If you did, you still have a chance to catch up. The EFC has published highlights and photos from many sessions on its website while our Latest from Alliance blog highlights a wide range of different perspectives on the conference.
We typically ask conference bloggers to report on ‘any aspect of the event that they find particularly interesting or surprising’ – and it’s always interesting to see what they do choose to write about. This year we have:
• Star blogger Maite Garcia-Lechner of the European Cultural Foundation, who blogged extensively on engaging with social media, the value of philanthropic investment in community development, and the power of storytelling.
• Terry Odendahl of Global Greengrants Fund reporting on the Impact Island team’s session ‘Sea Change or Hard to See Change? Are Foundations Making Enough of a Difference?’ where Terry seems to have had fun ‘finding out how we really do our work, by analysing the ‘”Do Good Foundation on the Island of Trouble”’ – though it has to be said that the headdresses were not up to standard this year.
• While Filiz Bikmen looked at recipes for building successful networks through ‘searching for the masterchef’.
• The conference title was ‘Rethinking Europe’ and the European project was the focus for Jenny Hodgson of the Global Fund for Community Foundations, Chandrika Sahai of the Peace and Social Justice Philanthropy Network, and Maribel Königer of ERSTE Stiftung.
• Inevitably Ukraine was never far from the discussion. There was a session devoted to foundations’ role in Ukraine specifically as well as a more general one on foundations in conflict situations, and Ukraine was a big focus for the session on women’s role post conflict, both reported on by Caroline Hartnell of Alliance. See also an interview with Madeleine Rees of the Women’s International League for Peace and Freedom and Caroline’s post celebrating the EFC’s first woman chair – 25 years on and about time!
• Finally, a view from the other side of the Atlantic, from Andrew Ho of the Council on Foundations, who reflects on the challenges to successful public-philanthropic partnerships, which seem to him more complex in Europe than in the US.
Sadly we did not in the end feature any blogs from the enthusiastic Mozaik Foundation team of five who had agreed to blog for us – for the very good reason that, in addition to hosting the conference, they were totally taken up with initiating projects for the relief of the suffering of the victims of Bosnia’s devastating floods. For more information and to make a donation, see here>
How to stimulate the venture stage of the impact investing market with fresh ideas has stubbornly remained an open question. However, an answer in the form of corporate venture capital that considers impact (or corporate impact venturing) has started to present a convincing response.
Similar to in 2013, respondents to the 2014 JP Morgan/GIIN impact investor survey identified the ‘lack of appropriate capital across the risk/return spectrum’ and the ‘shortage of high quality investment opportunities with track record’ as the currently most limiting characteristics of the impact investing market. In fact, only 11 per cent, or USD 5 billion, of the capital invested by the 125 respondents was committed to start-ups and venture stage businesses. This is less than one-sixth of the capital invested by global companies in start-ups via corporate venturing over the same period, which amounted to USD 29.4 billion in 3,995 deals.
Over the past 50 years, corporate venture capital has helped corporations to capitalize on their profound industry expertise and move from early insights into emerging trends to actual investments that end up generating the new products and services that power core business. The pursuit of impact is now being added to this formula: sustainability is increasingly driving value creation, and assessing joint opportunities for financial and social returns is the new way forward. This venturing approach is very ambitious in terms of scale and impact. The USD 5 trillion Base of the Pyramid market, the USD 546 billion global virtuous consumer segment, the multi-trillion dollar market for green growth and a rising circular economy, combined with a modernizing welfare state, are mega trends creating massive investment opportunities and the possibility to achieve sustainable growth, social impact and corporate profits.
The pathways for sourcing business innovation are also being updated. Fundamental to this shift is the changing role of corporate philanthropy and traditional corporate social responsibility (CSR): the bolt-on approach that is compliance driven, costs money, and produces limited reputational benefits is gradually coming to an end.
Acting on the opportunity has nonetheless proven challenging for many. At a time when sustainability considerations loom ever larger for global CEOs, and in the minds of consumers and regulators, many executives report that they are stuck on their climb: the path to transformation is not yet readily discernible. To help address this issue, Impact Economy, the global impact investment and strategy firm, released Driving Innovation through Corporate Impact Venturing: A primer on business transformation in March 2014. The good news is that corporate leaders do not need to have all of the ideas themselves. With CIV, they can build on the proven channel of venture capital in order to source the innovations now needed, marrying corporate venture capital with positive social and environmental outcomes.
