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Cary Martin Shelby, Profiting from Our Pain: Privileged Access to Social Impact Investing, 109 Cal. L. Rev. __ (forthcoming, 2021), available at SSRN.

“Doing well while doing good” has become the mantra for a large segment of investors in today’s capital markets. In the wake of COVID-19, the Black Lives Matter movement, and the increased focus on climate change, many investors today are looking for ways to use their capital to positively impact society and address its various challenges. Responding to this demand, various socially conscious investment vehicles have emerged, such as environmental, social, and governance (ESG) investments, socially responsible investments (SRI), and social impact investing. But as these investments grow in popularity and size, it becomes necessary to question whether they are truly having the positive impact their name suggests.

In Profiting from Our Pain: Privileged Access to Social Impact Investing Professor Cary Martin Shelby explores the underbelly of socially conscious investment, focusing specifically on social impact investing. Social impact investments “seek to positively impact the environment or society at large, while simultaneously yielding a return for the underlying investors.” Because of its express and specific focus on social impact, this type of investing has the greatest potential for generating positive results for targeted communities. Yet, despite the potential benefits of social impact investing, Professor Martin Shelby argues that the public-private divide in U.S. federal securities laws creates opportunities for elite investors to profit at the expense of marginalized communities. This occurs through two interrelated yet distinct ways.

First, most social impact investments are private offerings, placing them outside the mandatory disclosure regime applicable to public offerings. The lack of disclosure allows social impact investments to obscure potential negative externalities that accompany their activities. Professor Martin Shelby notes that in “solving” one problem, social impact investments may only exacerbate other issues within the communities they claim to assist. Or, alternately, these investments may fail to achieve a positive impact and then be abandoned, leaving the affected community to clean up the resulting mess.

Second, due to the nature of the investment vehicle, only specific types of investors can participate in social impact investments—elite, wealthy investors who are unconnected to both the community and the problems to which their investments are directed. Exclusion from the investment process deprives the persons and communities most affected of means to provide inputs on the issues in question, further marginalizing them. Additionally, these marginalized groups are unable to share in the profits generated from the commodification of their community pain. Both factors serve to “increase the collective ‘pain’ experienced by disadvantaged communities” and obscure the magnitude of the resulting harms.

Professor Martin Shelby’s insights are both relevant and poignant. Social impact investing and other forms of socially conscious investments are only likely to grow in the coming years as there is a greater demand from investors to “do good” with their investments. This makes it all the more important to recognize that social impact funds may result in negative externalities that undercut the very “good” they are supposed to accomplish. Examples of such negative externalities include: (i) clean energy investments that destroy a surrounding habitat; (ii) displacement of lower funded but higher quality products that would have a greater level of impact than their replacement; and (iii) gentrification.

Professor Martin Shelby proposes regulatory reform and intervention to address these negative externalities. She proposes closing the public/private divide in securities laws applicable to social impact funds, stating: “Categorizing funds as private simply because they are restricted to elite investors who can fend for themselves no longer works in a world where their investments can generate massive negative externalities.” Her proposal is to create a new series of exemptions under the Securities Act of 1933 and the Investment Company Act of 1940—the Social Impact Exemptions. The proposed exemptions change existing rules related to disclosure and access and create new mechanisms to increase accountability and community involvement and expand management structure.

Professor Martin Shelby’s proposals aim to increase regulatory and community involvement in addressing the harms that accompany social impact funds. She recognizes that social impact funds need regulatory flexibility to invest in illiquid and possibly short-term unprofitable ventures, but she proposes providing this flexibility in exchange for compliance with the new framework. Professor Martin Shelby’s proposal is nuanced and practical. And, importantly, it addresses the ways in which marginalized communities are excluded from participating in or profiting from the commodification of their collective pain, while minimizing the likelihood that these same communities are left to deal with the negative consequences of wealthy investors trying to “do good.”

Professor Martin Shelby’s exploration of who gets to profit from the commodification of marginalization is both nuanced and necessary at this juncture. Impact investing is poised only to increase as ESG, SRI, and social impact investing increasingly become mainstream. However, the ability of impact investing to operate opaquely, passing off negative externalities to already disadvantaged communities is an under-explored issue that is rooted in the federal securities laws’ notions of “publicness.” Ensuring that social impact investing does not result in significant harms for the communities they claim to serve requires a holistic approach of more disclosure, innovative community access, better accountability, and a broadened management structure. If investors truly want to do well while doing good regulators must first ensure that these investments do not exacerbate existing harms, expose communities to additional risks, or operate to the exclusion and detriment of the persons they’re supposed to help.

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Cite as: Gina-Gail Fletcher, Doing Well While Doing Good: Impact Investing & the Commodification of Marginalization, JOTWELL (November 3, 2021) (reviewing Cary Martin Shelby, Profiting from Our Pain: Privileged Access to Social Impact Investing, 109 Cal. L. Rev. __ (forthcoming, 2021), available at SSRN),