A Two-Tiered Approach to Impact Investment Strategies

Essley Jay100x100
By: Jay Essley,
Director of Global Client Engagement, Sutherland Global Services

 

 


Impact Sourcing and Social Investment

At first glance the word “investment” typically invokes thoughts of fiscal capital spent in order to receive future financial gain, whether in profitable returns, as interest, income, or appreciation in value. However, equally as important in the definition is the expenditure of time, effort, and resources in order to effectuate the desired outcome or goal. For Sutherland, it is the marriage of both concepts that ultimately defines our impact sourcing and social investment strategy.

It is no secret that every dollar of investment in a charitable or social mission is only as good as the effort behind the cause. The question, “what will we get for our dollar,” is almost more relevant when discussing social programs. At least with monetary investments for financial gain the goal is simple: increase above and beyond from the principle amount you put in. However, with charitable and social investments the goals are often subjective and vary depending on the cause. Forcing a definitive roadmap for where each dollar goes, and what each dollar accomplishes in the world of social impact is the key to a successful return on investment.

Prudence dictates that an analysis of the force multiplier on an impact investment is of paramount importance. Will the investment be spent in the right places? How many lives will be impacted? What will the impact be? What result will be generated from each dollar given? From a corporate standpoint, these are the types of questions that we must ask ourselves prior to deciding on which social causes and programs to financially support.

Without proper execution by motivated and competent resources,
an investment for social impact slips into the muddy waters and
can become mired in risk and potential failure.

As most of you reading this have probably experienced, simply funding a charitable cause or giving money to benefit a social program does not necessarily guarantee a positive outcome. Just like financial investments for profit, social ones are not immune to risk or failure, even if the intentions are all coming from the right place. With that said there are ways to manage associated risks and increase the odds that the investment reaches its full potential and impact.

Increasing the Odds for Success

Sutherland takes a two-tiered approach when analyzing potential impact sourcing investments. First, capital expenditures may be required to initially fund a project or program but the crucial investment is the human element that follows. Without proper execution by motivated and competent resources, an investment for social impact slips into the muddy waters and can become mired in risk and potential failure.

One solution to increase the chances of impact sourcing investment success is to maintain control, or at least oversight, on the entire project with input or assistance from strategic partners if necessary. This is by no means a criticism of the hundreds, if not thousands, of amazing social programs and sourcing projects in existence but merely an observation based on past experience. Sutherland certainly does not advocate the abandonment of regular charitable and social giving but rather a divestiture of your CSR portfolio to also include some home-grown efforts.

Allow me to provide a real time example. Over the past few months Sutherland made the decision to expand our hallmark CSR project from its existing locations in India and the Philippines to Jamaica. The Community Technology Center program, CTC as it’s called, provides free digital literacy training and certification to the community at large, focusing on vulnerable and underserved areas. The first step was to assemble a team of individuals whose experience and motivation could provide the necessary “effort investment”. This was followed by the capital investment through corporate funds for the required facility space and related assets needed to offer the program.

CTC Jamaica

The Community Technology Center in Jamaica

After the initial set-up was completed, we next leveraged our strategic partnerships. Microsoft generously provides the software needed and the certification curriculum and local NGOs and community groups provide access to a student pool. With all that in place the local team of Sutherland human capital was able to take over and get up and running. We are proud to say that as of right now a soft launch has already begun and Sutherland is now impacting the lives of many people in Kingston by empowering them with a free, basic digital education.

The Sutherland strategy is only one answer of many when it comes to social impact investments but it is one that we have found to be effective, especially when talking about the CTC program. Our success with the CTC program was borne out of trial by error and years of tweaking the model. While we are proud to highlight this program and the awards it has generated, the real reward is the impact it has had on tens of thousands of lives.

In closing, Sutherland invites you to join the worthy cause of worldwide digital literacy. Imagine the number of lives that would be impacted if hundreds or thousands of other socially responsible companies of all sizes invested their time, effort, and capital into this program as well. To that end we have created a “cookbook” of sorts with a recipe that outlines the steps to create your own CTC center and operate autonomously. We encourage you to leverage our experience, successes, and most importantly the roadblocks we faced. Excuse the financial pun but this is an impact investment that is sure to produce a return and we have the prospectus to get you there. Please feel free to reach out and we would be more than happy to assist in your jumpstart.