Corporate impact venturing is also relevant for philanthropic institutions, which have thus far played a key role in providing the seed capital that has been helping to build the impact investing market. Fresh potential partners are now coming on stream. Take the field of education, for example, which is both a classical domain of philanthropy and a particularly strong future focus for early-stage investors as per the JP Morgan/GIIN survey referred to above. 64 per cent of respondents plan to increase their exposure in education, with none intending to decrease it, and another third of later-stage investors are expecting to increase their allocation as well.
Education is a foundational field of modern philanthropy, and plays an important role in corporate philanthropy and CSR. Corporate impact venturing is a next logical step. TakePearson, which is present in more than 70 countries and aims to be the leading learning company worldwide. In 2012, Pearson launched the USD 15 million Pearson Affordable Learning Fund, which focuses on providing K-12 education at the Base of the Pyramid. The Fund’s goal is contributing to ‘Education For All’ via for-profit investments that drive both impact and profits. As a company, Pearson achieved USD 1 billion of revenue in developing markets for the first time in 2011; the Fund can now help it access the next key innovations in education at the Base of the Pyramid. This is important given its declared objective of becoming a truly global player. Other similar examples are emerging every day.
Corporate impact venturing offers a powerful way to promote corporate opportunities without neglecting corporate responsibility. The prospect of doing well and doing good at the same time has never been greater. As the market gains scale, companies undertaking impact investing can complement philanthropic investments and help build the pipeline of later-stage opportunities desired by many impact investors.
Maximilian Martin is the founder and global managing director of Impact Economy and the author of Driving Innovation through Corporate Impact Venturing.
At the annual Council on Foundations conference, one of the key moments to focus on international questions has always been the global philanthropy dinner, and in particular its keynote. This year, that keynote was given by Lester Salamon, director of the Center for Civil Society Studies at Johns Hopkins University.
Salamon is a chronicler of civil society activity both within and outside the borders of the United States. He is a key figure in bringing overall frameworks, models and numbers to the diverse and changing world that is global civil society, and he led the team which authored Global Civil Society: Dimensions of the nonprofit sector. Typically, Salamon’s work has helped describe the vibrancy and importance of civil society as a force for social good.
Salamon’s talk at the CoF dinner took a somewhat different direction, emphasizing the poor linkages between civil society and capital, and looking at possibilities for improving capital flows to non-profits. What Salamon calls a potential ‘revolution in social purpose finance’ is described in his new book, Leverage for Good: An introduction to the new frontiers of philanthropy and social investing.
Salamon started by reviewing the state of non-profit finance in the US. He noted that the non-profit economy totals about $1.3 trillion, of which $504 billion comes from the US government, and $681 billion from fees. Only 10 per cent of non-profit revenue comes from philanthropy, and only 2 per cent – about $32 billion – comes from foundations. Thus, while non-profits are by far the largest recipients of foundation grantmaking, foundations are a small part of the overall non-profit finance picture.
While $1.3 trillion seems a significant size, Salamon continued, non-profits are capital-starved, often able to address only small parts of the social challenges they exist to combat, and living hand to mouth financially. Many non-profits are unaware of the most significant capital markets, and, according to Salamon, ‘non-profits often don’t understand the difference between operating income and capital’. Non-profits face competition from for-profits; Salamon showed how the non-profit share of many social services has declined in recent years, even in areas like home healthcare that were pioneered by non-profits. Further, the non-profit brand seems to be losing ground in many areas to the for-profit social enterprise.
Salamon sees promise in the explosion of actors and tools seeking to mobilize private resources for public good. Among the actors he emphasized were capital aggregators, secondary markets and social stock exchanges. He noted that capital aggregators, such as the community development finance institutions (CDFIs) in the US, have accumulated $300 billion in the last decade, compared to the $700 billion of assets held by foundations. Within the foundation community itself,
Salamon noted the phenomenon of ‘philanthropication’ through privatization of state assets, which has resulted in the creation of 88 new well-endowed banking foundations in Italy and 200 ‘conversion foundations’ in the US, mostly in the health sector. The new tools available include a wide variety of loan arrangements, social impact bonds and guarantee funds.
