According to the Global Impact Investing Network (GIIN), there is currently more than $715 billion invested through impact investment funds globally, roughly the size of the GDP of Colombia or S. Africa. These investments reach companies of every size, from sole proprietor to global behemoth, and in every corner of the world. Impact investors come from global venture funds, family offices, individuals or even nonprofits. Some governments are even dabbling in impact investment. In my work evaluating funding trends more broadly among public funders, corporations, impact investors or traditional philanthropy, I’d surmise that impact investing IS the future of funding.
Why is impact investing so hot? Consider the premise - a financial services company, with expertise in producing financial returns, couples economic returns (i.e. profit) with social and sustainable returns, thereby creating a triple bottom line (social, environmental and economic) win for both themselves AND a portfolio company. Why would a company NOT want to partner with an impact investor when it means they receive financial support AND a method to evaluate and advance the positive impact they are seeking? One could argue that any socially minded business has the potential to be a prime target for an impact investor as long as they can make money over time AND produce even minimal impact. Even traditional banks are taking on an environmental, social and governance (ESG) lens in their investment portfolios, driven by the growing population of young, wealthy investors keen to put their money into money-making schemes that also ‘give back.’
Within the scope of measurement, financial returns are always of prime importance to impact investors. But how do impact investors show they’ve made actual social or environmental impact as well? Measurement systems are ample, but inconsistent in their depth.
What I mostly question, however, and why I am not yet completely convinced of impact investing as a solution for every funding need, is how hard it is for socially minded entities (in our client base these would be social enterprises, corporations or NGOs operating in developing countries) to get small tranches of funding they need from impact investors to grow and scale. See impact investors require certain types of financial mechanisms to work with a portfolio company. Usually this takes the form of equity or debt. In some cases there are hybrid mechanisms that take the form of lines of credit, or other financial debt instruments, but more than likely, to access investment capital a company must be willing and able to take on debt. This makes sense, since an investor needs skin in the game, and must have its investment paid back over time, but what about those companies that simply aren’t able to take on debt? What about companies or programs that have literally only just begun, and their returns aren’t measurable? How can these organizations tap into impact investments? How can these well-intentioned companies begin to thrive in a burgeoning impact investment market when what they really need is grant money, free money, startup, flexible money that isn’t tied to a portion of their company or debt? I really struggle with this question when I hear about amazing women and men starting companies in tiny villages, or in remote parts of the world, keen to test new systems, or solve ongoing problems, particularly around the Sustainable Development Goals (SDGs). If impact investors do want to make a difference as they say, and track real impact around the SDGs, be partners with business owners worldwide, and help buoy global economies during times of uncertainty, how will they manage to work with the millions of small businesses that need flexible funding to get started, grow and scale?
I pose these questions with a true curiosity and intent to find some answers. Existing clients are exploring the impact investment space as an alternative to traditional philanthropic grants or public funding. Understanding the role impact investors will play as the social investment space evolves will be a priority for me. I open my door to discussion, to information, to questions or more.
Global challenges require global solutions, and only by working together across all sectors, public, private, finance, civil society, global agencies, etc., will we develop the actionable solutions we need by 2030 when we aim to close the SDG gap. Of course this is so much easier said than done. Yes, leveraging donor funding is more critical than ever before. Traditional grant based aid alone is not sufficient to translate SDGs into reality. The speakers reiterated several times that we must tap into private financing. Yet the big question is how do LDCs attract new pools of funding, deliver social and financial return and ensure funding gets to those who really need it as they work to supercharge their economies?
The UNCDF shared their intent to ensure development interventions are equally benefiting those who are furthest behind. They recognize that these support mechanisms can be improved.
That’s encouraging, and perhaps a vast understatement.
The private sector is already engaging in leveraging public development funding in various ways. This ranges from interjecting investment capital, creating access for smaller companies, helping improve gender equity in SME financing, differentiating markets and building programs for blended finance. There is still some short sightedness, however. When one of the panelists from Bamboo Capital Partners indicated that some of their smaller investments are at levels around $250,000, it makes me wonder what SMEs in LDCs are structured in such a way that they can even accept $250,000? Frankly even small companies in the United States may not be able to absorb that level of funding. Are smaller tranches an option? Certainly government assistance programs can support smaller companies with smaller cash assistance needs. Though in many countries, support for small business during times of disaster or economic turndown simply doesn’t exist in government budgets. Again, how do private sector actors reach those who are not having their needs met, and how can governments support/leverage those efforts?
