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.

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“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.

Sustainable and Socially Responsible Sourcing Awards (3S Awards)


brought to you by The Global Sourcing Council
GSC logo
Calling all individuals and organizations with a

Socially Responsible Conscience!

Showcase your work and stand to win an award!

The Global Sourcing Council (GSC) honors individuals and organizations that have demonstrated exceptional social and economic leadership in innovating, improving and implementing Sustainable and Socially Responsible Sourcing (3S) practices. 3S practices are those activities that individuals or organisations do to ensure that they make a meaningful impact across their value chain into the lives of the of the buyers, suppliers, business partners, advisory services and surrounding communities, which are not only socially responsible but sustainable as well. Previous winners of the 3S Awards can be seen on www.gscouncil.org.

Apply in one of the following six (6) categories:

  • 3S Community Engagement Award: This award is focused on organizations that influence and make sustainable a single or multiple communities by providing employment, making available building block resources for survival, providing educational tools and resources and enabling communities by availing business opportunities.
  • 3S Employee Engagement Award: The Employee Engagement Award is aimed at businesses/organizations that empower their employees towards 3S actions. This would include but is not limited to engaging employees in sustainable and socially responsible practices through the company/various groups and providing tools for employees (educational/ vocational).
  • 3S Empowered Women Award: This award recognizes 3S initiatives taken to empower women that are part of global supply chains or their surrounding communities, as well as honoring women who have made a 3S difference.
  • 3S Impact Sourcing Award: This award recognizes individuals and organizations that have established and implemented impact sourcing practices to benefit disadvantaged communities.
  • 3S Innovative Sourcing Award: This award recognizes innovative 3S initiatives across all industries and platforms.
  • 3S People’s Choice Award: This award is based on popular vote by the sourcing community. Videos from all categories will be up for voting and the most popular submission will make the cut for the award.

Applications for 3S Awards are now being accepted. You may request an application by contacting Gary S. Pasricha, Chairman of 2015 3S Awards, at gary.pasricha@gscouncil.org. Applications will involve submission of an on-line application and short video (approximately 3 minutes) highlighting the applicant’s achievements in the offered awards categories.

All applications will be evaluated by independent judges who are experts in the fields of sustainability, social responsibility, and sourcing. The People’s Choice Award is an open online competition subject to one vote per IP address.

prizes

In the past, prizes have varied from the actual receiving of a physical Award itself, to hands-on training and skills development in the form of a Boot Camp and in instances where significant sponsorship was available, monetary rewards have been given to the winners. The 3S Boot Camp participation consists of training sessions and conferences that have helped companies scale-up and develop their socially responsible business practices. Each year, the winners have gained unique exposure to world media and C-suite global business people from across sectors, around the world.

The prizes for the upcoming 2015 3S Awards will be announced closer to the date of the Awards.

sponsorship opps

3S Awards Host Sponsor $50K
Platinum Sponsor $30K
Gold Sponsor $20K
Silver Sponsor $10K
Bronze Sponsor $5K
GSC Web Meeting sponsor $1K

*Details of your benefits under each sponsorship package are available upon request.

*Customized packages are also available upon request.

application entries

Entries will be accepted until March 31, 2015.

date for awards

The Awards Ceremony will be held in New York City in June 2015.

This is a wonderful way to promote your socially responsible business and dedication to global sustainability. You can support the 3S Awards program financially or with valuable in-kind support including but not limited to: food/beverage, graphic design, printing, marketing and other information technology opportunities, social media exposure, GSC website maintenance or the gift of your time to volunteer to help in the build-up towards the Awards Ceremony or during the Ceremony itself in New York .

CONTACT:

Websites: www.gsc3SAwards.com
www.gscouncil.org
Twitter Handles: @3SAwards
@globalsourcing

Or, email Gary S. Pasricha (gary.pasricha@gscouncil.org), Chairman of the 2015 3S Awards for additional information