While the ‘let’s move beyond grants alone’ discussion is by no means new at CoF conferences, it was very useful to have it presented in a macro perspective. What role will foundations play in trying to link non-profits to these quickly multiplying sources of finance? This will call for a new sophistication and flexibility among foundations, and, as Salamon pointed out, ‘new partners, new financing mechanisms, and new skill requirements’.
The challenges to non-profit finance in the global South are even greater than those described by Salamon for the US. The government-financed revenue streams are typically much smaller in most developing country contexts, and fee-based programmes can be a challenge for non-profits that are serving the most vulnerable or which do not have products that are easily commercialized. It would be very useful to review Salamon’s ideas for bringing more abundant capital into the civil society sector, specifically with low-income countries in mind.
The new strategy of the Council on Foundations seems to be to reach out more to specialized networks for expertise, rather than trying to have deep expertise on many topics in house. This is probably a wise choice regarding this complex and rapidly growing area of non-profit finance, particularly in the developing world. It will be interesting to see how the Council seeks to forge linkages, information channels and working groups that will equip foundations to play a more active role.
Peter Laugharn is executive director of the Firelight Foundation.
7 June, aboard United Airlines flight 484 from Denver to Washington DC:
As the Council on Foundations annual meeting, entitled ‘Philanthropy Exchange’, takes place in Washington DC this week, many Council members are looking for clear evidence of the change that has been promised as the distinguished 65-year-old Washington institution adapts to the realities of a networked world in which information flows freely and once-exclusive organizations like the Council are struggling for a relevant value proposition that will capture the imagination of the next generation of foundation leaders.
Despite plenty of confusion and some consternation about recent changes at the Council on Foundations, the one thing that everyone in American philanthropy seems to agree on is that the Council is the sector’s single most influential representative in Washington DC.
But the Council has a long-established policy of bipartisan neutrality on political issues of any substance, except for regulatory policy that affects philanthropy itself. That policy of self-interest has been challenged by only a few Council members and some outside critics, but the policy and practice remain firmly entrenched because the non-profit sector, which depends on philanthropy, has been afraid to used its considerable influence to push its funders to harmonize their missions with their investments, especially when it conflicts with the dominant political economy. Thus the Council has not been pushed successfully by its members or by the beneficiaries of its members, to take an unambiguous position on the most critical public policy matters of our time, even overwhelming ‘trump card’ issues such as climate change.
Despite the fact that many leading Council members have invested billions of philanthropic dollars in campaigns to mitigate and adapt to climate change, the Council itself has never been pressured to take any initiative itself on the issue in Washington.
Last week the Obama Administration, finally after decades of costly delay, announced that the US will reduce carbon emissions from power plants by 30 per cent by 2030. Some say it’s too little, too late. Others, who deny that climate change is happening, still insist that it’s too much, too fast. But most Americans agree with scientists, and with Obama, that extreme weather events show that it’s time for the US to act on climate change.
We shall soon see whether the newly network-adapted Council will be embraced by its membership, and become more nimble on public policy issues of global importance to all of philanthropy.
Chet Tchozewski is a board member of Chino Cienega Foundation.
If you’re looking at impact investing, do you see a glass half empty or a glass half full? It all depends which end of the looking glass you’re looking through. If you consider that the term wasn’t even invented ten years ago and there are now countless impact investing funds – GIIN alone has almost 200 large institutional members in 30 different countries – you might see a glass half full. If you look at the volume of funds in impact investing compared to total investments and the scale of social problems to be solved in a material way, you’re more likely to see a glass half empty.
It seems to me that the authors of Beyond the Pioneer start with a glass half empty – seeing too few ‘inclusive businesses’ to benefit the poor managing to scale up sufficiently. Their aim is to remove the barriers so the glass can start to fill up.
If these inclusive businesses are to reach the required scale, it seems that ‘mainstreaming’ must be at least part of the answer – mainstream funds going into industries that have themselves become part of the mainstream. Interestingly, it is Álvaro Rodríguez in Mexico and Vineet Rai in India – both from countries where the social problems to be solved are substantial and not addressed with any level of scale by government – who most clearly express this mainstream vision. Neither has much time for external ‘do-gooders’ who think they can tell the poor what they ought to want and then try to sell it to them.
‘What is your hope?’
