When Money Packs a Positive Punch
06 Oct 2014|Leslie Pascaud
Impact investing is the all the rage in billionaire circles. Now as most of us aren’t billionaires, you might ask: ‘why do we care?’. Quite simply because this phenomenon is changing the face of both philanthropy and finance and has the potential to radically impact our communities, the causes we care about and the world at large.
Impact investment funds, initially created by foundations like Rockefeller, Gates, and the Omidyar network, seek to convert money destined for pure philanthropy to more strategic and business-driven investments. The returns on these investments are, by definition, higher than those on philanthropy. And the projects often have corollary benefits to the investing business: by providing capital to support solutions for some of the world’s most pressing challenges around sustainable agriculture, affordable housing, accessible healthcare, literacy, employment, clean energy and financial inclusion, they have the potential for massive social impact and significant business upside.
Public Good via Private Funds
As a result, enlightened investors, who recognize that the health of their businesses is inextricably linked to the long-term prosperity of their clients and communities, are increasingly interested in getting in on the game. The value of global business opportunities in social and environmental markets is projected to be upwards of $3 trillion annually by 2050. That’s a lot of public good that can be generated via private funds.
Importantly, impact investors commit to measure and report their social and environmental performance, making them more transparent and more accountable for their decisions. This structure makes proof of impact a priority.
As marketers and innovators, we tend to look to the Googles and Tesla’s of the world for some of the most exciting and disruptive innovation. But, with the arrival of impact investing mechanisms and models, we are starting to see some real creativity emerging from the finance sector. New York City and Goldman Sachs have been experimenting with social impact bonds (SIB) to finance a cognitive behavioral therapy program for young offenders at Riker’s Island, with the hopes of breaking the cycle of recidivism without putting tax payer dollars at risk. Although there is some debate about the wisdom of ‘privatizing’ such programs, this kind of experimentation may finance initiatives that would otherwise not have seen the light of day.
Barclays out in front
More innovative still, Barclays has created a Social Innovation Facility to serve as a catalyst for the generation of commercially viable and socially impactful new product developments within the bank itself. The goal is to develop sustainable revenue streams from new propositions that would otherwise be considered too high risk or too long term to meet the current hurdle rates established by the bank, but that Barclays’ leadership believes may represent the future. This facility has already funded programs including the creation of a mobile social networking platform to helps students connect with mentors while starting to save for college (recent data suggests that kids from the lowest income families are four times more likely to graduate if they have saved just $500!) a partnership with the Grameen Foundation to develop viable mobile financial service products in Uganda and funding for this past summer’s launch of the Women in Leadership index on the NY Stock exchange. According to Barbara Byrne, Vice Chairman at Barclays, the Women in Leadership index capitalizes on the growing body of third-party research suggesting that gender-diverse leadership may correlate with relatively stronger corporate performance.
Impact investing isn’t just limited to the financial sector, Vodafone has moved in with its M-PESA mobile payments platform in Africa to provide services to the previously “unbankable” by allowing users with a national ID card to deposit, withdraw, and transfer money easily with a mobile device. And B Corporations like Warby Parker and Etsy are pledging and legally committing to achieve social as well as business goals in their bylaws.
But despite all of the encouraging signs, the impact investment movement is still progressing more slowly than is needed. The pipeline of investible deals is still too thin because many social entrepreneurs aren’t aware of the new avenues for funding or don’t know how to get started. It is also still too hard to measure impacts and outcomes that would allow these funds to accurately report their performance.
Marketing and Analytics as Catalysts
Interestingly, many of the tools used to measure and market mainstream products can be applied to address these issues. Danone Communities, the social business incubator of Danone, is perhaps the most famous example of private corporation leveraging both its funds and its brand to advance social good. Coke’s FivebyTwenty program is another. The creation of the term ‘impact investment’ has, in and of itself, driven heightened awareness and interest in the field by underlining the active role the millennial investors seek to play. And the numbers bear this out: A 2013 Spectrem group survey found that thirty-five percent of the ultra-wealthy below the age of 45 consider social responsibility a primary investment selection factor, compared with only 19 percent of ultra-wealthy investors overall.
Today’s data analytics which are evaluating new media impacts can also help investors measure whether their funds are being put to good use. They can tally how many more girls are reading in Tanzania as a result of digital literacy app or how many of the healthcare vouchers for pre-natal checkups are being redeemed. Jeff Martin, CEO & Founder Tribal Planet talks about creating a Yelp of social investment to help us all judge whether we are really making a difference.
Despite the obstacles, the prognosis for impact investment is good. The will of a new generation of investors to make a positive difference, the acceleration of innovation in financing mechanisms and the growing ability to measure impact are clearly pushing us into a brave new world where, as the Case Foundation expresses it, “Money becomes more fearless in delivering its disruptive potential.”
Written by Leslie Pascaud, Executive VP Added Value.
Follow Leslie on Twitter @LesliePascaud
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