The fourth sector is a chance to build a new economic model for the benefit of all

by Heerad Sabeti*

The Fourth Industrial Revolution promises technological advancements that can dramatically transform the nature of life on Earth at an unprecedented pace.

At the same time, we face a host of critical challenges that threaten to radically destabilize societies and the ecology of the planet. These include expedited climate change, rising inequality, political upheaval, disruptions to labour markets and mass displacements of people, to name but a few.

Are our institutions equipped to successfully navigate the challenges and opportunities of the 21st century? Can they ensure the Fourth Industrial Revolution advances in a manner that maximizes benefits and minimizes harms to people and the planet?

Unfortunately, no they aren't and no they can't. The evidence is all around us. Governments are under-resourced, overburdened and constrained by the business interests to which they are beholden for resources. Businesses are caught in an environment where the system demands them to behave in a way that maximizes profit, often at the expense of society and the environment – even though most stakeholders, from the CEO to the consumer, prefer to pursue a more responsible, purposeful and sustainable path.

Non-profits are woefully under-resourced and face growing demand for their services, as businesses further externalize social and environmental costs and governments devolve from providing adequate social safety nets.

Incremental improvements are not enough

Today’s dominant economic systems and organizational models around the world have become outdated. They were born in the industrial age, at a time when natural resources were relatively abundant, human rights were narrowly conceived and globalization was in its infancy. These realities have shifted dramatically in the past few centuries and especially in the past few decades, creating immense pressure to adapt.

In response, there has been a myriad of interventions. Corporate Social Responsibility, Sustainability, Cause Marketing, Venture Philanthropy, Impact Investing, Conscious Capitalism, Circular Economy, Inclusive Business, Social Enterprise, Social Auditing, Privatization, Blended Finance – the list goes on. But despite the tremendous progress made by such interventions in the past few decades, the scale and urgency of the world’s biggest challenges have grown at an alarming rate, outpacing the gains. This is largely a result of the current system architecture, under which economic growth, which has become the engine of progress, unintentionally compounds many of the problems we are facing. It is simply suicidal to continue to try to grow our way out of these problems, without addressing the underlying structural flaws in the system.

The Sustainable Development Goals (SDGs), which leaders from all countries adopted in 2015, are a clear call to action. The SDGs encompass 169 targets under 17 broad goals to end poverty, protect the planet and ensure prosperity for all as part of a comprehensive sustainable development agenda to be achieved globally by 2030. They provide a good framework for understanding the breadth, scale and pace of effort required to rise to the challenges before us.

Almost two years into the 15-year timeline, progress has been disappointing. There is growing recognition that if we are to achieve these targets and build a better world for all by 2030, business-as-usual and continued incremental reforms will not be enough. Instead, we need to exponential progress, starting now.

This can only be achieved if we upgrade our legacy organizational models and economic systems to a fundamentally new architecture [see footnote], one designed to deliver good quality of life for all while protecting the planet, even as we navigate the technological, economic, political and ecological disruptions that surely lie ahead. In short, an economy that is sustainable, inclusive, and resilient.

A way forward: growing the fourth sector

The good news is that such a transformation is, in fact, already organically underway and we now have the opportunity to hasten it.

Most modern economies around the world have evolved into three-sector systems, comprising the public, private, and third sectors (i.e. government, for-profit businesses and non-profit organizations). In the past few decades, this landscape has changed. Many for-profit firms have broadened their purpose to pursue social and environmental objectives, while many non-profit and governmental organizations have adopted market-based approaches to advance their aims.

At the same time, a new, fourth sector of the economy has emerged at the intersection of the three traditional sectors. It consists of for-benefit organizations, which come in a wide variety of models that all share two common characteristics. Like non-profits, their primary purpose is to advance societal benefit and, like for-profits, they generate a substantial portion of their income from business activities. The Schwab Foundation for Social Entrepreneurship supports a global network of several hundred exemplary for-benefit enterprises working across a wide range of issues and industries.

While there is a dearth of data on the fourth sector, there are indications that it could account for as much as 10% of GDP as well as nearly twice the job growth rate as traditional for-profit businesses in the US and Europe. There are numerous studies suggesting a significant demand for fourth sector approaches among consumers, investors and other stakeholders. According to a Global Entrepreneurship Monitor report, there are millions of for-benefit startups being launched around the world each year. The sector is poised to grow rapidly.

That’s important because growing the fourth sector is essential to tackling global challenges and building more inclusive, sustainable economies. The World Bank has estimated that in order to achieve the SDGs by 2030, trillions of dollars of private capital must flow into enterprises across the world that deliver strong social, environmental and economic impacts. Many of these will need to be for-benefit enterprises, businesses whose purpose is to deliver such impacts, rather than traditional profit-maximizing firms.

But there are significant impediments. Each of the traditional three sectors has its own specialized support system that enables the creation and operation of organizations within it. For example, for-profit businesses and non-profit organizations each have their own distinctive policy environments and financial markets.

The fourth sector’s ecosystem, in contrast, is very nascent and highly fragmented. While it has been developing for decades, the sector is still not well recognized or understood. New laws in several countries have been enacted, for example, to formally distinguish for-benefit enterprises as a class of organization, but these are very narrowly scoped and experimental and they do not serve the needs of the overwhelming majority of fourth sector organizations. Consequently, most for-benefits are still legally structured within the boundaries of the traditional three sectors.