At the end of the panel on ‘The rise of key agents: women and youth’, Marie-Gabrielle Cajoly, executive director of the Sinopec-Addax Petroleum Foundation, hosting the second Addhope Forum in Geneva on 22 May, posed this question to me and the other panellists. This, to me, was a profound question, which I believe lay at the heart of the rich conversations that we had during the forum. After a minute of thought, I shared mine:
‘That young people will have the freedom to create the futures they envision regardless of their backgrounds.’
Indeed, it is that hope that drove me to establish Lead Us Today in my home country of Zimbabwe, where many young people’s desire and ability to live full, productive lives have been curtailed by years of difficult economic circumstances. After the forum, my passion to translate my hope into reality was heightened; I left eager to work so much more to create opportunities for young people to believe in themselves and build their capacity to create bright futures.
However, as speaker after speaker emphasized during the forum, it is dangerous for us – people with opportunities to serve others – to be enamoured by our own hopes for other people. The world’s history, especially with the rise of the ‘development’ paradigm, is littered with examples of incredibly well-intentioned people who had noble hopes for others but eventually did not do nearly as much good as they had anticipated. Dysfunctional wells, donor-dependent populations and distorted markets in the Global South are testimony to how fixation on a hope that disregards those of the people we serve is, at best, self-indulgent and, at worst, destroys other people’s capacity to have their own hopes. It is based on this realization, I believe, that one key message coming out of the forum was for philanthropists and development practitioners to listen, with sincerity, to the hopes of others.
Based on these reflections, I arrived at the point where I recognized that the question ‘What is your hope?’ cannot be directed only at the people who were privileged to attend the Addhope Forum but should be extended to the people we serve. Only that way can we make a real, sustained impact in their lives.
Yet, extending the question and truly listening is not a foolproof way of ensuring that the people we seek to serve, and who we have hopes for, are fully included in our work. What happens when you extend the question and in return you receive a blank stare from a disillusioned young person in Zimbabwe who confesses, ‘I have no hope’? Do we then impose our hopes on such people and their communities? Do we simply ‘give’ hope?
Here is my biggest takeaway from the forum: we cannot act based solely on our self-indulgent hopes. We cannot simply impose our hopes on people who often have their own. Even when we are confronted by seemingly hopeless people and communities, we must earnestly strive to recognize them as intelligent people who we can partner with to create conditions where their dormant hopes can be enlivened. Our responsibility as people who are privileged in different ways is to constantly balance our hopes against those of the people we serve and ensure that we are continually creating more space and opportunity for others to – at the least – hope, dream and envision as boldly as we do.
Thinking more about my own work with Lead Us Today, through which I develop the leadership and entrepreneurship skills of young Zimbabweans, I left the Addhope Forum with a fresh perspective. The easy path for me to take would be to descend from my place of privilege and exposure, dishing out hope that may, a few years from now, be meaningless. Thanks to the forum, I have renewed my commitment to listen first and then, based on the experiences of the young people I work with, build their capacity to hope more boldly and more fiercely than I ever would.
Dalumuzi H Mhlanga is founder and CEO of Lead Us Today, a non-profit organization that mobilizes Zimbabwean youth to be socially responsible citizens.
The recently released Monitor Deloitte report Beyond the Pioneer examines why so few market-based solutions to poverty are getting to scale and what can be done so that they can deliver meaningful benefits to the poor. Based on research spanning Asia and Africa, the report’s main finding is that many of the barriers to scale cannot or will not be addressed effectively by any individual firm. What is needed is external support in the form of market facilitators that can remove these barriers at an ecosystem level.
Our own experience at Artha Networks Inc (ANI) over the last ten years, helping to build ecosystems friendly to investors and SMEs in India, Africa and Latin America, bears out the report’s main findings.
Impact investors as market facilitators
In our view, impact investors are uniquely well placed to play the role of facilitator. Impact investing is still evolving and impact investors are therefore more open to new ways of working with firms and with one another. To use the language of Beyond the Pioneer, impact investors frequently have a ‘wider lens’ than other actors in the development space. In addition, their willingness to commit their own funds for periods of five to ten years gives them the heightened credibility that comes from having real skin in the game.
Unfortunately, much of this potential remains unrealized. Based on our experience, impact investors can be effective market facilitators when they do three things:
1 Look beyond the transaction to identify the kind of systemic change their activities (eg due diligence) can spark.
2 Leverage local knowledge and resources.
3 Recognize that scaling market-based solutions to poverty is a messy process.
Shareholder reports tend to highlight elegant models that yield clear and favourable outcomes, but the reality is that overcoming poverty-related challenges is incredibly complex and fraught with information gaps and feedback lags. This complexity is usually too much for any one impact investor to fully comprehend, let alone overcome, so we believe a network approach will work best.
