/content/chapter/-2016-11-en
 
Development Co-operation Report 2016
Previous page 42/109 Next page
branch I. The SDGs as sustainable business opportunities and five approaches to make it happen
  branch 5. Investing for social impact in developing countries

by

Karen E. Wilson

Development Co-operation Directorate, OECD

Social impact investors seek social and environmental impact from their investments, in addition to financial returns. This chapter discusses the potential of social impact investment for developing countries, highlighting several examples to demonstrate how it works in practice. It examines the challenges, including assessing whether interventions have achieved their intended impact and expanding the evidence base. The public sector can promote social impact investment, for example by providing risk capital to enable the private sector to offer affordable, accessible, quality products and services to the poorest populations. The chapter makes recommendations for increasing the reach and the scale of social impact investment.

Challenge piece by Julie Sunderland, Bill & Melinda Gates Foundation. Opinion pieces by Manuel Sager, Swiss Agency for Development and Cooperation; Sonal Shah, Beeck Center for Social Impact & Innovation, Georgetown University.

A special thanks to Julia Sattelberger and to Wiebke Bartz from the OECD Development Co-operation Directorate for, respectively, help with the boxes and examples in the chapter; and with the background data and the case studies.

The challenge: Can social impact investment serve the  “bottom of the pyramid” ?

Julie Sunderland, Director of Program-Related Investments, Bill & Melinda Gates Foundation

It's not surprising that the private sector faces challenges in serving bottom-of-the-pyramid customers: the largest and poorest population groups. By definition, bottom-of-the-pyramid populations don't have much income, making margins slim. In addition, the often weak infrastructure and distribution channels in developing countries make the transaction costs of reaching these customers high. Much of the procurement of basic goods and services for the poorest populations goes through government-managed development co-operation channels, which are often bureaucratic and opaque to companies.

Nonetheless, there is still great potential for the private sector to serve bottom-of-the-pyramid populations. Capital flows into the private sector, both via investment and revenue, dwarf flows from philanthropy and development co-operation combined. The private sector's commercialisation and manufacturing capabilities can allow for scaled production and delivery of affordable, life-saving products. The private sector can bring critical knowledge, capabilities and resources to solving social sector problems, and its capacity for research, development, innovation and entrepreneurship can be applied to generate transformative technologies and new business models.

Social impact investment can help to realise this potential. When done well, it can address market failures that keep the private sector from investing in social sectors. At the Bill & Melinda Gates Foundation, we've seen in practice how patient, flexible risk capital can support innovative models that provide affordable, accessible, quality products and services to bottom-of-the-pyramid populations. When done badly, however, social impact investment can distort markets and prop up unsustainable businesses.

For social impact investment to become a credible bridge to a private sector focus on bottom-of-the-pyramid populations, it needs to address three challenges.

Align incentives for social and financial goals. Except for the limited resources allocated to corporate social responsibility, private companies and investors are driven by financial goals. While a new class of impact investors may be willing to sacrifice some financial returns to generate social impact, investment capital at the very least needs to be repaid out of the cash flows generated by the business activity. One of the current challenges for making social impact investment work effectively, therefore, is identifying (and working creatively to expand) the opportunities for aligning revenue/profit generation with the achievement of social goals.

A great historical example of such alignment is the proliferation of cellular technology. Mobile phones have had significant social impact in fields as diverse as disease response, financial inclusion and technical assistance. Mobile phone companies have also provided excellent returns for their investors. Yet most social goals will lack the natural alignment with scale and profit evidenced by mobile telecommunications. Social impact investment has the potential to bridge this gap through risk reduction mechanisms, such as guarantees; through the application of low-cost scaling capital to validate nascent distribution models; and through company-building equity investment in technologies that hold promise similar to that of mobile phone technology.