The question I raised was this: Private sector is already doing quite a bit to fund SDG gaps. Yet many groups in LDCs are still not reached. Beyond financial investors, how can commercial entities that have an interest in investing in new and diverse regions know where their investments in market development will be matched by government transparency and infrastructure support? Currently many companies depend on other government co-funding as first loss guarantee. Are there other options?
According to the panelists, only 3-4% of overseas development assistance (ODA) is used for private sector investment. How do you leverage that at a higher rate? One attendee rightly suggested that given 70% of populations in rural areas in Africa, for example, is supported by agriculture, how does funding support the need to absorb additional blended capital (i.e. equity and debt) in small, rural agricultural communities? Until now, much investment has been in the form of grant funding or zero-interest rate loans.
I have no doubt the private sector is taking this financing gap seriously. It’s still unclear, though, how much of leveraged private sector funding goes to traditional technical assistance, humanitarian support and philanthropy rather than shoring up business systems, investing in new business models and supporting small, growing businesses in LDCs.
Bamboo Capital Partners, as well as UNCDF and several donor governments have committed to the BUILD Fund, a blended finance vehicle to stimulate small businesses in LDCs. I was encouraged to hear that several European governments, including Sweden, Luxembourg, Noway and the Netherlands, will contribute to this fund, and recognize that regulatory environments, infrastructure, financial institution stability, first loss guarantee programs, and micro-funding approaches must be shored up beyond what we’ve seen over the last 20 years. “It’s all needed," and while quite a lot of money has been delivered (perhaps in the billions), there needs to be a newer approach.
What does that look like?
I certainly don’t have all of the answers. All I know, from speaking to private sector companies, as well as professionals working in government funding, is that coordination, clear identification of gaps and needs, more transparency from LDC governments, first loss assurance, and shored up markets will be necessary to make significant progress.
What are your thoughts on this issue?
Feel free to share in the comments or email me anytime: email@example.com
A highlight of my work as a partnerships advisor is helping businesses of all sizes, and with clear sustainable development impact goals in place, find ways to work more effectively and in line with governments as part of public-private partnerships. These typically take the form of a company with a global presence asking us to liaise on their behalf with U.S. or European agencies working in developing countries, and around issues like increased market access, trade facilitation, climate smart agriculture, health access, access to finance and gender equity. Often times these companies are looking for additional funding to support their development initiatives.
The U.S. Agency for International Development (USAID), Millennium Challenge Corporation (MCC), Development Finance Corporation (DFC) and U.S. Department of Agriculture (USDA) tend to be the go-to agencies I approach for these discussions here in the United States.
It’s easy to love a scope of work that allows me to find policy action that supports business advancement, since I’ve been working on economic development challenges for the last 20 years. I’ve always seen business as a key driver for positive change in places where the economy needs a shot of adrenaline, or what’s more, market-driven fluidity. Businesses must have a good relationship with governments that build and support infrastructure, and are often drivers of the investments needed for effective markets in all places where they operate. Thus when a U.S. or European-based business needs help raising money in tandem with a government actor here in the U.S. or in Europe, I see it as an ideal way to engage in effective public-private partnerships that have mutual benefit for the business, the government agency, and the communities in need of greater investment support.
Recently I was asked by a corporate client of ours whether the company could be easily set up to “prime” a U.S. Government funded program to institute a market-building effort in a country of priority to their production efforts.
What does it mean to be a prime? Essentially a prime partner of a U.S. (or other government) entity is one that receives a large chunk of funding to carry out a key program for the government, and thereafter sub-contracts that funding to technical implementers to ensure the program is delivered as promised and guaranteed by the prime. The prime partner must keep track of deliverables, budgets, timelines, ensure the program is operating as promised, and report back on progress. Often times primes are big contracting firms, set up specifically to monitor and manage big U.S. (or other) government programs.
So can a private sector partner be set up to prime? The answer is yes.
Susanne Barsoum, Founder of Keylime, a marketplace for international development expertise, shared with me this: "Donors are looking for the kind of innovation and private sector engagement that large international companies are so well positioned to offer. International development and the private sector each have so much to gain working together."