About the Author: Jay Essley is the Director of Global Client Engagement at Sutherland Global Services where his day to day responsibilities focus on the negotiation of commercial contracts. In addition, Mr. Essley is General Counsel to SGS’ Corporate Social Responsibility Board. In that capacity he has taken a lead in promoting SGS’ efforts to codify comprehensive CSR policies and engage partners in continued CSR efforts.  Prior to joining Sutherland Jay was a commercial trial attorney in New York City and remains a member of the NYS Bar Association and the American Bar Association.

Contact Jay at: JasonM.Essley@sutherlandglobal.com

Sutherland Global Services presently maintains relationships with over 150 multinational corporations, healthcare providers, governments and universities around the globe.

Investing in Inclusion

Schlein M100x100
By: Michael Schlein
, President and CEO of Accion

Modern financial markets exclude billions of the world’s poor. That’s a failure of those markets—and a failure of imagination. A more financially inclusive world would give billions of people living in poverty access to a full range of important financial services, yielding a high rate of return by economic, social, and societal measures. The challenge is how to achieve this in a responsible, sustainable way that provides the greatest number of people with the financial tools they need to improve their lives in the shortest amount of time.

That is precisely the mission of Accion, a global nonprofit dedicated to creating a financially inclusive world. We operate in poor communities throughout Latin America, Africa, Asia, and the U.S. and see firsthand how these services help transform lives, create opportunities, and build stronger, more resilient communities.

As nonprofits, Accion and our peers can take chances that the private sector cannot. Over our 50-year history, we have helped build 66 microfinance institutions in 34 countries that today serve millions. In the last few years alone, we have supported institutions in rural communities such as Myanmar and Inner Mongolia and expanded the array of financial services for the poor beyond credit to savings, insurance, and payments.

One point is clear: philanthropy, though critically important, is insufficient to achieve full financial inclusion. We need to harness the capital markets and create institutions that deliver both social and financial returns. Though we are a nonprofit, we work to build sustainable, scalable, for-profit companies dedicated to serving the financial needs of society’s most vulnerable members: those living in poverty.

ACCION Manaus_Environment_AMBR_2012_(43)

Accion in Manuas, Brazil

Today, traditional lending institutions largely ignore the poor. And some nonprofit organizations discount the for-profit motives of the private sector, seeing them as exploitative and off-mission. Neither view is accurate. In fact, for-profit microfinance is sustainable, scalable, and socially progressive—complementing nonprofit services and creating an entire industry of institutions that can compete for clients, expand access, and accelerate innovation.

Twenty years ago, Accion helped create Bolivia’s BancoSol, which today is one of the world’s best-known microfinance institutions. Its creation as a commercial institution dedicated solely to serving the poor was controversial, unprecedented—and a rousing triumph. As the world’s first for-profit bank dedicated to serving the poor, BancoSol tapped the debt and equity markets, attracting both foreign investment and expertise. It focused on strong management and operations, better governance, innovation, and improved responsiveness to clients. To date, BancoSol has loaned more than $3.3 billion, and has an 89 percent client-retention rate and a 99 percent repayment rate.

Accion in Bolivia working with BancoSol

Accion in Bolivia is working with BancoSol

Mexico’s Compartamos Banco, in which Accion was a major founding investor, is equally impressive. Its operations grew so quickly and efficiently that, in 2007, it launched an initial public offering with a monumental response. Thousands of other microfinance institutions were inspired by Compartamos’ success, which in turn creates more competition and better services for the poor.

Accion is proud to have helped launch and grow these pioneering institutions, which are models for the world and whose collective outreach has brought financial services to millions who would otherwise be left out.

But the future of financial inclusion goes beyond traditional microfinance. We embrace this change, investing venture capital and technical assistance via two vehicles – Frontier Investment Group, which invests early and growth stage funding, and Venture Lab, which provides seed-stage funding to pre-revenue firms – into start-ups with bold, disruptive business models aimed at helping those living in poverty.

For example, Accion is investing in companies such as DemystData, which leverages big data—huge sources of information that can be analyzed to help financial institutions broaden their outreach to poorer clients. Others, like Tiaxa, use mobile technology to make small “nano” loans over the phone, which can help reach people living in remote communities. Tiaxa facilitates over 2 million mobile-loans every day across 15 countries – making it one of the most successful big data companies serving the poor. Still others are pushing the boundaries of inclusion, offering financial products such as life insurance to South Africans living with HIV/AIDS—an idea that was unthinkable just a few years ago.