Change the economics of reaching bottom-of-the-pyramid populations. Capital-intensive, complicated or transaction-heavy business models that might work elsewhere will not be sustainable in bottom-of-the-pyramid markets. The private sector can develop new technologies, products and business models that are adapted to the needs of bottom-of-the-pyramid populations, allowing for rapid uptake and producing high sales volumes, even if margins remain slim. For example, there are innovations that have the potential to cut delivery costs, ranging from sachet-sized consumer products to agent-based distribution models and pay-as-you-go financing. Social impact investment can support the further development and demonstration of these new business models by leveraging and, ultimately, crowding in private sector investment.

Cultivate top-tier, on-the-ground investment and entrepreneurial talent. Access to capital is often cited as a primary limitation to the growth of small and medium enterprises, and to social sector businesses. Yet access to talent may be a bigger and more persistent constraint as promising models replicate and grow. Social impact investment needs to develop two levels of talent: strong intermediaries and fund managers who are good at allocating capital and building companies; and strong entrepreneurs and managers to lead social sector businesses.

Over time, improving secondary and post-secondary enrolment and education, and increasing entrepreneurial expertise in local markets and among diaspora, will allow talent to flourish. Social impact investors can speed up this process by taking the risks and investing in emerging intermediaries and entrepreneurs, recognising that while they are learning they will be developing experience and networks. A handful of successful cases can encourage others in the private sector to seek out and further develop untapped human capital.

 

Social impact investment is the use of public, philanthropic and private capital to support businesses that are designed to achieve positive, measurable social and/or environmental outcomes together with financial returns (OECD, 2015c). It has evolved over the past decade as a means of using traditional development financing, in particular official development assistance (ODA), to develop new business models that can complement existing ones.

Social impact investment can not only help to direct new capital flows to developing economies; it can also bring greater effectiveness, innovation, accountability and scale to investments, increasing their economic and social benefits for the world's poor (SIITF, 2014a). For example, a study by the United Nations Development Programme shows how in Africa, capital flows from the private sector and philanthropic actors are offering opportunities for impact investors to increase access to basic services for healthcare, education, clean water and energy (UNDP, 2014; and see Box 5.1).

Box 5.1.  “Pay-as-you-go” energy

SDG 7 calls on the global community to “ensure access to affordable, reliable, sustainable and modern energy for all” (UN, 2015). The demand for energy is growing in developing countries, with estimates of the need for investment in renewable energy at around USD 34 billion (UN, 2015; Schmidt-Traub and Sachs, 2015).

Many companies are already rising to the challenge. For example, in Africa M-KOPA Solar is offering “pay-as-you-go” solar energy for customers who do not have access to more central resources. Since its commercial launch in October 2012, M-KOPA has connected more than 300 000 homes in Kenya, Tanzania and Uganda to solar power, and is now adding over 500 new homes each day. It offers solar energy to low-income households at affordable prices using a pay-per-use system. Aside from being cheaper than traditional kerosene lighting, solar-powered energy is better for human health and for the environment. Based on a calculation of 1.3 tonnes of CO2 reduced per M-KOPA solar system over four years, the company estimates that it has helped to reduce 260 000 tonnes of C02.

M-KOPA draws on a team of Kenyan and international software engineers who have built the platform from the ground up. For example, embedded sensors in each solar system allow M-KOPA to monitor real-time performance and regulate usage, for which fees are collected via mobile phone systems. The innovative M-KOPA business model has enabled the company to take their solutions to scale, spreading success by creating jobs for 650 full-time employees and 1 000 commission-based sales agents.

For more information see: www.m-kopa.com.

 

Pay-as-you-go solar energy in Kenya has helped to reduce 260 000 tonnes of C02 over four years.

 

Examples like this illustrate how the power of markets combined with innovative ways of efficiently and effectively using public and private capital can be channelled to bring solutions to urgent social, environmental and economic challenges (see the “In my view” box by Manuel Sager). While these innovative approaches will not replace the core role of the public sector or the need for philanthropy, they can provide models for leveraging existing capital to produce greater social impact (Wilson, 2014).

In my view: The public sector can do much to promote social impact investment in developing countries

Manuel Sager, Director-General of the Swiss Agency for Development and Cooperation

Partnerships between the public and the private sector can take on many forms. When it comes to leveraging additional resources for sustainable development, social impact investors are key partners for development agencies. They include private and institutional investors that seek not only financial returns, but also social and environmental improvements. The market for social impact investment has been growing steadily in recent years. It makes sense for development actors to pay greater attention to this investor segment and to look for synergies with it.

