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SEEING THE FOURTH SECTOR REQUIRES A SHIFT IN MINDSET.

"We can’t solve problems by using the same kind of thinking we used when we created them."

 

– Albert Einstein

THE FOURTH SECTOR'S SUPPORTIVE ECOSYSTEM.

In each of the traditional three sectors of the economy, organizations rely on a specialized supportive ecosystem to operate successfully, but this is not the case for the fourth sector.  

 

The growth of the fourth sector is constrained by legacy "3-sector thinking" which perpetuates the lack of a coherent and cohesive supportive ecosystem for the sector — including policies and regulations, financial markets, measurement and reporting standards, among other enabling conditions. 

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In the same way that for-profits cannot effectively rely on the supportive ecosystem of the nonprofit sector, and vice versa, for-benefits should not be expected to rely on the ecosystems of the for-profit or nonprofit sectors.

Entities in each of the traditional three sectors (for-profit, nonprofit, and government), can utilize and rely on a robust, specialized and inter-operable supportive ecosystem (see diagram), which includes financial markets, policy and regulation, training and educational systems, measurement and reporting standards, and more.

 

Since for-benefit organizations have to predominantly rely on the ecosystems of the traditional three sectors, they are often forced to make unwanted trade-offs that compromise their impact in one way or another.

 

For example,

> current legal and tax structures make it difficult for for-benefits to integrate commercial and mission-related activities;

> there are no broadly accepted standards for triple-bottom-line measurement and reporting of performance;

> educational systems are not adequately training managers or support professionals to operate in an environment that demands integration of business and mission logics;

> and financial markets are bifurcated between philanthropic and private investment, making it difficult for for-benefits to access risk or growth capital that is mission-aligned.


 

To illustrate... when a social entrepreneur starts a for-benefit business, they are forced to choose between a nonprofit or for-profit legal form — neither of which are well suited for their intention of using the market to solve a social or environmental problem.

 

If they choose a for-profit legal form, it will have difficulty embedding commitment to its mission into its structure, thus risking mission drift as it grows and new investors and management enter the picture.

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On the other hand, if the for-benefit selects a nonprofit form to protect its mission, it will face difficulty accessing private capital, making it much harder to reach scale.

Once in the market, for-benefit businesses compete on an uneven playing field, in which the higher burden and costs associated with their purpose and values — like waste, fair wages, environmental practices and so on — are not reflected in market prices, for example. 

 

Similarly, positive spillover effects of for-benefits to society, such as creating quality jobs or providing affordable healthcare, are not broadly recognized, well seen, or harnessed.

 

Traditional legal frameworks hamper the creation and growth of for-benefits. In most jurisdictions, social enterprises are still not seen or recognized by government. Moreover, publicly held companies are still mostly legally obligated to maximize shareholder profit above all else.

Further, financial regulations, originally designed to protect profit-maximizing, have slowed innovation in social finance, such as impact investing and microfinance.

Despite these challenges and many others, this sector has been growing in size and demand, especially in the last decades. And, while still nascent, fragmented, and hampered by '3-sector-thinking,' its ecosystem has also been growing rapidly. 

For example:

We have seen the emergence of financial instruments, funds, and intermediaries that facilitate investments that seek positive social and environmental impacts alongside profits.

A number of countries have adopted new corporate forms legislation and other enabling public policy to recognize and regulate for-benefit organizations.

New assessment and reporting tools and accounting standards have been emerging that seek to integrate financial, social and environmental performance. ​

 

Educational and training programs have been created to cultivate the technical, management and leadership skills required for operating in the fourth sector.

A growing number of lawyers, accountants, consultants and other technical assistance providers now specialize in for-benefit enterprises.

“The relationship between governments and social economy enterprises is a reciprocal one. On the one hand, social economy enterprises require government policies to enable them to overcome the barriers they face, and on the other hand governments might work in partnership with social economy enterprises to achieve their own policy objectives. Social enterprises explicitly address social, economic and environmental challenges, and thus contribute to the general interest.”
 

– Antonella Noya,

Senior Policy Analyst and Manager of the Forum on Social Innovations at the OECD

For decades, demands for a systemic shift have been growing.

Calls for system change were growing louder before COVID-19 breakout.  Today, they have become a survival imperative. Recognizing, supporting and  leveraging decades of social innovation and widespread demand to spur sustainable and equitable economic growth must become a priority for national strategies to achieve the SDGs…

A fourth sector in action.

Despite the lack of a cohesive supportive ecosystem, for-benefit enterprises from all over the world are in the frontline accelerating innovation to mitigate the impacts of COVID-19 and showing greater resilience than other business models. Similarly, many conventional private sector firms are prioritizing public good over their bottom lines to help their communities and countries to overcome crisis…

ABOUT THIS EFFORT.

Accelerating the emergence of the fourth sector.

 Governments should leverage decades of innovation, and widespread demand from citizens, consumers, CEOs, employees, investors, entrepreneurs, and youth alike, to spur sustainable and equitable economic growth, built to meet the challenges that lie ahead...

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A collective global effort driven by leaders in policy, business, investing, academia, social innovation, and civil society who have come together to harness the growing fourth sector of the economy as pathway for social and economic recovery from the COVID-19 crisis.

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Building back a better economy is an effort that requires massive collaboration — there is a role for everyone across every sector. To get involved, or if you have any questions, please contact us!