The concept of making investments that produce both social and financial return is not new. Triodos Bank, Oikocredit and ShoreBank have been investing for social returns for more than two decades, and Profund, the first microfinance equity fund, is nearly ten years old.
What is new is that this approach to investment is attracting significant international attention and increasing amounts of capital – in the United States $2.3 trillion out of a total market of $17 trillion is invested in funds that have some kind of social screen – and that increasing numbers of investors are recognizing that the value they create is not either financial or social, but rather a true blend of the two.
What is new is a movement beyond double bottom-line to blended value investing and the recognition of the reality that all investing may generate multiple returns to shareholders and stakeholders alike.
Some of the best analysis of this blend and the various investment instruments investors may use has been written by Jed Emerson, Timothy Freundlich and Shari Berenbach. In their paper The Investor’s Toolkit, the authors draw distinctions between three forms of capital – capital that intentionally pursues financial returns with social impact at market rate, capital that seeks social impact but not financial returns, and capital that is invested for social and financial returns but accepts a below market rate of return.
Emerson, Freundlich and Berenbach also make a distinction between passive socially responsible investments that are screened to reflect the owner’s moral and ethical beliefs and investments that promote their social goals and ethical beliefs. Socially responsible investors might be considered Hippocratic investors – they vow to ‘do no harm’ while seeking risk-adjusted market-rate returns. They refuse to buy tobacco stocks and invest instead in a home supply store that chooses not to sell lumber from old-growth forests. They’re partial to socially oriented funds like the Green Century Balanced Fund, which invests in companies that have clean environmental records.
Private investors with social goals, on the other hand, are not content to ‘do no harm’. They’ve vowed to ‘do some good’. They’re the activists, agenda on their sleeves, willing to accept lower financial returns in exchange for greater social returns. They like microfinance institutions that provide opportunities for people in chronic poverty to establish viable businesses.
The two investors both seek to maximize full ‘blended value’ – that is, a combination of economic, social and environmental returns. While no one argues that using the market for social good can solve every social problem, blended value investors have had stunning effect in certain sectors.
The microfinance movement
Nowhere is this more in evidence than in microfinance. Grameen Bank, established in 1976 and now serving 3.7 million borrowers, 96 per cent of whom are women, launched the current microfinance movement. Grameen has been copied all over the world, and the ‘field’ of microfinance includes organizations that link northern funds to banks in the South. The idea that has been so effectively championed by Muhammad Yunus is now a worldwide industry furthered by a multitude of lenders.
The Consultative Group to Assist the Poor (CGAP) estimates that the combined portfolios of microfinance lending institutions total $15 billion. More than 50 million microenterprises have been established in Latin America and the Caribbean alone. As studies of some of the best known microenterprise projects show, with the help of microenterprise loans, family assets can more than double in four years, and families can send their children to school, feed them and get them health care.
Consider these two examples from the ACCION International website:
- A $150 loan to Braulia Parra Pruneda in Monterrey, Mexico enabled the self-taught seamstress to buy yarn and sewing supplies and open a tiny business. Ten loans later she sells 100 items a week, supports her family of seven, and has installed a toilet and an outdoor shower in her dirt-floored home.
- A similarly small loan from an ACCION-supported micro lender enabled Guatemalan woodworker Juan Pirir to buy his first power saw. After 15 more loans, the uneducated former farm labourer has a full set of tools, two part-time employees, and the ability to produce a couch in one day instead of three. His six children spend their days in school, not in the fields.
While 90 per cent of investment funding for microfinance institutions comes from public sources, the remaining 10 per cent – or $100 million – comes from social investment funds that welcome private investment. But micro-loans are not enough, and ShoreCap International is one of a number of financial institutions that raises funds to support small businesses and micro entrepreneurs. If a micro-loan helps a family buy chickens, someone has to invest in the chicken coops.