And here’s why:
Are you a business interested in learning more about opportunities to partner with government agencies to leverage funding and help build long-term market action in countries of importance to your business?
Whether it’s via a “prime” relationship or not, let’s discuss where there’s a fit for you.
Challenging times these days, eh? My goodness. It’s like we are being slapped on each side of our face over and over. Between COVID, polarizing politics, racial injustice, people who seem to just HATE each other, fear, brutality, violence, ongoing environmental challenges - we can’t seem to catch a break. It becomes overwhelming. How can we begin to address these systemic problems, and feel like we are contributing meaningfully?
As a corporate leader, 2020 presents an opportunity to participate in the rebuilding we’ll need after we’ve torn ourselves apart as a global society. It’s possible to begin constructing a future you want for your business or organization, based also on what the planet needs for recovery. The key is to start by figuring out what positive impact is achievable, given your limited resources of time and money.
The question you may be asking yourself is, "How?"
The most critical first step in determining what role you can and should play in creating lasting change, is prioritizing. If you begin an impact project or program without taking the necessary steps to prioritize, or deciding what makes the most sense for your business first, you won’t get there fast enough.
You need to ask yourself questions like:
After going through these prioritization questions, narrow in your responses and land on one to two high-impact and well-prioritized goals that are going to help you succeed as a company, but that also help you to deliver on impact over time.
Once you have completed a successful prioritization exercise, you are much more able to focus intently on finding critical partners and collaborators, funding if that’s what you are most needing, or ways to advocate for the change you think is most needed. If you don’t prioritize first, you run the risk of playing whack-a-mole with all of the different issues and challenges that touch your organization or that drive you to seek change.
Here’s an example:
An idea exists to improve market access for health services in poorer countries and regions. The owner of the idea knows she can have significant impact once her solutions reach a generous sized group of pilot testers, but how is the question. Approaching this challenge could lead us down several paths:
In our example, once these questions are answered, we determine that the idea could be replicated in several regions as an initial pilot, but more funding is needed to get the pilots off the ground. The markets exist and regulation is not really the challenge. Financial services firms are abundant to help the local health facilities obtain financing and support. Thus we can narrow in on funding and pilot development. Once the funding is in hand, and the pilots underway, only then can the idea owner start considering what comes next. Only then can the next phase of impact be possible. Only then can other partners, including financial services firms, technical trainers, advocacy groups (if relevant), co-funders, etc be brought into the mix.
Priority setting is the most critical first step in making a positive impact. In our work as partnership advisors, it truly is a must before any other steps are taken in identifying partners or funders.
In 2020, with the ground quaking beneath us, we know we all play a role in seeking positive change. Even with the greatest desire, passion and intent, we must start somewhere. Using an effective priority setting process will help ensure all future action is truly effective and takes us forward with intention.
My task during this meeting was to secure an interest on the part of my friend’s agency to co-fund this project. When my friend rushed into the coffee shop, he sat down and mentioned he had limited time. What was my ask? I shared with him the situation - that this well known client of mine was testing a new social impact program, had received some substantial initial funding, but was keen to bring other partners on board, and in particular, wanted my friend’s agency to be a core funder in the replication and scale of the program.
My friend looked at me like I had told him a three-headed alien had landed in my driveway.
Why do they need us he asked?
It’s a fair question. Why would a multi-billion dollar company need more funding to advance a social impact project?
Here’s what I shared with him:
Because of these reasons, and a recognition that working in concert with the private sector will allow funders to make their investments go farther, funders across the spectrum have been ramping up their private sector engagement strategies. Collaboration in international development is no longer just about implementation or designing projects. It has developed into a method for identifying and deploying systemic solutions that promote long-term sustainability and lasting impact for the people and communities who need the support most.
As for the coffee date with my friend at the funding agency, we weren’t able to come to terms during that initial coffee meeting. But after several meetings with our corporate client, we helped build out a strong partnership that will bring opportunities for sustainable impact for decades to come.
Want to learn more about private sector engagement to address the SDGs?
Read about how to set SDG commitments, what's needed to make public/private partnerships more effective and why leveraged funding is critical to advance the SDGs.
Of course contact us with any questions or to learn about how we can help your SDG program find the right funding, partnerships and scale for impact.