When people think of private foundations, they often think of mega foundations with names like Ford, Kellogg, MacArthur or Rockefeller. These foundations have a few things in common besides name recognition: they each have endowments in excess of a billion dollars, and they were all founded by donors who have been deceased for decades. In stark contrast, the overwhelming majority of foundations do not have enormous endowments, and many are still connected with living donors.
Out of over 86,000 private foundations in the US, only about 70 hold assets worth more than $1 billion, and 98 per cent hold endowments of less than $50 million. Because most of what we read about the sector focuses exclusively on the behaviour of a 2 per cent minority, our perceptions of private foundations are terribly skewed. In fact, there are important differences between the 98 per cent and their billion-dollar brethren.
In Foundation Source’s most recent study of these foundations with assets under $50 million, we found that, unlike the mega foundations, which rely exclusively on investment income to support their charitable giving, these foundations are fueled by both investment income and new contributions from donors. In the aggregate, the 714 foundations that we studied put 89 cents back into their endowments for every dollar they disbursed in grants and charitable programmes.
The fact that these donors continuously supplement their endowments with new infusions of capital indicates that they are actively engaged with their foundation. We see additional evidence of this when we look at giving levels that are well in excess of the 5 per cent minimum mandated by law. The average distribution of all foundations in the study was 7.3 per cent, with foundations under $1 million leading the way, disbursing 14 per cent of their assets on average. This is a pattern we’ve seen repeated every year over the past six years – the most difficult economic climate in decades. All these findings suggest that despite their relatively small size, the foundations in our study ‘punch above their weight’, granting energetically and generously thanks to the enthusiasm of active and committed donors.
Not only do they give more relative to their size, but the types of grants they provide are the most coveted by non-profits. Foundations with less than $10 million in assets awarded almost as much in general operating support grants as they paid out in grants for specific projects.
Finally, our experience with these clients suggests that they aren’t content to leave funds to charity only after they’re gone. Instead, they take an active hand in creating their own legacies, frequently establishing their foundations during their lifetimes, often at the peak of their careers, and involving their children in the work.
Although mega foundations enjoy the lion’s share of assets held by private foundations – as well as media attention – we must recognize that they represent a small minority of the foundation community. The majority of the sector, the 98 per cent of foundations like those in our study, are likely to continue to grow both in number and in collective social impact. A better understanding of how these foundations behave will surely grow in importance too.
Andrew Schulz is executive vice president of Foundation Source and author of this year’s report.
Scalable, replicable market-based solutions are surely the holy grail for those seeking to solve the world’s most pressing social problems – and this is the focus of Monitor Inclusive Markets’ new report Beyond the Pioneer: Getting inclusive industries to scale. The June special feature is partly a response to this report. Guest editors are Audrey Selian and Ken Hynes of Artha Platform and Artha Networks Inc.
calable, replicable market-based solutions are surely the holy grail for those seeking to solve the world’s most pressing social problems – and this is the focus of Monitor Inclusive Markets’ new report Beyond the Pioneer: Getting inclusive industries to scale. The June special feature is partly a response to this report. Guest editors are Audrey Selian and Ken Hynes of Artha Platform and Artha Networks Inc.
Beyond the Pioneer outlines opportunities for intervening to address industry-level barriers to scaling, and we asked foundations, venture philanthropists, impact investors and social entrepreneurs how they view these. Most examples in the report are drawn from Asia and Africa, so we asked Alvaro Rodriguez of Ignia in Mexico and Guillaume Taylor of Quadia in Switzerland to consider how the report resonates in Latin America and in a more developed European economy.
The special feature also raises issues the report doesn’t address. Martin Brookes asks if there are some things that should never be for sale, while Suzanne Biegel looks at the value of a gender lens on investing.
The June issue of Alliance also features an interview with Ford Foundation president Darren Walker, looking at his priorities for Ford, especially in areas such as philanthropy, infrastructure and institution building. It includes an opinion piece asking ‘Should consultants be thought leaders?’ and articles on an overcrowded crowdfunding market, impact angels in Asia, India’s new CSR law, the implications for foundations of the new FATF international standards on money laundering and terrorism, and opportunities for philanthropy in Myanmar and Liberia.
