Diana Hollmann

Net Impact 2009: Emerging Markets Investment – Beyond Aid

Impact investing is estimated to reach a total of 500 billion USD within the next decade. Profit-seeking investment to generate social and environmental impact could be an alternative model or an important supplement to traditional aid flowing from developed countries to emerging markets.

Taking a closer look at this issue, J. Alexander Sloan – Advisor Council at the Center for Sustainable Global Enterprise, moderated the session “Emerging markets investment – Beyond Aid” featuring three finance professionals with previous experience in foreign aid: Henry Gonzalez – Vice President at Morgan Stanley, Amie Patel – Investment Officer at the Soros Economic Development Fund (SDEF), as well as Harold Rosen – Executive Director at the Grassroots Business Fund.

Aid or investment? This is one of the key questions all of the panelists – and most likely all of us – have thought about and discussed many times. Aid effectiveness is often undermined because “aid doesn’t trust governments” and tied to a comprehensive set of requirements to avoid abuse and misuse. Henry acknowledged that even though there have been successful public sector projects in place, not enough has been achieved in terms of poverty alleviation over the past decades. The question therefore arises, whether one should pursue Jeffrey Sachs’ approach of increasing aid to tackle poverty or become a “seeker” à la William Easterly by developing small and sustainable initiatives from the bottom up. Henry, Amie, and Harold found their answers and chose to direct their career path towards working in impact investing.

After having worked with the World Bank and the United Nations in the past, Henry is now eager to prove the concept of double bottom line investments within the mainstream driving investments in emerging markets rather than aid.

Amie experienced the limitations of aid delivery as well as the inefficiencies and lack of effectiveness of aid agencies while working with a non-profit Nepal. At SEDF she helps to seek investments that have a social impact. While SEDF aims to recover their initial investment, they are not focused on generating high financial returns.

Harold had worked for almost 30 years at the International Finance Corporation (IFC) before becoming a “seeker” for sustainable enterprises to invest in. He now heads the Grassroots Business Fund and wishes that US aid could be at least partly rechanneled “to do smart subsidies rather than aid straightjackets.”

What is the role of governments? Do governments tend to take a top-down approach? Can it work? “Yes, they do – but it doesn’t work!” Henry argued that governments need to bring in more talent to be more strategic and effective in their efforts. Many governments have failed to reduce poverty rates over the past decades. In Latin America, for instance, there is a lack of Angel Investors even though those could make an important contribution to nurture entrepreneurship and growth. Governments should incentivize investments by providing an adequate framework for venture capital funds and by promoting best practices. “But for some reason double bottom line is not something they do”, summarizes Henry.

Are the investments successful? Morgan Stanley’s environment and social finance arm designed a small portfolio of Micro Finance Institutions (MFI). The MFI receive funding in local currency so that they don’t carry the exchange risk that would otherwise occur. To date, all MFI are performing well and have paid interest on time. Morgan Stanley’s engagement in this type of social impact investment is still at a very early stage. However, if the set-up proves to be viable over the next few years, it is likely that a dedicated impact investment platform will be created as a stand-alone option.

SEDF has not systematically measured its impact in the past. The measurements conducted so far have included project-specific and qualitative rather than quantitative metrics to prove success. In order to pursue a more systematic approach, SEDF has started to refine metrics. The five to ten year-long investments start to pay back first returns.

Harold from GBF argued that “everybody should be happy” with 7-9 percent return on investment accompanied by social return. Impact measurement is a priority at GBF and realized with tools such as the Progress out of Poverty survey. Rather than providing affirmative data, Social Return on Investment (SROI) helps to track and manage the level of impact.

For those interested in entering or continuing to work in impact investment three key lessons came out in the panel:

1. Ensure balance
Currently, there is a lot of interest shifting towards impact investing generating great excitement. However, there are not enough enterprises ready to absorb the available investment capital. The current returns on investment are often times much lower than investors might expect. It is important to avoid the creation of an investment bubble and to build a pipeline of fundamentally sound investment opportunities.

2. Know the sector
One should not underestimate the difficulty of changing the DNA involved in transforming social initiatives into viable businesses. Harold found it particularly important to add “arms and legs” to each investment, combining financial support with capacity building in order to pursue an approach that is integrated and more prone to succeed in the long-run.

3. Get excited
Henry’s key advice for those interested in starting a career in impact investing: “Get a job!” As intrapreneur everyone can make a difference in their organization; no matter if big or small. “Be true to your needs and circumstances; make sure you are enjoying what you do and move when the time is right.”

Amie suggested that if you have the opportunity and the ability to work in the field you should definitely go ahead and do it. This will provide invaluable insight into processes, opportunities and challenges on the ground. As Harold put it: “Learn about the mess that is going on in the countries.”