Socially Responsible Financing For-Profit: An Emerging Opportunity

This is what the triple bottom line should be all about but maybe a Harvard Business Review article will put a firmer imprimatur on an emerging business opportunity for CEOs in the for-profit finance sector: Linking entrepreneurs and their companies with the necessary resources needed to create lasting social change.

Writing in HBR’s blog this week, Bill Drayton, the founder, chairman and CEO of Ashoka: Innovators for the Public Since 1980, says that since the late 1980s the financial industry has not kept up with the rapid change and growth occurring in the “citizen sector.”  As a result, the “change makers of the citizen sector lack the financing options they need to make their projects successful and scalable.”

Without new sources of private capital “the citizen sector has to continue to rely on funding by governments and foundations,” Drayton continues. And “that’s far from ideal.”

The reason? Often government institutions and foundations do not have the structure and flexibility to work outside of a specific funding area or project list. Plus governments’ yearly funding cycles can be problematic.

“Only the private sector, not government, can meet the needs of social entrepreneurs and provide on a sustainable basis the resources needed to address the huge social problems our planet faces,” he emphasizes.

Private-sector funding makes more sense, Drayton says, because it focuses on the long term, promotes agility and is cost-effective.

“And it makes sense – big cents – for the banks: The transaction costs of government and foundation grant-making now run 20 to 45 percent, or roughly 10 times the norm of business finance.

“The new commercial microcredit funds that have been introduced over the past few years are the first major example of the next step: The for-profit finance industry profitably connecting investors with social and business opportunities,” he says.

They can do this because there are 120 to 150 large, well-established microcredit lenders that can “invest large sums safely without incurring significant expense.”

This is a success story, Drayton says, but is it “far, far from enough.”

His pitch for private sector funding is powerful, but the recent turmoil in global financial markets saw private equity firms and investors mostly heading for the hills along with everyone else. It took government interventions and monetary infusions to bring them back, so perhaps it’s not quite the either-or that Drayton posits.

Also private investors are often highly focused on immediate, targeted returns on investment.

But Drayton’s point is well-taken: It is time for the finance industry to “develop smart ways for clients to invest in social issues that affect every income level.”

In the for-profit sector it’s an opportunity to create new classes of investments, find new clients and increase returns.

writer, editor, reader and general good (ok mostly good, well sometimes good) guy trying to get by

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