While the field of impact investing started small, it has been gaining momentum in recent years. With increased scale has come increased interest on behalf of larger institutional investors who realize the potential returns available in this space. Initially, large raises were focused on microfinance with its proven returns. Several companies, including Ignia, Elevar Equity, Bamboo Finance, and MicroVest, are now looking to move beyond microfinance into other social issues that they believe have the potential to generate financial return while creating value.
Speaking on a panel at SoCap 2010, Alvaro Rodriguez of Ignia explained his impetus for moving into a new space. While talking to micro-entrepreneurs he found that many of them wanted access to health care, housing, education, and insurance. The problem was that no one was providing these services to the bottom of the yramid. Rodriguez realized that there was clearly a market for these services. What was needed now was capital to fund businesses that were willing and able to deliver them.
The conversation at this year’s Social Capital Markets conference in San Francisco was “what’s next;” how do we bring impact investing into the mainstream? During her opening keynote, Jacqueline Novogratz of Acumen Fund stated that while there have been 192 new social impact funds created in the last 3 years, impact investing is still a nascent sector and its growth will require continued development of metrics, policy and incentives to protect social goals and efficiencies.
Several panels at SoCap 2010 explored one of the major themes of this conversation, which is achieving scale. Two key elements to getting there: infrastructure to facilitate investing and lower transaction costs for social investments on a global scale. RSF Social Finance, Investors’ Circle, Toniic and Dasra are just a few of the organizations finding innovative methods to develop to facilitate high engagement at a low cost. How are they doing it?
Businesses often outsource to cut costs. But what about outsourcing to create value, specifically social impact value? Better World Books, Benetech and Samasource are three innovative businesses that are doing exactly that. The three firms spoke on a panel at SoCap 2010 to explain how the value chain came together after Good Capital, a VC firm that provided a round of funding to Better World Books, recognized the potential for synergies between them.
The chain starts with Benetech, a Palo Alto based company that provides technology solutions to solve social issues. Benetech’s Bookshare program is a web-based digital library for people with print disabilities. Speaking at SoCap 2010, Betsy Beauman of Benetech described how in 2007, after winning an award from the U.S. Department of Education, they realized they needed to grow quickly and needed a channel partner to do so. Good Capital introduced Benetech to Better World Books, a social enterprise that collects and sells used books in order to fund literacy initiatives and donate books to communities in need around the world. Better World Books has a warehouse in Indiana where they house over 6 million titles. Now, when Benetech receives an order from a teacher in Mexico with a vision-impaired student, they place an order with Better World Books who finds the book in their warehouse and de-binds and scans it to put it in digital format. The technology is by no means flawless, though, and the digital file needs to be proof-read for errors. That’s where Samasource steps in.
Reporting from SoCap 2010:
There’s a lot of buzz in the social and environmental sector about the innovative entrepreneurs who are changing the mindset of business as purely profit-driven. But what about the large, established multinationals of the world? Are these companies, with their massive infrastructure and wide reach, really committed to creating a sustainable future? The 200 companies that form the World Business Council for Sustainable Development appear to be.
Reporting from SoCap 2010:
Convincing one wealthy donor to invest $50M to provide education loans to underserved individuals seems like a daunting task. But what about convincing 1 million people to invest just $50 each? Could you convince the millions of people that make charitable donations every year to instead make a loan to a person for whom more education could generate a threefold increase in income? This is the premise that Kushal Chakrabarti started with when he founded Vittana three years ago. The company created the first student loan model in developing countries through an online platform where people provide education microcredits to individuals in impoverished areas.
A great deal of impact investing takes place through traditional financing models including private equity, venture capital, and debt financing. However, there is also a movement to develop new impact investment vehicles that capitalize on both for-profit and government funding for solving social problems. Social Finance UK has pioneered one of these new vehicles: the social impact bond.
Contrary to what its name implies, these are not actual bonds. As Emily Bolton explained during a panel at SoCap 2010, Social Finance UK was originally looking for a way to raise money for programs that addressed social issues. While a good amount of money is flowing microfinance initiatives, it has been harder to drive capital into other issues like education, health, and crime prevention. Social Finance UK developed the social impact bond as a way to address these social issues that government would normally pay for. Here’s how it works: institutional investors invest in a limited partnership. The money is used to finance nonprofits that are delivering programs. Social Finance UK uses a well-developed set of metrics to measure the success of the program and demonstrate the economic value that it creates. If the program is successful, then the UK government agrees to invest in it. The institutional investors receive a return (currently capped at 13%) from the money that the government invests.
Quoting Nike CEO Phil Knight at his afternoon keynote at SoCap 2010, Jay Coen Gilbert says: “No one gets excited about a product. They get excited about a brand.” It is for this reason that GIIRS, the Global Impact Investment Ratings System, is creating a brand: a new asset class of impact investing. Created by the non-profit B Lab, GIIRS is a ratings agency that provides social and environmental impact ratings for companies and funds seeking to raise capital from impact investors. GIIRS, which has received funding from USAID, Prudential Financial, Rockefeller Foundation, and Deloitte, is based on the existing impact ratings system that B Lab has used to certify over 350 B Corporations.
The term “impact investing” has been making the rounds in recent months. Just last week the Clinton Global Initiative announced the launch of Global Impact 50, an index of the top 50 impact investment fund managers delivering financial returns while creating social and environmental value. It is estimated that the potential market for impact investing is over $120 billion. With increased visibility on the global scale, impact investing has piqued the interest of traditional investors who have been battered by the financial crisis and for whom the prospect of earning reasonable returns while doing good is looking more and more attractive. While some have raised concerns about the number of viable investment targets and the feasibility of successful exits, there is no doubt that this is a growing sector that is driving capital to business that tackle social and environmental problems in efficient and effective ways.