The Fourth Sector is a new economic space that is emerging at the intersection of the three traditional sectors (public, private and non-profit). Its goal is to unify and enhance the activities of those new enterprises and business models that want to achieve financial success while contributing to the creation of a more prosperous, fair and sustainable economy worldwide.
Why do we need a Fourth Sector?
In the last decade, it has become evident for most of the world that our current economic systems and organizational models need a strong update. They were born in the industrial age, at a time when natural resources were relatively abundant, clime change was unknown by scientists, human rights were narrowly conceived, and globalization was still in its infancy. The consequences of this lack of awareness are now evident. Modern capitalism has produced unprecedented prosperity and improved the quality of life for much of humanity. But at the same time, it has created the most large-scale, urgent, and complex economic, social, and environmental challenges that we have faced in our history.
The Sustainable Development Goals (SDGs) designed by the United Nations, are a clear call to action. They encompass 169 targets under 17 broad goals to protect the planet and ensure prosperity for all as part of a comprehensive sustainable development agenda to be achieved globally.
Governments and NGOs of 194 countries have committed to work on this Agenda. However, research already shows that the efforts of these actors will not be enough. If we are to achieve the SDGs by 2030, the way in which the private sector operates has to change dramatically. This means going far beyond current incremental reforms such as Corporate Social Responsibility. We need to upgrade our traditional organizational models and economic systems to a fundamentally new architecture, one in which enterprises deliver strong social, environmental and economic benefits, without generating the negative externalities we often see with traditional businesses.
This might sound like science-fiction to many, but the good news is that such a transformation is, in fact, already organically underway and we now have the opportunity to hasten it. Since the advent of the new millennium, the world has witnessed the emergence of a number of powerful movements led by entrepreneurs, consumers, and thought-leaders that are challenging the status quo, demanding new standards and organizational models, and reinventing the role of business in society. Some notable examples include:
- Circular Economy
- Conscious Capitalism
- Community Development Finance
- Corporate Social Responsibility
- Social & Civic Innovation
- Fair Trade
- Impact Investing
- Inclusive Business
- Shared Value
- Social Economy and Social Entrepreneurship
- Venture Philanthropy
- Sustainable Development
- Stakeholder Accountability
- Shared Economy
- Blended Finance
The changing mind-set has also given rise to the appearance of new hybrid organizations and business models that aspire to achieve financial success while contributing to solve some of the most pressing societal, economic and environmental challenges of our time. These organizations come in a wide variety of forms (B Corporations, Cooperatives, Social and Sustainable Enterprises, Civic Ventures, etc.), but all of them share the same core approach: like for-profit enterprises, they generate their income from business activities; however, like non-profits, their primary purpose is to have a positive impact in the world, while reducing the negative externalities to a minimum.
Since 2010, these movements and new forms of hybrid enterprises have increased significantly in visibility and volume, to the point that they already represent 10 per cent of the Europe and the U.S.’s total GDP. Unfortunately, this is not enough to steer the economic system towards a more equitable and sustainable economy worldwide, especially in regions such as Latin America, where the presence of this type of business is even more limited.
There are several reasons for this failure to scale: the proliferation of terms and lack of coordination between these movements, the resistance of some traditional industries, and, perhaps more importantly, the boundaries and constraints imposed by the current dominant systems. Once incubated and constituted, for-benefit enterprises are forced to compete in a private sector that has not been tailored for them, but for large for-profit companies driven by a completely different set of principles, missions and incentives. This is constraining their growth and limiting the positive impact that they could have.
In order to solve this problem, we need to create a new, for-benefit ecosystem, which adapts to the unique characteristics of social enterprises and helps them scale without making compromises that dilute their original values and impact objectives – just as we created the third, non-profit sector after World War II.
This is what we call the Fourth Sector, a new economic space that will bring together and strengthen all those new enterprises and business models at the intersection of the three traditional sectors (public, private and non-profit).
To create the Fourth sector and unleash the power of business to solve pressing social and environmental challenges at scale, there needs to be a massive effort to develop strong and cohesive supportive ecosystems that make it easier for for-benefit enterprises to thrive everywhere in the world.
Getting the Fourth Sector formerly and properly stablished will be a highly challenging, long-term, global endeavour that will comprise a number of tasks:
- Conducting Policy Reforms. For-benefit enterprises lack their own distinct policy environment and are therefore typically forced to conform to the policy regimes of nonprofits or for-profits. To avoid the trade-offs that come with this, the Fourth sector needs its own enabling policy environment, including conducive legal forms and tax treatment for for-benefit organizations and investors, along with a range of other regulatory reforms that support for-benefits and ensure their accountability.
- New Financial Markets. The standard for-profit and non-profit channels to capital are not suitable for the Fourth Sector. New kinds of investment funds, intermediaries, exchanges, instruments, and institutions that take into account both the financial and public benefit aims of investors, donors, and for-benefit enterprises are needed.
- Research & Understanding. Academia, research institutions, and think tanks must integrate Fourth Sector ideas, language, thinking, and practice into their curricula and research agendas to advance the frontiers of theory and knowledge about the Fourth Sector and its ecosystem.
- Assessment & Reporting Standards. For for-benefit enterprises to be seen as credible and trustworthy, new integrated metrics are required that assess social and environmental value creation and impacts alongside financial performance. There must also be protocols for ensuring for-benefit organizations are fully accountable, not only to shareholders, but to all stakeholders.
- Ratings & Certification. Using the new metrics for value creation and the associated accountability protocols, ratings and certification platforms need to be created to verify and compare operating performance and social contribution of for-benefit organizations.
- Technical Assistance. Fourth Sector entrepreneurs require legal, accounting, strategic, marketing, technology and other types of support from professionals properly trained in the emerging laws, standards, practices, protocols, procedures, technologies, and other aspects of the emerging for-benefit ecosystem.
- Education & Training. Dissemination of Fourth Sector concepts and know-how requires the active participation of our formal and informal educational institutions. Credible educational and training infrastructure for transmitting knowledge about the Fourth Sector and training its workforce are in development, but need to be expanded and standardized to meet the growing demand.
- Marketing & Communications Channels. To market themselves and communicate their messages to customers and other stakeholders authentically and effectively, organizations with a true, demonstrable commitment to social and environmental performance must be able to distinguish themselves from those who are less sincere or effective. This requires specialized marketing, communications, and public relations support as well as alternative media channels that are aligned with Fourth Sector values.
- Culture. Fourth Sector concepts and language must be absorbed into mainstream culture in order for the sector to attract the broad engagement required to realize its potential. Such a transformation will require inspiring a shift in attitudes, priorities, and values. The outdated mind-set of business solely as a means for financial gain needs to be replaced with a vision of business as a force for the betterment of the world as a whole; as does the bias that the provision of social good is solely the domain of governments and non-profits.
- Connection & Representation. Membership and trade associations, networks, affinity groups, and gatherings are needed to connect and support the various constituencies within the Fourth Sector and its ecosystem. They can facilitate knowledge transfer, drive changes in public policy and other aspects of the ecosystem, create visibility for the sector and the organizations involved in it, and provide support services for members. New networking structures are also needed to enable collaboration and interoperability among those engaged in the development of the Fourth Sector ecosystem.