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Flexible Funding Needed to Make Impact Investment Viable For SDG Focused Entities

10/21/2020

2 Comments

 
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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.

2 Comments
MACHARIA NDEGWA link
10/26/2020 07:22:32 am

APPEALING FOR FUNDING;
Kindly, we are Appealing for Donor Funding to Fund our Projects.
My name is Macharia Ndegwa. Am the CEO - FOUNDER of Ragsbond Enterprises a medium size Non - profit making Company engaged in Agriculture Research & Rural Development. In our Findings we have observed that areas where Governments have not taken Agriculture Seriously people tend to be poor and feel marginalized. This has had a direct relationship with the SGDs for 2030, with the following links, in this order (1)Poverty (2) Hunger (3) Water (4)Environment (5) Energy etc.Now, with Covid - 19 it has left everybody wanting, Europeans are looking for Americans, Africa is looking for Europeans and so on. With the jobs &
Business disruptions, a big number of our Youth have been left unemployed. For us to improve their Quality of Live, if Funding are not Available an ALTERNATIVE OF USED COMPUTERS or USED LAPTOPS, TO TRAIN EVEN THE NUMBER OUT OF SCHOOL WITH BASIC COMPUTER
KNOWLEDGE. This is very urgent and most pressing, Waiting to Hear the soonest, possible Time,
Thank For Your Time and Consideration.

Reply
Stephen Ussery
10/26/2020 08:48:20 am

I think these questions are extremely relevant to my line of work, helping new nonprofits develop business plans and strategies for how to grow and realistically apply for funding. This problem is not something that only exists overseas, US organizations struggle to fund start-up ventures as well.

This situation is somewhat humorous because it prevents many members of underprivileged communities from being the actors of change, they may require someone from outside their unique context to come in and provide support. While these outsiders are well intentioned and have proved competency, are not community members the best people to understand the situation and know what actions could lead to effective change?

Support providers have certainly gotten much better at engaging with local stakeholders, but why do we insist on having middlemen? Can we restructure the way corporations, NGOs, and government entities can directly interact with local change makers?

The U.S. government has farmer support programs through the FSA whereby the government will guarantee up to 95% of a loan provided by a private institution to qualifying farmers. Many microfinance initiatives overseas have proven high repayment rates and disproportionate benefits for women.

Do you think a model that combines microloans with impact investor guaranteed loans to community members would be something worth pursuing? If loans were evaluated with the same scrutiny as grant funds, even defaulted loans could be considered to have a positive impact. Interested in the discussion, thanks for reading.

-Stephen Ussery

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