This new dimension of our work is promising for investors: we expect that a major Wall Street firm will approve one of our funds as the first impact product offered to their clients very soon. And we believe that others will follow.

Accion working with Mexico’s Compartamos Banco

Accion is working with Mexico’s Compartamos Banco

Although it is still too early to determine the impact of these brand-new companies, they have the potential to have a significant impact on the lives of our clients. We need to invest in more fast-moving, innovative ideas like these. Although the financial inclusion movement is rapidly evolving, it remains young and has much to learn. Growing pains are normal, but they must be addressed head on to strengthen the industry and inspire the next generation of institutions that will create greater opportunities for the poor.

Accion’s Center for Financial Inclusion is a good start. It brings together industry players to tackle common challenges and create the conditions to achieve full financial inclusion on a global scale. For example, the center’s Smart Campaign promotes the protection of clients through greater transparency, prevention from over-indebtedness, and the provision of means to address concerns. It’s been endorsed by nearly 1,500 microfinance institutions in 130 countries and represents more than 75 million clients.

By building competitive, commercially viable financial institutions that provide a healthy return on capital and by taking bold risks and investing in innovative ways to expand financial services to the poor, Accion and our partners are spurring new opportunities and sustainable progress throughout the developing world, and helping to bring billions more into the global economy. That is how change happens!

About the Author: Michael Schlein is the President and CEO of Accion, a global nonprofit dedicated to building a financially inclusive world. Mr. Schlein brings nearly 30 years of extensive international banking, management and public service experience to his role as President and CEO of Accion, having previously worked as President of Citigroup’s International Franchise Management, and Chief of Staff at the U.S. Securities and Exchange Commission in the Clinton Administration.

In 2014, New York City Mayor Bill de Blasio appointed Mr. Schlein to serve as the Chairman of the NYC Economic Development Corporation, which encourages economic growth throughout New York’s five boroughs and facilitates investments that build capacity, generate prosperity, and catalyze the economic vibrancy of city life as a whole.

Accion is a world pioneer in microfinance and has helped build 66 microfinance institutions in 34 countries which currently reach millions of clients providing them with the financial tools that can help improve their lives.

 

 

IN CONVERSATION: An Interview with Meg Voorhes

Voorhes  M100x100
Meg Voorhes, Director of Research and Operations, US SIF Foundation

 
 
 
 


By: Wanda Lopuch, Chair of the Global Sourcing Council

 
 
 
 
IN CONVERSATION is a monthly profile of people actively engaged in sourcing. Wanda Lopuch, the Chair of the GSC sits with Meg Voorhes, the Director of Research and Operations for the US SIF Foundation, to talk about Meg’s experience in the area of corporate responsibility and socially responsible investment.

US SIF Foundation is a nonprofit organization that supports educational, research and other activities of the Forum for the Sustainable Investing (US SIF Inc.).

[divider]

Lopuch (Q): Meg, I would like to start this conversation on a personal note: can you share with us your journey into the space of socially responsible investment?

Voorhes (A): I was introduced to the field of corporate responsibility in 1979 when, as a very young researcher, I was hired by the Investor Responsibility Center. IRC was created by US foundations and universities to explore questions on how their investments affect societies. I found myself in the middle of discussions on the role of American companies doing business in then apartheid–governed South Africa. A discussion that was economic, political and emotional at times.

At the age of 25, I was sent to South Africa to conduct research on the ground with South African companies and other institutions. It was a fascinating time. I had an opportunity to talk to the managers of international companies about their views on the role of business under apartheid rules; either divesting assets and moving out, or staying-in to support the transformation. I had an opportunity to watch trade unions rising to power. And the rest is history.

Although the heavy lifting in ending apartheid was definitely done inside South Africa, I do believe that the anti-apartheid corporate responsibility movement in the US and elsewhere in the world played a role in how history unfolded itself.

These early experiences created the foundation for my career. In the ‘90s I was involved in a number of projects addressing labor rights, global supply chains and environmental issues. (Lopuch notes: Meg co-edited the 1998 book, The Sweatshop Quandary: Corporate Responsibility on the Global Frontier.)

So when I joined the US SIF Foundation in 2008, it was a continuation of my journey in the field of investors’ responsibility and corporate responsibility.

Lopuch (Q): Meg, please introduce to the GSC membership the Forum of the Socially Responsible Investment (US SIF) and the US SIF Foundation.

Voorhes (A): Our vision is a world in which investment capital helps build a sustainable and equitable economy.

