NB Financial Innovation
How Social Enterprises and Impact Investors Can Move the Needle to Achieve the SDGs
Last month the UNDP and Impact Hub organized the first Social Good Summit in Geneva, bringing together impact investors, international organizations and entrepreneurs to discuss how to scale up and finance impact-driven ventures to accelerate the implementation of the Sustainable Development Goals (SDGs).
There was a great appetite at the summit to exchange ideas. Investors were looking to meet with innovative ventures and discuss how to create a reliable pipeline of investable entrepreneurs. Bilateral and international agencies were eager to learn how to increase funding sources and leverage their resources to implement the SDGs. Not to mention the presence of five entrepreneurs, selected through the rigorous #Accelerate2030 programme, who hoped to identify partners and supporters to scale up their respective ventures.
SDGs are good for business, how do we put that in motion?
Betting on social entrepreneurship to accelerate the implementation of the SDGs makes sense from an impact and a financial return perspective, but the sector requires both financial and non-financial support. To put it simply, entrepreneurs need to unlock three doors: finance, market and talent.
When asked about key impediments to growth, Verena Liedgens, CFO of Agruppa, sees the key challenge as professionalization. “Everything related to back office – accounting, HR and IT – is a barrier to scale,” she said. “Social entrepreneurs in Europe and the U.S. can at times access pro bono services. This is not the case in emerging markets where companies often don’t have the resources to buy them but need them to grow.”
A 2014 report from the Aspen Network of Development Entrepreneurs shows the value of incubators and accelerators providing early- and growth-stage companies with leadership skills, operational support and access to technology, and facilitating peer mentoring. The need to strengthen that part of the picture was certainly one of the main conclusions of the summit discussion on scale, as the demand for support exceeds largely what is freely available.
Why AREN’T investors betting on implementation of the SDGs?
Impact investing is still a niche compared to mainstream investment. Aymeric Jung of Quadia Impact Finance points out that there is approximately USD 70 billion invested through impact investment, microfinance included. On the other hand, USD 70 trillion is managed by fiduciaries, while the amount necessary for the realization of the SDGs is approximately USD 3 trillion annually.
This is also a sector that still focuses on “winning tickets.” These include the areas of financial services, energy or agriculture, which have been covered by impact investors for at least 10 years. But money could also flow into areas that are traditionally more challenging for capitalizations, such as health, sanitation or education. Finding investable entrepreneurs and reducing the transaction costs of the due diligence on early-stage businesses, especially for small “tickets,” is a serious bottleneck to mainstream impact investing. “There are hundreds of pipelines in different sectors, and there is a need for improved coordination,” noted Audrey Selian from Rianta Capital Zurich.
International organizations can play a pivotal role by aggregating data and supporting the screening and monitoring of projects, with their extensive presence on the ground and large network of experts. They can even go one step further and provide interventions throughout the business cycle of social entrepreneurship, meeting the needs of both entrepreneurs and investors. “Development organizations are able to target the overall impact investment ecosystem at a specific country level and support social enterprises at all the stages of their development, from ideation to expansion,” said Artak Melkonyan from the UNDP. One could say that such interventions would reduce the risks and incentivize investing in impact-driven ventures.
But that might not be the perfect argument. “De-risking is not the most attractive element for investors. Liquidity is a much bigger barrier than risks,” said Bertrand Gacon from Bank Lombard Odier. Is there room for governments and charities to bring more liquidity and create ”paths to exit” for investors? “We can help the scaling up of companies, globally leveraging the footprint and expertise of organizations such as UNDP, thereby facilitating their exit strategy,” said Melkonyan. As “going public” and listing in “social stock exchanges” are still marginal incentives for impact ventures, some in the room voiced the idea of creating a designated “exit fund” to address the liquidity issue.
A key consideration remains, though: Is public and philanthropic money appropriately utilized when there is a risk of a market distortion, particularly when capital flows to businesses whose social benefit outcomes remain unmeasured?
Are these investments able to make a difference?
If there is agreement that “scale is impact,” then it’s important to consider ways to measure and replicate that impact at scale.
Some noted the potential of innovative mechanisms and packaged products like impact bonds. With impact in their DNA, their binary structure implies a strong focus on social achievement and calls for committed investors. Participants also stressed that if the focus of a company is on impact, its operational key performance indicators should also be impact-focused and new technologies and tools can allow beneficiaries an unprecedented feedback loop on the value of such investment to improve their lives.
The reality is that we’re only at the stage of creating a benchmarking framework, versus being equipped to assess the results of impact investment across diverse portfolios. We still have 15 years to complete the SDGs and this is only the beginning of the conversation, which we intend to continue when we meet again for the 2017 SGS in Geneva.
Note : For more information about the Social Good Summit in Geneva, contact email@example.com.
Sarah Bel is a communication adviser for the UNDP’s Geneva office, manages UNDP media relations in Europe and runs the Social Good Summit.
Photo of the Social Good Summit by Adam Kane.
Homepage photo courtesy of the United Nations.