In almost every other way, for-benefits must adapt to the systems of the other sectors to survive, often causing them to divert resources and energy away from their core missions. None of the three traditional sectors are designed to support organizations seeking to integrate the institutional logics of business and a social/environmental mission in one entity. Often there are specific restrictions or disincentives to doing so. Consequently, for-benefit organizations are at a disadvantage to traditional for-profits and nonprofits in such an environment unless they make compromises that dilute their mission or impede their ability to scale.

To succeed at delivering on both their commercial and impact objectives, for-benefits need strong support systems just like the other sectors but tailored to their unique requirements. They need access to financial markets that seek positive social and environmental impacts, enabling policy and regulatory environments, integrated assessment and reporting standards and tools, specialized technical and legal assistance and training offerings, and more. In short, the mechanisms that make a market function.

A challenge with significant opportunity and everyone has a role

Currently, the entire system of the fourth sector and the architecture of the for-benefit model are developing organically, in real time, through many uncoordinated efforts around the world. By taking a more deliberate, coordinated approach to the sector’s development, we have a “clean sheet” to design and build a new system optimized to support and scale sustainable, inclusive, market-based solutions to social and environmental problems. The principles of sustainability and inclusiveness will be embedded into the DNA of for-benefits and their system, so as the fourth sector scales it will not generate the level of negative externalities we see with traditional business.

These are precisely the systemic reforms needed to achieve the SDGs and upgrade our economies to meet the demands of the 21st century. What’s more, they are exponentially easier to achieve through building the fourth sector, rather than trying to re-engineer the other three.

Because the fourth sector is a distinct organizational landscape, we can rapidly pilot and scale new policy and regulatory frameworks, financial structures, metrics and other system innovations in a sandbox, without directly affecting existing organizations in the other sectors. This will help to avoid the high levels of resistance and institutional inertia that often accompany system change. We also have the advantage of hindsight, because our efforts can be informed by the best lessons learned from past efforts to structure and reform organizations and economic systems across the world.

Developing this system will not only expedite the growth and increase the impact of the fourth sector, it will also extend the capacity of the other sectors to drive positive change. Its model will provide the supportive environment sought by organizations in other sectors that struggle to balance their commitment to societal impact with the imperative for profit.

For business, the fourth sector’s growth will bring access to expanded markets and new customers, business and investment opportunities. It will enhance stakeholder engagement, improve productivity and strengthen supply chains. It can shift the possibilities for industries whose products and services are inherently a public good, such as healthcare, infrastructure, utilities, energy, education, journalism, mass transit and banking.

For non-profits, the fourth sector will bring new contracting and partnership opportunities, increased philanthropic resources and the opportunity to build self-sustaining, scalable solutions. Finally, for governments, its growth will bring increased revenue and greater private investment, as well as stimulating job creation and economic growth as it reduces the liabilities linked to social and environmental degradation.

A fully developed fourth sector will ultimately consist of millions of individuals and organizations around the world working in their own spheres to support for-benefit enterprise in a myriad of ways. Policymakers, investors, companies, consumers, entrepreneurs, academia, civil society, the media, faith communities, philanthropists and other groups all have important roles to play. This will require mobilization and collaboration on a massive scale.

Fortunately, however, much of the activity will be demand driven. As stated earlier, there is considerable demand for for-benefit organizations across the world from consumers, investors and other stakeholders. This, in turn, creates significant demand for for-benefit organizations and all the elements of the fourth sector’s support system — its laws and lawyers, accounting standards and accountants, investment capital, training and so on. Being part of the fourth sector and its system will create huge opportunities for many people.

Now is the time to come together and invest in growing the fourth sector by trillions of dollars by 2030. This will unleash a wave of innovation and entrepreneurship that can deliver scalable solutions to pressing global challenges and close the gap on achieving the SDGs. The fourth sector’s expansion will catalyse the systemic transformation needed to bring our economies into the 21st century, setting us on a course toward a sustainable, inclusive and resilient global economy.

Daunting as such a transformation may seem, the fact that time and again we humans have proven our aptitude for achieving audacious and seemingly impossible tasks should give us the courage to try. This is a moonshot project for our time.

Footnote: a lesson from computing

System change can seem very complex and abstract, so it helps to borrow an analogy from the computing world to help make it more tangible.

To tackle the global challenges we face, we need fundamental transformation at both the organizational and economic system levels. Think about individual organizations in an economy as apps and the economic system in which they operate as their operating system, like a word processor running on Microsoft Windows or a game running on IOS or Android.

In computing, you can upgrade the performance of an app to a certain limit before you bump into the constraints of the operating system on which it runs. The same is true for an economy: you can only improve the social and environmental performance of a business so far before you run into the limitations of the economic system within which it operates. No matter how hard you try to improve its products or services, processes, operations or governance to make it more responsible and impactful, if the financial markets, regulatory environment or consumer markets are not compatible with those changes, your efforts will be frustrated.

We need to upgrade our economic systems in order to be able to sufficiently upgrade the performance of our organizations.

Computer operating systems typically undergo two types of upgrade: incremental ones and major ones. Incremental upgrades are made using regular releases of software to enhance features and performance, until a point is reached where advancements in the underlying hardware technology or certain desired features necessitate a complete redesign of the operating system, including an entirely new architecture. For those who remember, Microsoft’s transition from MS-DOS to Windows in the mid-1990s was this latter type of upgrade.

In improving our economic systems, we have had decades of effort focused on the incremental approach, but circumstances now necessitate a major upgrade to a fundamentally redesigned architecture. We must embrace this reality if we want to successfully navigate the opportunities and challenges of the Fourth Industrial Revolution and achieve a sustainable, inclusive and resilient global economy.

*CEO, The Fourth Sector Group
**First published in weforum.org