US SIF is The Forum for Sustainable and Responsible Investment, a US membership association for professionals, firms, institutions and organizations engaged in sustainable, responsible, and impact investing. US SIF and its members advance investment practices that consider environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact.

US SIF Foundation is a nonprofit organization that supports educational, research and other activities of the Forum for the Sustainable Investing or US SIF Inc.

Lopuch (Q): You are responsible for the US SIF Foundation flagship research program called “Trends in SRI”.

Voorhes (A): Since joining the US SIF Foundation in 2008, I have been involved in a number of research projects ranging from examining the size and scope of sustainable, responsible and impact investing (SRI) and measuring attitudes about SRI. These have included specialized reports on community investing, alternative investing, the roles of US foundations endowments, and of course the SRI “Trends” report.

Indeed since 1995, every two years the SIF Foundation tracks the trends in the SRI space. This report provides an overview of the scale and scope of SRI over years. The last published report in 2012 documented dynamic growth in the SRI space. We will be releasing the newest 2014 SRI Trends Report on Nov. 20th this year. Advocates of SRI will find more good news in this year’s snapshot.

Lopuch (Q): What are the highlights of the 2012 Trends Report and what can you unveil about the 2014 report?

Voorhes (A): The most important findings of the 2012 report was the confirmation of the amount of capital involved in the SRI space. We are not talking any more about SRI as a tiny corner of the capital investment space. In 2012 the assets engaged in SRI strategies amounted to $3.47 trillion dollars under the umbrella of the SRI strategies representing over 11% of all the capital markets in the US. New players are coming to the SRI space – firms that traditionally have not been engaged in SR investment strategies. SRI is consistently growing faster than the general capital markets. I can only say now, that there is more good news in the 2014 Report. So stay tuned.

Lopuch (Q): To what factors would you attribute this growth?

Voorhes (A): In 2012 a part of the growth is attributed to the recovery in the economy which was just coming out of the recession. At the same time more players that engaged ESG factors in evaluation of their investment portfolios entered the field – from 497 firms in 2010 to 720 in 2012. This significant increase came from traditional firms, such as large mutual funds that started to embrace ESG as an integral part of their investment strategy. Plus, there are new funds coming to the investment market with ESG factors built-in as the investment parameters.

When we probe our respondents, especially the traditional ones, asking what prompted a shift to embrace SRI strategies or ESG factors, the overwhelming reason is always: clients requests and clients demands. This pressure is visible and growing.

Lopuch (Q): How would you compare this trend towards incorporating ESG factors in the US to other parts of the world? Let’s start with Europe where local governments play an active role in SRI.

Voorhes (A): European institutional investors have generally been ahead of their US counterparts in taking SRI seriously.

There are a number of organizations similar to US SIF in Europe. In both the proportion of capital engaged in SRI strategies as well as organizational infrastructure for SRI space. The European Sustainable Investment Forum, or EuroSIF, consists of country level membership organizations in Belgium, Holland, Germany, France, Italy, Spain, Sweden and the UK, which have strong local agendas. Frequently they collaborate with local governments.

A number of large European pension funds make clear when they search for and select investment managers, that they expect these managers to have expertise in analysis of ESG factors. Members of EuroSIF, frequently international financial management institutions, expect their US financial partners to embrace ESG factors. They expect the managers of funds to be proficient in the ESG framework. This has helped persuade US-based investment management firms to develop SRI expertise in order to compete.

Lopuch (Q): In Europe, local governments play a significant role in pushing the SRI agenda in terms of legislation and/or by participating in public-private SRI initiatives.

Voorhes (A): In the US, the situation is different. There is an Office of Social Innovation in the White House, which is supportive of sustainable and impact investing, although its charter is limited. The US Securities and Exchange Commission has also required publicly traded companies to disclose certain environmental, social and governance factors. It is required under “Dodd-Frank” financial reform law of 2010 to issue a rule to require companies to disclose the ratio of their CEO’s pay to median worker pay. Sustainable and responsible investors are also petitioning the SEC to require companies to disclose their political and lobbying expenditures.

Lopuch (Q): So Europe is ahead of the US. What about other parts of the world?

Voorhes (A): Responsible Investment is definitely a growing global field. In just about every part of the world except Africa, there are organizations that champion responsible investment strategies. US SIF is a member of the Global Sustainable Investment Alliance (GSIA), which consists of:

  • Association for Sustainable and Responsible Investment in Asia
  • EuroSIF
  • Responsible Investment Association Australasia
  • Responsible Investment Association of Canada
  • UK SIF – UK Association
  • US SIF – US Association
  • VBDO – Dutch Association

The GSIA releases its own trends report which offers the global outlook on the SRI field. For more information: www.gsi-alliance.org.