Subscribers can read the issue here>
New readers can subscribe to Alliance magazine here>
It certainly is an exciting and interesting year for impact investing. The government is working to make the UK a global hub for social investment, a new tax relief has been announced and investment banks like Goldman Sachs and Morgan Stanley are entering the market. The most recent Impact Investor survey published by GIIN and JP Morgan also shows positive progress with market growth, investor collaboration, impact measurement practices, and pipeline quality.
But how do we know if investments are really creating a positive social impact? While the GIIN and JP Morgan report highlights promising progress I can’t help but wonder if impact investing is living up to expectations?
When it comes to measuring impact, the recent survey revealed that a quarter of all impact investors are indifferent to or prefer to avoid impact measurement post-investment. Great progress has been made in the last few years with many using impact standards and metrics like the Global Impact Investing Network standards or the BSC matrix. However, it seems that in practice fewer investors than we might expect measure these outcomes in a robust and systematic way. For many, merely stating that an organisation works to achieve outcome x or y is enough to show that impact is being achieved. Indeed, Clearly So and NPC’s investment readiness report found that most investors focus first and foremost on understanding the financial return of investments and social return comes as an afterthought. A 2013 LSE report concluded that the state of measurement was far from satisfactory. They found a lack of consensus over definitions and methodologies and, as a result, major differences between funds.
So, where does this leave us? Are we making well-meaning investments that look good but may not be changing anything for anyone? Research has shown us time and time again that great sounding things do not necessarily lead to positive impact or worse can do more harm than good. There is a growing realisation of the importance of measurement among investors but this needs to be backed up by impact measurement in practice.
Of course, this is easier said than done. Many investors (such as ourselves) back early stage ventures that are trying out new and innovative ways to tackle social problems. For these ventures, evidence will be hard to come by and the organisations are unlikely to have run a high quality impact evaluation. That is why it is essential to have a staged approach to impact measurement.
The NESTA Standards of Evidence for Impact Investing does exactly that. The standards on a 1-5 scale begin with organisations having a clear articulation of how their product or service leads to positive social change. As organisations grow and develop, we expect them to start gathering evidence to back up their initial understanding of their impact. Over time, we will work with organisations to understand whether that change was truly down to their activity, and finally, we hope to use this information to begin replicating the product in a number of different locations and contexts.
The five levels of NESTA’s Standards of Evidence for Impact Investing
For example, one of our investees, Oomph! delivers specially designed group exercise classes for older people in care homes to improve quality of life and physical health. Their impact story argues that interactive classes, specially designed for older people, are more successful in engaging residents. As a result, older people not only increase their level of enjoyment but over time improve their physical health and range of movement. Oomph! has used academic research to show that regular physical activity leads to improved life satisfaction, reduced cognitive decline and a reduction in falls. We are now working with them to gather evidence to see if this impact story rings true. So Oomph! is gathering data on the well-being and physical health of older people before and after exercise classes. This kind of data will allow them to reach level 2 on our standards of evidence. Over time, we will work with Oomph! to measure any difference between their participants and older people who did not attend the exercise classes. This way we will know if any change is purely down to the Oomph! classes.
Supporting our investees to start simple and increase the rigour of their evidence over time is crucial to our mission as an impact investor. Indeed, we will be judging our own impact as a fund on how well our investees do at delivering and evidencing impact as well as their financial success.
So, I would argue that as impact investors we need to worry most about what happens on the customer side of our investments. How many people is a venture working with? Who are they? And what kind of change are they seeing? Without asking these questions, we risk creating an elaborate house of cards—one that will begin to crumble if these fundamental questions remain unanswered and unmeasured.
Eibhlín Ní Ógáin, Insights manager at NESTA Impact Investments.
Globalization, long-term demographic trends, changing consumer preferences, and the state of public finances are collectively driving the emergence of an integrated social capital market for the first time in human history, currently valued at US$46 billion. Nonetheless, the social sector remains highly fragmented. This lack of coherence serves to hold back investment by raising costs and complexity.
Social entrepreneurs also need money for starting and scaling their ideas, but existing funding solutions are often imperfectly suited to their needs. Chris West, director of the Shell Foundation and a long-time supporter of social enterprises, commented: ‘One of the barriers social enterprises face in reaching scale and sustainability is the “valley of death” that exists between securing grant funding and investment capital. To bridge this gap, we need innovative tiered capital structures that blend “patient capital” with debt and equity.’