Energy and environment funds
Blended value investors have also found a home in the energy and environment sector, where they have embraced an array of funds. The Global Environment Fund (GEF), for example, makes market-rate investments and provides management support to ‘companies that make positive contributions to the environment’, particularly clean water, clean energy, sustainable forestry, efficient transportation and clean technology. The Dexia-FondElec Energy Efficiency and Emissions Reduction Fund supports projects in Central and Eastern Europe aimed at improving the energy efficiency of existing plants, installing emission reduction technologies, and increasing the use of clean and renewable sources of energy.
The Triodos Renewable Energy for Development Fund, which invests in off-grid renewable energy services in rural areas in Africa and Asia with underserved populations, has investments from large government agencies, charitable foundations, development NGOs, and bilateral and multilateral institutions, all of whom are comfortable with below-market returns. Triodos also manages the Triodos Green Fund, a Netherlands-based debt fund for renewable energy, organic farming and forestry. The fund, sold to individual investors, is expanding at a rate of 25 per cent annually though it produces a financial return of between 3 and 4 per cent. By taking advantage of tax incentives, Dutch investors can add an additional 2.5 per cent to the actual financial return generated by the fund and thereby achieve a market rate of return.
Increasing the size of the field?
At a September workshop sponsored by the World Economic Forum, the Rockefeller Foundation and the International Finance Corporation, investors ranging from private funds to mainstream banks and investment managers joined social entrepreneurs to consider how best to significantly increase the size of the ‘blended value field’. In his opening remarks, Louis Boorstin of the International Finance Corporation (IFC) pointed out several of the significant advantages of market-based social and environmental activism. Donor money that catalyses private sector investments goes further than in other models (indeed, in microfinance the same money is used over and over again). Furthermore, a commercially viable project is more likely to be sustained and replicated, and it can call on private capital in addition to philanthropic and public money. The private sector is also more likely to have access to new technologies and more apt to insist upon efficient and effective management techniques.
Participants at the conference identified certain catalysts that can increase the chances of success of such ventures, particularly government regulation and government incentives. In the US, South Africa and Brazil, governments require banks to invest in and provide services to low-income communities (where banks were surprised to learn they could make a profit). Tax incentives can also be a significant force – the 25 per cent a year increase in size of the Triodos Green Fund, for example, would not have been achieved without tax incentives for Dutch investors. Programme related investments are popular with US foundations largely because they receive favourable tax treatment.
Perhaps the greatest limit on the growth of the field is local capacity. Workshop participants made a powerful case for ‘smart subsidies’, which can be in cash or in kind. Before a small business can grow, the managers need training and technical assistance. Some require help with start-up costs in the form of a grant rather than a loan. Subsidies are often an important step in building consumer markets and developing secondary markets. Given the extent of subsidies for nuclear power and agriculture that we take for granted, one should not apologize for the modest subsidies needed to launch systems and businesses that in the end increase the chances of the poor earning enough to feed their children. And so some organizations, from ShoreBank to the IFC, offer a combination of subsidies and investment capital carefully designed to complement each other and targeted to change the behaviour of key businesses and financial institutions.
The challenge of measurement
Investors still debate how and whether they can measure social returns, particularly given that some social and environmental outcomes can take decades to appear. In the end, stories are not enough. Some projects can be measured numerically. The Acumen Fund can boast that it has raised funds to help produce 150,000 bed nets to protect people in East Africa from malaria. Microfinance groups have several numeric measures they can use. But for the most part, it takes a long time before one can see the impact of investment in social areas. And northern impatience can destroy a project that depends on low-key, steady work to get buy-in from everyone in a village.
Blended value investing will grow when capital that is available connects with projects that are well designed and well grounded, and when there is enough confidence in the social and financial returns for the now modest secondary market to grow and thrive. Innovation is the order of the day.
1 For research and papers on these concepts, please see http://www.blendedvalue.org
2 CGAP, Focus Note 25, Foreign Investment in Microfinance, January 2004.
4 A phrase coined by the Development Finance Forum in its publication Capital Plus, p5 (http://www.dfforum.com).
Adele Simmons is President of the Global Philanthropy Partnership and Senior Advisor of the World Economic Forum. She can be contacted at firstname.lastname@example.org