Lopuch: Meg, thank you very much for your time and insight. We will be following-up with you on the highlights of the 2014 Trends in Socially Responsible Investment Strategies.

Voorhes: Thank you Wanda and the members of the Global Sourcing Council.

About Meg Voorhes: Meg is Director of Research and Operations for US SIF. Before joining US SIF in 2008, Meg directed environmental, social and governance research for RiskMetrics Group’s Financial Research and Analysis division. She spent much of her career at the Investor Responsibility Research Center where she directed research for institutional investors and corporate clientele on environmental, human rights and other social issues raised by shareholders at U.S. companies and specialized in issues related to multinational investment and corporate responsibility in South Africa.

She is the author or co-author of several US SIF Foundation publications, including its biennial Report on Sustainable and Responsible Investing Trends in the United States.

For more information on US SIF Foundation: http://www.ussif.org/

Social Impact Investment – The Power of the Possible

Karen Morris
By: Karen A. Morris,
 Board Member, The Global Sourcing Council and Chair, GSC Women’s Empowerment Committee

 

 

Editor’s Introduction

Our GSC community is excited about the human, environmental and economic impacts of sustainable and responsible investment trends, especially the revolutionary potential of the nascent global market for impact investment.

Our founding Board Member, the innovation strategist Karen Morris, reports this month from the United Kingdom on British-led developments in the impact investment marketplace.

[divider]

“Well, you know, we all want to change the world.”

Surrey’s insipid blue skies have been seeping rain all day. But I am comfortably ensconced beside our crackling fire; the pluvial November afternoon passes pleasantly. We are snug.

A couple of miles down the road in 1968, at Ringo’s country home, John and the rest of The Beatles may have been snug too but they weren’t smug.

Lennon had finished several verses of a new song. His most political work to date.

“You say you want a revolution
Well, you know, we all wanna change the world.
You tell me that it’s evolution
Well, you know, we all wanna change the world.”

Almost half a century later, and comfortable as most of us are in absolute and relative terms, many of us nonetheless want to change the world. The question Lennon was ruminating still obtains. How?

Does it take nothing more than “a small group of thoughtful, committed citizens” as Margaret Meade so famously contended? Does it take protest and civil unrest? Do we need revolutionary or evolutionary thinking to confront seemingly intractable global problems?

Lennon’s “Revolution” continues with the verse:

“You say you got a real solution
Well, you know we’d all love to see the plan.”

What’s the plan? In my retreat from the rain, I just read one…not a complete plan, not a panacea, but a brilliant and encouraging contribution to our understanding and advancement of a potent way to improve people’s lives, social impact investment. I am talking about The Report of The Social Impact Investment Taskforce (SIIT) of September of this year – a taskforce that is in the international vanguard of a revolution in our thinking about philanthropy and private and public sector funding of social progress.

Our 21st Century challenges are too formidable, too complex and
too urgent to be solvable by government and the social sector alone.

The acronym might sound like ‘sit’ but SIIT has certainly not been sitting around since being established under the UK government’s Presidency of the Group of Eight Countries in 2013. The taskforce’s Chair, Sir Ronald Cohen, succinctly gets to the heart of social impact investment: “Social impact investment harnesses the forces of entrepreneurship and capital and the power of markets to do good.”

Sir Ronald knows a thing or two about entrepreneurship, capital and innovation. Dubbed “the father of European Venture Capital”, he is a notable pioneer in impact investment models, the recipient of The Rockefeller Innovation Award for innovation in social finance and the Chairman of Britain’s first social bank Big Society Capital. As the SIIT’s Chair, he speaks of the need to catalyse the growth of a global market for impact investment.

The SIIT Report articulates an action plan for governments and markets. It illuminates and emphasizes the role of government in the impact investment arena. Its recommendations effectively endorse the perspective of successive recent British Governments that government is an important protagonist in enabling investment in social change and progress. The report supplements its recommendations by drawing upon experiences and practices in the UK, which was an early innovator in the formal promotion and enablement of impact investment. The UK, for example, has succeeded in doubling the number of its impact investment funds in the last two years.