In Switzerland, for example, the volume of investments seeking social impact in developing countries is substantial: in 2015, assets under management for such investments in the country amounted to an estimated USD 9.85 billion. 1 While the global impact investment industry is still in its infancy, it is set to grow significantly over the coming years. Investors are increasingly interested in returns other than purely financial ones and seek new investment classes to diversify their portfolios.

Given the close alignment between the goals of impact investors and those of the international development community, it seems only natural that the two sides should engage in more mutually supportive partnerships. This would strengthen the impact that socially oriented capital has on poor communities, particularly in lower income markets.

In my view, there are four key areas in which development agencies like the Swiss Agency for Development and Cooperation could do more to partner with the impact investment industry and support the transformation of social impact investment into a mainstream choice.

First, partner governments and development co-operation agencies should not neglect the important objective of strengthening the overall governance framework in developing countries. This is essential to create attractive investment opportunities, including for impact investment. After all, impact investment decisions are informed by the same factors that make a business environment attractive for other forms of investment. These include effective public administration, rule of law, a sound macroeconomic framework, low levels of corruption, and easy, transparent business procedures. Switzerland will continue to work with its partner countries to improve their overall business climate and promote good governance, including in the world's least developed countries and in countries emerging from conflict.

Second, the public sector can support a number of activities to help reduce the cost of impact investment relative to other types of investment. Switzerland has created the Swiss Capacity Building Facility 2 for this purpose. The facility is a public-private partnership that provides small technical assistance grants to financial service providers in developing countries. Its contribution reduces the entry costs for those seeking to offer innovative and affordable financial services to low-income earners, smallholder farmers and small businesses. Financial products such as agricultural input insurance or livestock leases allow clients to boost their income, employ more people and reduce their vulnerability.

Third, where it makes sense, public funds can be used to leverage private funds via guarantees or early-stage investment. One of the most successful microfinance funds in Switzerland – the responsAbility 3 Global Microfinance Fund – was launched in November 2003 with initial capital of CHF 3.6 million from the Swiss State Secretariat for Economic Affairs. Today, this is a flagship microfinance fund worth over USD 1 billion in private capital invested in various microfinance institutions in developing and transition economies. 4

Finally, development actors and the social impact investment sector need more platforms for exchanging knowledge and sharing experiences. This dialogue can help them identify what works and what doesn't work, and to ensure that the right incentives are put in place on both sides to advance the goals of the 2030 Agenda. In Switzerland, the sustainable investment community, which comprises a number of impact investors, has banded together under the auspices of the Swiss Sustainable Finance 5 organisation to help establish the country as a leading centre for sustainable finance. To date, Swiss Sustainable Finance comprises over 80 members from Swiss banking, insurance and financial services, and includes a working group on investment for development.

As we set out to achieve the Sustainable Development Goals by 2030, it is clear that social impact investors can make a big contribution. What we need now are smarter policies to enlarge the circle of contributors.


Swiss Sustainable Finance (2016), “Swiss Investments for a Better World. The First Market Survey on Investments For Development” . The classification used in the survey entitled “investments for development” summarises investments that combine three necessary elements: the intention to improve the social, environmental and/or economic situation in the investment region; target low or middle-income frontier countries; and aim for returns in line with other investment categories.

http://scbf.ch.

www.responsability.com/investing/en/678/Investments-AG.htm.

www.responsability.com/investing/en/1061/responsAbility-Global-Microfinance-Fund.htm?Product=19665.

www.sustainablefinance.ch.

 

This chapter examines the concept of social impact investment in the context of other forms of private sector contributions to sustainable development. It discusses both the potential and the challenges of social impact investment in developing countries, providing illustrative examples of how it works in practice. It concludes by offering recommendations for fostering social impact investment in developed and developing countries.

Acrobat PDF page
 



Visit the OECD web site