Building Impact Businesses through Hybrid Financing: Special impact starter edition, a new report released by Impact Economy last week, examines leading social enterprises operating in a number of fields ranging from alternative energy to solid waste management and explores how these efforts can be more effectively and efficiently funded for growth and greater impact. It is meant as a companion to Impact Starter, a new platform to help get social entrepreneurs started.
A key implication emerging from the work is that successful social enterprises can use hybrid financing to drive greater impact. Grants remain the best way to seed a social enterprise, but grants tend to become insufficient in providing the capital required for the venture to scale if it achieves initial success. Hybrid financing models use some combination of up to four forms of capital (eg grants, debt, equity, and mezzanine or convertible capital), as well as a variety of possible financial instruments such as internal credit enhancement through subordination or reserves, or external credit enhancement via letters of credit.
Time also plays a hugely important role in these structures: hybrid financing can be synchronic (or tiered), combining for example grant and non-grant sources of capital simultaneously to fund the joint expansion of profitable elements and the optimization of unprofitable elements of the value chain and reduce risk. Or they can be diachronic, with hybrid funding unfolding over time, typically beginning with grant funding and then ‘graduating’ to equity and debt funding as the venture achieves critical mass.
Transformative progress on a number of issues needs to be the shared objective of innovative hybrid financing strategies. Some of these issues, which are covered in the report, include the fact that only 40-70 per cent of all the urban solid waste in developing countries is collected; open dumping and burning of waste continues to be the norm rather than the exception; and a country like Peru alone has 108,000 informal waste pickers who often live on toxic dumps. What’s more, 2.5 billion people around the world do not even have toilets.
While the poor spend USS433 billion per year on energy, 1.2 billion people still lack access to electricity. India’s new government led by Narendra Modi recently made waves by planning to harness solar power to enable every home to run at least one light bulb by 2019. With 400 million people currently lacking electricity in India, fresh approaches will be needed to translate this ambitious goal into reality, and a strategic combination of patient or long-term capital as well as grants.
Jürgen Griesbeck, founder and CEO of streetfootballworld, the focus of one of the case studies in the report, commented that hybrid financing strategies offer ‘important components to transform entire industries. Like subsidies or public research grants in the private sector, donations are highly important to the social sector to fund innovation and to support hard-to-monetize thematic areas.’ Hybrid financing strategies ‘can help to bridge the gap: from the current reach of clients in the social sector to all of those that are not yet served,’ said Griesbeck.
With 270 million people around the world playing football, which also happens to be a great way to reach at-risk youth, and the opening match of this year’s FIFA World Cup only 10 days away, football-for-development as practised by streetfootballworld is one of the many areas where it is time to unleash the power of hybrid financing. Combining philanthropic and commercial capital can help achieve a step change in impact, and build and finance the social enterprises of the future.
Maximilian Martin is the founder and global managing director of Impact Economy and the author of Building Impact Businesses through Hybrid Financing: Special Impact Starter Edition.
On 28 May UK grantmaker Comic Relief made a commitment not to make investments in arms, alcohol and tobacco companies as part of a new investment policy ‘in line with the ethos of the charity’.
Comic Relief, which has an investment portfolio of £138 million, was criticized in a BBC TV Panorama programme last year for investing millions of pounds in companies that make most of their money in these areas, which run directly contrary to its mission. The charity announced a review of its policy the day after the programme aired. It has now published the review panel conclusions, all five of which it has agreed to accept.
The panel recommended Comic Relief have ‘only a small number of absolute prohibitions’ in its portfolios, in order to ‘avoid an excessive reduction in the universe available for investment’. But the panel said the charity should engage with companies it invests in to improve their behaviour.
The charity has already removed the excluded stocks from its portfolio. It has also promised to sign up to the UN Principles for Responsible Investment, to build stronger links between its investment committee and its trustees, and to allocate a proportion of its portfolio to social investment.
Source: Civil Society News. Click here to read the full story>
At the same time, according to British newspaper The Telegraph, Microsoft co-founder Bill Gates has sold down part of his stake in UK-based security services company G4S, held through Cascade Investment, his private vehicle, and the Bill & Melinda Gates Foundation. Pro-Palestinian activists have called on major investors and institutions to divest from G4S, which has contracts with Israeli prisons in the Palestinian territories and supplies surveillance equipment for West Bank checkpoints.