SIIT Report_India captioned
The SIIT Report’s authors, over the course of 15 months, consulted deeply and widely with hundreds of experts from around the globe. They advance myriad ways in which government, in collaboration with the financial service and social impact sectors, can purposefully help the supply and demand dynamic for effective capital flow to charitable and social enterprises.

The State is uniquely placed to facilitate impact investment market-building, to act as a market steward and to benefit society as a consequence. They have every motive to do so. Our 21st Century challenges are too formidable, too complex and too urgent to be solvable by governments and the social sector alone. Impact investing offers a third, innovative path to creating, growing and sustaining social entrepreneurship based on a twinned alignment of financial returns and purpose in the funding of social “outcomes”.

Although the origins of impact finance are not recent, consider the cooperative movement in Europe, credit unions in Canada and community development finance in the USA, this sector has only recently demonstrated rapid expansion. The estimated size of impact investments under management globally is now about $50 billion and is predicted to rise to a trillion US dollars by 2020. These are not trivial figures but remain nonetheless a mere drop in the vast ocean of today’s $210 trillion global investment market.

In explaining the thrust of the taskforce’s work, Sir Ronald is clear: “This is not about increasing or reducing public expenditure but helping government to benefit from innovation and private sector capital with the money that it has.”

The impact investment model augments governmental and social entrepreneurial efficacy; it does not imply that government dilute or deny its responsibility for social issues but rather that government tackle them in a fresh, preconcerted way. By encouraging and distributing innovation outside and then drawing it within, government both engenders and extracts value. Due to its rigorous emphasis on measurement and accountability, the impact market model creates greater net value across dual social and financial measures.

The SIIT recommendations touch on many potentially useful measures ranging from legal structures, laws and regulations, to the funding of intermediaries, the design of financial products, and to governmental behavior in the commissioning and procurement of services and more. All of the foregoing can stifle or stimulate funding flows into the social investment economy.

Government can make it easier

On the supply side, the report explores forms of finance, such as grants, loans and Social Impact Bonds, channels for impact capital, such as social banks and impact investment intermediaries and sources of capital. Recommendations examine ways to support the provision of capital to the social impact sector by raising awareness, removing obstacles and improving infrastructure, platforms and standards. Diversifying the investor base to encompass a broad gamut of funding sources is also critical whether it be from institutional investors, Sovereign Wealth Funds, pension funds and others, to philanthropists, corporations and private individuals.

Government can make it easier for the investor base. The report urges, for example, that we refine and clarify the legal duties of the trustees of charitable foundations and pension funds so that they can legitimately evaluate social impacts along with the financial returns of investments without fear of being in breach of their fiduciary obligations.

The Chair emphasizes the importance of this disambiguation:

There should be no room for doubt that trustees responsible for other people’s money can be prudent and responsible when they incorporate impact alongside risk and return in their decision-making.”

Government can also reward socially-conscious retail investors fiscally for directing their assets to impact funding. A pertinent UK example is the Social Investment Tax Relief rates introduced in the 2014 Budget which will allow eligible investors to deduct 30% of the cost of impact investment from their income tax liability.

Another compelling recommendation underscores the need to create infrastructure, such as government funding for social incubators or for risk/mitigation risk-sharing mechanisms, to address impact entrepreneurs’ hefty challenges in raising early stage risk capital. Creative examples abound from all over the world.

An integrated global solution

The report is forthright that solutions, structures and tools will vary by context, jurisdictional, political, cultural, social and so on. Nonetheless, we must aspire to a multi-faceted and integrated global solution. And just as any innovation-centric conversation thrives on the exchange, combination and recombination of diverse ideas and insights, this reports’ discourse is rich and varied in its array of allusions and illustrations.

Underscoring this from a moral and economic perspective, Pope Francis is quoted in the report: “It is urgent that governments throughout the world commit themselves to developing an international framework capable of promoting a market of high impact investments and thus to combating an economy which excludes and discards.”

It’s an astonishing feat for a concept to have such catholic and Catholic support, from politicians, economists, social scientists, impact ventures, investment bankers, money managers and more, including the Pontiff.

Moreover, if the G8, representing some of the world’s richest countries recognizes the imperative to find innovative ways to fund responses to major social challenges,and places impact investment so visibly and vocally on its agenda, the relevance of finance innovation to the world’s emergent and developing economies cannot be understated. In the SIIT Chair’s words:

Impact investment can transform development finance because it can add momentum to existing private sector development efforts.”

