CAMBRIDGE, Massachusetts — In 2013, more than 48 billion dollars were invested globally by venture capital firms supporting innovative and creative commercial ideas. Is it possible to imagine this amount of money channeled toward development and socially beneficial projects? Stepping outside its role of just supporting others, the venture capital industry itself innovated a way to make profits for their investors while at the same time achieving progress in the social sector.
Social impact investing is the latest buzz word among the socially responsible. Impact investing is driven by a for-profit mentality but has social good at its heart. Sir Ronald Cohen is credited with being a pioneer in this field. He is the chairman of the Social Impact Investment Taskforce set up by G8 and the co-founder of Social Finance UK. In opening remarks for a Harvard Business School event on the Future of Impact Investing, he talks about how bringing a business model to a sector that historically has been catered to by philanthropy could allow organizations to scale up and increase their impact. Impact investing ideally should remove the constant need of social projects for grant money.
The Global Impact Investing Network defines a few major criteria for social investing. The intent of the investor should be to generate social or environmental impact and they should have the expectation of getting back at minimum what they invested. In such investing, the returns can range from below market to risk-adjusted market rates, and they can take a while to be realized. For this reason, it has earned the moniker “patient capital.” A factor that makes this investing stand out from philanthropy is that it is metric driven. Capital is provided to the organization when it has met a pre-determined milestone for success.
Several impact investing firms are springing up all over the world. SpringHill Equity Partners in the U.S. is an investment management company that focuses on providing venture capital support to businesses serving the basic needs of low-income populations in East Africa. They provide a small capital funding to a proposition and provide more funding when the business demonstrates success. This iterative approach allows the organization to scale up their approach. The firm, in turn, receives their returns as the organization’s success allows for its financial stability, just like from any other venture capital projects.
They look for businesses that satisfy present demand and can develop a sustainable model for growth. One of their investment projects, Bridge International Academies, aims to expand access to high-quality primary education for poor families in Kenya. They offer a model system to provide training, curriculum materials and all other necessities for high-quality franchise schools. Since the SpringHill investments, Bridge has opened 134 new schools catering to more than 53,000 students.
Impact investing can also support government projects. Social Impact Bonds, or SIBs, are financial tools born out of this field that allow the private sector to back government projects. Although they have a fixed term like normal bonds, their returns vary based on how risky the project is. They are used to finance government-run pay-for-success programs.
In 2012, the City of New York funded by SIBs from Goldman Sachs and other private enterprises, launched a program to reduce adolescent recidivism in Rikers. Goldman Sachs’ Urban Investment Group footed the 9.6 million dollar bill and investors only received payments if a milestone of 10 percent reduction in recidivism was attained. Goldman Sachs was well rewarded for their risk-taking as recidivism dropped 17 percent between 2012 and 2014 and payments were made out accordingly.
In 2013, eight billion dollars were committed globally to social impact investing. A majority of the projects were related to microfinance, followed by those concerning small and medium enterprises and agriculture. There is plenty of room for social investing to grow and many sectors like health and education that could benefit from it. There is no doubt that social impact bonds benefit governmental development projects and reduce the risk taken on by the government.
However, on the flip side, there are also many things for the field to mull over. A metric based performance measurement may not be ideally suited for all nonprofits and more worryingly, may not be a good indication of needs met. An organization could undertake building a certain number of wells in a given region but the question of whether wells in those particular locations add value to the community may need to be answered with an entirely different metric. The metric milestone needs to be well thought out to accommodate this discrepancy between real and perceived social value. Smaller community-based non-profits that do not have expandable markets or do not bring in continuous revenue streams will lose out. With room to grow and evolve, in due time, social investing might find a way to accommodate all these cases as well.
– Mithila Rajagopal