As donors quickly move funds to the Pacific to respond to the health and economic crises brought on by COVID-19, we have an opportunity to rethink how aid functions, and what role impact investment in social enterprises can play in the region’s recovery.

Since 2016, Pacific RISE has been working to attract capital to Pacific social enterprises. In our work at Pacific RISE, we’re consistently finding the need to pay careful attention to power dynamics in social investments, including the gender dimension. Our experience in the Pacific is reinforced by findings from other regions that deeply held cultural values – such as a belief that those who hold the most capital deserve the most power – have a strong influence on which deals are made, and how.

In its recent paper Partnerships for Recovery, the Department of Foreign Affairs and Trade (DFAT) indicates a willingness to partner in new ways with the private sector to assist Pacific businesses in accessing capital and re-establishing markets and value chains.

It’s essential that DFAT and other donors, along with social investors, apply a power and gender lens when financing COVID-19 recovery efforts. Based on our experience, we compiled a number of recommendations for DFAT and other donors as they formulate their approach to helping rebuild Pacific financial and economic systems in response to COVID-19.

In forging innovative partnerships with the private sector, DFAT and other donors should examine the role of power in deciding who is seated at the table, whose knowledge is valued, how negotiations are conducted, and how finance is delivered to support the COVID-19 response and recovery.

One place where power dynamics are clearly evident is at the negotiating table in capital investments. In late 2019, we partnered with the Criterion Institute – a global think tank focused on using finance for social change – to analyse power dynamics in 14 Pacific RISE deals at various stages of the investment process. The deals used a variety of social finance models and capital types in framing impact investments in the Pacific.

Our analysis demonstrated seven clear power dynamics at play between investors, intermediaries and businesses that influenced the overall success of the investments:

  1. Knowledge – which skills and experience are valued?
  2. Access – who is considered ‘worthy’ to access capital and resources?
  3. Decision-making – who holds power across each phase and process?
  4. Timing – whose timeframe matters most and sets the pace?
  5. Transparency – who gets to know what, when?
  6. Risk sharing – whose risks are prioritised and mitigated?
  7. Alignment/incentives – who is structurally incentivised to do what?

Our findings reinforced the view that traditional finance models are underpinned by a deeply held cultural value that those who hold the most capital are deserving of the most power and influence:

  • Investor risks are privileged over entrepreneur and community risk.
  • A preference for high-growth scalable equity opportunities is the norm.
  • Deal terms are often sourced from finance-first models rather than being contextualised, and can be inappropriate in social investment contexts.

In conversations with investors, we also found additional bias against impact investments in the Pacific specifically. Investors’ concerns about ease of doing business, repatriation of funds, and general inconsistency of tax and regulatory frameworks in the region lead to stricter scrutiny and evaluation.

We found that organisations that shifted away from traditional finance models made more equitable and more successful deals.

Pacific RISE is paying deliberate attention to power dynamics – including women’s economic empowerment – during our due diligence process, which is in turn influencing investors to explore alternative investment vehicles to finance Pacific businesses.

Partnering with Pacific Trade Invest Australia, we’re working with Pacific diaspora group Pacific Business Sport and Entrepreneurs (PBSE) to design an investment fund that will include mentoring and finance for Pacific small and medium-sized enterprises (SMEs). We’re also working with Good Return to design an impact investment model that matches SMEs with the resources they need to grow their business, and connects them with the partners best placed to help, including Pacific financial service providers.

Partners such as Pacific Trade Invest Australia, PBSE and Good Return take the time to understand the Pacific context and the SMEs. They value knowledge of the Pacific context in designing their investment vehicles, and work in strategic partnerships with a range of Pacific organisations. They offer context-specific financial products alongside other resources to grow businesses, such as training and mentoring.

The power dynamics that we found in our analysis of the Pacific investment deals reflect what is happening in other parts of the world: investors and capital holders have more influence than the entrepreneurs. Investors are also affected by their unconscious biases, such as who is seen as being ‘worthy’ of having access to capital. As traditional investors face greater pressure to incorporate social investments into their portfolios, it’s important that we learn the lessons from programs, such as Pacific RISE, and other analyses.

DFAT’s Partnership for Recovery policy rightly includes exploring how non-grant finance instruments – including loans, guarantees, equity investments and impact investing – can play an important role in supporting long-term economic recovery.

Post-COVID, the shift globally must be toward businesses that are building stronger resilience. How successful the recovery is, and what it looks like, will be strongly influenced by who receives support during the response and on what terms – decisions that are being made now.

As donors and investors look toward future investments, the recovery of Pacific businesses and economies will ideally create both social and financial returns. For those returns to be realised, however, we need to place equity and power front and centre in impact investing.