On the stimulation side, an obvious area of government influence is in commissioning and procurement where policy and practice of government agencies could revolutionize both government spending paradigms and the relevance of the social impact sector. In this regard, government wields power at scale, but so too, collectively, can socially-minded consumers and corporations. But, here the call is emphatically for a mind-set shift that focuses on paying for and commissioning outcomes, “paying for success” not just for goods or services.

Government can also increase demand by helping social enterprises become “investment-ready” for funding with the caliber of governance, transparency and measurement-oriented practices that will render them attractive investment targets. Equally, they can be assisted in acquiring organizational competencies geared to achieving scale and financial stability, such as by liberalizing constraints on revenue generation and lifting restrictions on certain legal forms’ entitlement to funding. It is also important to expand the class of impact-driven organisations with grant-reliant organisations at one end of the spectrum, pure charities if you will, and for-profit businesses with significant impact-outcomes objectives at the other.

To read more about the Social Impact Investment Taskforce and its recent 2014 Report: http://www.socialimpactinvestment.org/about.php

Financial Tools

Innovation and an eco-system to stimulate innovations recur thematically in this report. The UK is cited for being the innovator of Social Impact Bonds (SIBs) also termed “pay for success mechanisms”. SIBs are one incarnation of finance instruments specifically geared to social improvement in which investors’ returns are linked to the measurable success of the social outcome of the funded initiative. The first, The Peterborough Bond, was launched in 2010 involving 17 foundations and charitable trusts to combat prisoner recidivism. It looks set to achieve measurable success in its goal and accordingly to provide a healthy return to its investors. Subsequent, similar bonds have been issued in Australia, Canada, Germany, Japan and the USA – and with many more in the pipeline, SIBs are growing rapidly in scale and scope, covering an expanding range of social problems.

Goldman Sachs, a prominent actor in the field of social impact bonds, provided a concise explanation of these instruments in October 2014. Click here to learn more: Social Impact Bonds

As previously mentioned, impact investment promises to be transformative for development finance. Here, outcome funders are foundations or aid agencies. Already, innovative financial tools are being investigated to improve the provision of education in Rwanda, provide malaria solutions in Mozambique and to combat sleeping sickness in Uganda. India launched its first Development Impact Bond this year to improve girls’ access to primary education in Rajasthan where 3.7 million girls currently go unschooled.

In the face of the many and diverse social issues that beset us, “we all want to change the world.” Impact investment is one of the ways we can. It is one of the ways to conjoin money and meaning and to connect investment for return with human-centered purpose. This report gives uplifting insight into the power of the possible when capital, entrepreneurship and innovation converge in the cause of improving lives.

In “Revolution”, Lennon’s conclusion was optimistic: “Don’t you know it’s gonna be alright.” The ebullience of youth? Perhaps, or simply a reminder that to be purposeful and tackle the terrible and terrifying challenges of humanity, we must not lose hope, never stop innovating and learning and always care about what we cause. “Alright, Alright, Alright”.About the Author: Karen Morris is a strategic advisor to national and multinational companies. She is also a frequent speaker and writer on innovation and leadership at global forums and conferences around the world.

Frontier Markets – Investing in the Bottom of the Pyramid

Shah A100x100
By: Ajaita Shah, Founder and CEO of Frontier Markets

 
 
 
 
Believing that Bottom of the Pyramid (BOP) households in India have a right to access goods and services that will positively impact the quality of their lives, Frontier Markets has set its sights on several initiatives including the lighting of homes and villages in remote rural locations.

Frontier Markets (FM) is a rural marketing, sales, and service distribution company that provides access to affordable and quality consumer durables to low-income households in India. We work primarily in solar lighting and power, and soon we will expand into cookstoves. The provision of these particular products will improve the quality of life in thousands of households that depend on polluting traditional fuels such as kerosene and offer safety from fumes and fire. It will also provide additional income to small retailers in the villages who become franchisees for FM.

Innovating Responsibly

It is too expensive for companies to build infrastructure in rural India and to have the feet on the ground to push products. The terrain is rough and the supply chain fragmented. The only way to make it worthwhile is to have strong margins across a wide product portfolio, which no single company has.

FM’s collective responsibility is to find innovative ways to overcome the barriers that prevent access, and once access is gained, ensure the quality and integrity of products we offer to people with very limited means. Anything less would destroy the fragile trust that must exist if we are to realize the goal of an educated and empowered citizen. Leveraging and building networks of retail points and providing support to retail entrepreneurs – especially after-sales support – is what differentiates us.

