privately-funded impact investor may face ramifications from the drop-off in US foreign assistance and weakened FCPA enforcement. 

Marc Schleifer