NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Recently, Sir Ronald Cohen, known in some quarters as “the father of impact investing,” called for no less than an “impact revolution.”

“Comrades,” he was quoted as saying, in a Pioneers Post article about the Global Steering Group for Impact Investing‘s annual summit, “it’s clear that capitalism in its present form has fundamental flaws. It’s not delivering on its promise to share prosperity and to bring social progress for all.” So far, so familiar.

The sentiment was no different when executives from development agencies and foundations across the globe met for an executive education program on impact investing and blended finance in Zurich, Switzerland last August. But when the talk came to the Sisyphean struggle to finance the SGDs, there was a lot of confusion in the room about how to mobilize private capital. “Is the impact investor or the development finance institution taking over the extra costs for the private capital to be happy to accept the right risk-return profile? There are a number of hidden costs that are not factored in,” said one participant, essentially summing up the discussions. While public and private philanthropists are well aware that crowding in private capital will be vital to tackling global challenges, the big question is “how exactly?”

A Winning Recipe for Change?

In seeking answers to that question, the executive education program – designed by the Social Finance Academy, the University of Zurich Center for Sustainable Finance and Private Wealth (CSP) and Convergence with support from the Swiss Agency for Development and Cooperation (SDC) – explored innovative, “fusion food”-style approaches like blended finance. One ingredient in the blended finance menu is the effort to empower small and growing businesses (SGBs) to reach impact at scale. At first glance, this may sound easier than it is. Besides betting on the right target with the best market-based impact model, there is the question of the most effective financing tools and incentives. How do you nudge SGBs and all stakeholders involved to align around impact? What is the ideal role of public funders in this big buffet of capital sources? How to migrate from the obsession with leverage ratios to an enthusiasm for additionality? And how to cure the philanthropic disease of “pilotitis” and create investments that allow promising pilot projects to truly reach scale?

After three intensive days, it was clear to experts and participants in the program that a winning recipe will require more than a thoughtful composition of cooks, ingredients and spices. It needs an extra portion of patience. To leave incumbent mindsets behind and build bridges between different providers of funding often starts with the dedication – and persistence – of single pioneers on the investor, philanthropist and investee side. “To hear about private wealth owners was extremely interesting because it gave us an insight of a world we do not really know. It motivated me to try to establish links,” said one donor participant, expressing her biggest takeaway.

Yes, it’s true that many private capital providers seem not to care too much about impact. Yes, they often shy away from too much perceived risk, or are not happy with the financial returns offered. Yes, they tend to only fund what fits conveniently with their own risk and return profile, as Uli Grabenwarter from the European Investment Fund recently argued, putting a finger into the wounds of his peers. But there are positive real-life examples of how blended finance can address these challenges.

Data Shows Blended Finance Can Effectively Mobilize Capital

Convergence just opened a large, delicious cookie box of data from more than 300 blended finance transactions with over 800 investors, and estimates that over US $100 billion has been mobilized in the market to date. Meanwhile, the SDC is enjoying the first fine flavors of success from a novel, results-based financing program in Latin America and the Caribbean based on the Social Impact Incentives solution. Impact enterprises that utilize this approach, such as Clínicas del Azúcar and Root Capital, are now tackling uncharted niche markets that were previously thought to be impossible to serve. Blended finance can make things happen – but only if the public and private sectors manage to speak the same language.

Being serious about impact plays a pivotal role in this. One of the experts in the executive program, Jeremy Nicholls, put it like this: “If we want to have as much impact as we can, we need to find ways to introduce more accountability and give power to those whose lives we affect.” How often, of all things, do impact actors forget (or simply neglect) to ask for feedback from those they strive to lift out of poverty, provide with a better education or give access to basic health services? This remains a classic mistake, and a stumbling block to creating real systems change.

Sir Ronald is known to be a huge fan of pay-for-success models, outcomes funds and a paradigm shift to risk-return-impact. As he puts it, “Impact entrepreneurs are powerful allies. Through their innovation, risk-taking and access to capital, they are perfectly positioned to deliver impact at scale. Let’s support their efforts globally.” This is a slogan to which the blended finance scene in Switzerland subscribes, too. “It is incredible how much untapped potential lies in the collaboration between public donors and private wealth owners,” said Falko Paetzold from University of Zurich CSP, summing up his insights as a program partner. “Public donors develop an incredibly deep and thoughtful pipeline, and private investors struggle to find projects at justifiable diligence costs. This urgently needs to come together.”

Blended finance might be just the recipe to bring both sides together and help trigger an impact revolution.

Christina Moehrle is an advisor at Roots of Impact.

Image provided by author.