We carefully evaluate each and every product we sell in terms of relative social benefit and work with industry experts who provide independent research regarding product safety and positive outcomes. By doing this, we earn the endorsement of our local channel partners to ensure credibility with their members. We invest our own time and resources to learn more about rural households instead of relying on commonly held assumptions, inform BOP households about their options and the impact of the products we endorse, and are sensitive to cultural norms and values.

Shah with BOP Locals
FM evolved from my own experience in microfinance where I had spent several years in India in the microfinance sector exploring “credit plus” options to better service customers – particularly in health, water and energy. The microfinance sector targets customers who need more than just financial services. While microfinance has great potential as a channel, it is not an actual distribution solution for products or services. So, FM was formed in 2010 to focus solely on non-financial services and after-sales service. We built a retail network which are the fulfillment points for both sales and after-sales service.

Essentially, we set up service centers covering areas of about 300 Indian villages each, with our staff engaging local entrepreneurs to sell solar energy products. For those farmers who have brick-and-mortar buildings, this is a great opportunity to add these products to their offerings, sell them from their shop and be branded as a Frontier Markets retail location. At present, FM has 250,000 rural customers and 225 retail points. These outlets have sold 50,000 solar solutions.

FM has also started the “Solar Saheli” campaign to empower rural women to become solar entrepreneurs in their communities with the intent of educating other women on the merits of clean energy and cost efficient solar products. We currently have 250 Solar Sahelis. I found inspiration for this particular campaign in Solar Sisters (an international social enterprise) and the US-based marketing companies Mark Kay Cosmetics and Tupperware. These companies believe in training, inspiring and mentoring women to become income-generating entrepreneurs.

Investments, Financing and Collaboration

Our end customers sit on an energy spectrum. As you go beyond the 30km radius of our centers, there is less and less grid connectivity. Our market therefore varies from partial electrification to totally off-grid.

Our product basket is diverse for this very reason, ranging from 1W PICO systems to 100W/200W systems that are used for utilities. Once you move into this space, financing does become an issue. Our product basket ranges from USD $5 -1,000. We are just about to enter the kilowatt range in Rajasthan, providing solutions to health care centers, schools and the like.

combo

Solar Lanterns, Solar Homelight System and Solar Torch

We have partnered with a Rajasthan partner, where we are linking sales to a local rural bank. Reserve Bank of India (RBI) regulations don’t allow leasing or rental, and distribution and after-sales service is already hard enough without providing consumer financing – so we’re not into providing that ourselves. We do provide, however, lines of credit to our entrepreneurs. We connect the wholesaler to the retailer, negotiate margins and control risk.

On the subject of financing partnerships, though, the rural bank model works very well in India because of the extensive Grameen model. For example, the customer puts in 30% of the cost of a product that is already subsidized due to regulations from the Ministry of New and Renewable Energy (MNRE). So let’s say a product is normally 50,000 Rupees. The subsidy reduces that to 35,000 Rupees. The customer puts down 10,000 Rupees as a down payment, and there is a 25,000 Rupees credit provided over 1-3 years plus interest, which is about 5%.

FM is now in 5 districts in Rajasthan and 4 in Andhra Pradesh. Next year is about scale and breakeven for the service centers. It takes three months to break even after setting up the center, as there is a lead-in time in building the market beforehand. Not all 9 centers will be breaking even, but enough so that the company as a whole is.

FM recently collaborated with the International Finance Corporation on an awareness campaign about the benefits of solar energy. This campaign forms part of IFC’s Lighting Asia initiative that aims to bring light to 400 million Indians living off grid.

With efficient distribution and superior service we hope to light 10 million households in the next five years and are expanding into solar water heaters and street lights.

About the Author: Ajaita Shah is the Founder and CEO of Frontier Markets and the President of Frontier Innovations Foundation. She has focused her considerable passion and acumen in microfinance on providing access to energy, healthcare and clean water to Bottom of the Pyramid households in India from FM’s base in Jaipur, Rajasthan. She has consulted with the Social Performance Task Force through CGAP and the Ford Foundation, Mastercard Foundation and the World Bank about microfinance in South Asia.

Among her many accomplishments she was a Clinton Service Corp Fellow (2006), an Echoing Green Fellow (2012), Cordes Fellow (2013), received the Most Influential Award in Microfinance for people under 30, and named in Forbe’s magazine’s 30 Under 30 list of social entrepreneurs.