According to a recent stock exchange filing, the holding has been sold down to less than 3 per cent, the lowest threshold at which investors must declare stakes. The filing does not say how many, if any, G4S shares Mr Gates still holds, although it is thought that the stake has not been sold entirely and has been taken to just below the 3pc level.
This is the second of two blogs (earlier blog post available here) looking at India’s new CSR legislation. This will look at some issues and challenges for companies and NGOs arising from it.
A limited definition of CSR
The most glaring shortcoming of the new law is its limited definition of CSR. The ten areas specified under Schedule VII inexplicably seems to exclude a number of activities that may be just as crucial to social development in India, such as social businesses, promoting financial literacy and road safety. This makes life difficult for those unfortunate NGOs that previously received CSR contributions but whose activities are not listed under Schedule VII. It is a matter of active debate whether it was prudent of the legislature to remove the autonomy afforded by a catch-all clause of ‘such other matters’, which existed in the draft version of the law.
Another deficiency is that CSR is measured under the new law by expenditure, not actual impact. It takes into account only actual spending and excludes the value of any services a company may contribute to the social sector. NGOs often welcome such services, which allow them to leverage private sector expertise in key areas such as skills and technological support. Companies, too, may find it more meaningful and convenient to contribute services rather than capital. The fact that the new law does not provide for such flexibility means that any services a company may choose to contribute will have to be over and above its obligatory CSR expenditure.
Similarly, the definition excludes activities undertaken by companies in the normal course of their business. Companies often undertake CSR initiatives that are closely linked to their business (training, for example) because their contributions are likely to have the most impact in those areas. However, the new law might not allow for this and does not adequately explain what may be deemed to be the ‘normal course of business’.
No mandate to spend
A disappointment for NGOs is that the new law only makes it mandatory for companies to comply or disclose. This means that while the new law will certainly lead to greater transparency and reporting on CSR activities, it may not actually result in improved levels of impact from CSR. On the contrary, it may dissuade companies from being imaginative about their CSR initiatives and instead cause them to do the minimum required under the new law. However, the legal duty to disclose is expected to press the right moral buttons and create some healthy competition among companies to outdo each other in terms of the CSR initiatives they boast of in their annual reports, in order to appease shareholders and customers alike.
Implications for foreign companies
The new law is also likely to get into some gnarly entanglements with other Indian legislation. The biggest concern is the Foreign Contribution (Regulation) Act 2010 (FCRA) and its wide definition of the term ‘foreign source’, which has not been addressed under the new law. A local arm of a multinational company or a company with an overseas shareholding of more than 50 per cent will find itself coming up against the FCRA every time it wants to contribute CSR funds to any NGO in India. The FCRA implications of each donation to an NGO from a ‘foreign source’ company will have to be thoroughly evaluated to prevent an inadvertent breach of the law.
Tax treatment of CSR contributions
The tax treatment of CSR contributions is also a grey area at the moment. Typically, companies are allowed tax deductions for donations or contributions made for charitable purposes to entities that have 80-G registration under the Indian Income Tax Act 1961. Now that CSR spending has been made mandatory, it remains to be seen whether contributions will continue to be viewed as contributions made for a charitable purpose. On the other hand, since CSR contributions exclude expenditure incurred in the ‘normal course of business’, will companies be permitted to deduct their CSR expenditure as business expenditure while calculating taxable income? Only time will tell.
Overall, the new law is a commendable step in the right direction towards bringing about the change that we wish to see in this world. Companies and NGOs will undoubtedly experience some growth pangs and the devil lies in the detail in so far as efficient execution of the CSR framework is concerned; but that may be a small price to pay for the mature and healthy relationship between the Indian private and social sector that is likely to be forged in time as a consequence. Any financing, including grant of CSR funds, is a function of ‘ability to give’ and ‘ability to receive’. How organizations institutionalize their processes to give and receive responsibly in order to foster inclusive growth and reduce poverty is what remains to be seen.
Pankaj Jain is a principal and Sanjana Govil is an associate at Impact Law Ventures, a mission-focused, boutique law firm that works at the intersection of start-up, sustainable development, impact investment and non-profit sectors in India.