Supporting economic development and reaching the SDGs through impact investing
03 Oct 2016 by Najada Kumbuli
How does Calvert Foundation support innovation and social entrepreneurship?
Entrepreneurship and innovation are two of the most prevalent terms in the vocabulary of any impact investor, including us at Calvert Foundation – and for many of us, the reason why we get out of bed every morning. For the past 21 years, we have been testing different financial and partnership models to scale positive impact created by social entrepreneurs across the globe.
When we first started our investment journey much of our focus was on microfinance – a field that primarily focuses on unbanked micro entrepreneurs whose business model aims to both be profitable and have a significant social impact. We soon realized that we were only addressing a sliver of the “access to finance” problem that was affecting people in different ways across the world. If we wanted to move the needle in terms of financial inclusion, job creation, wealth building and resource preservation, we had to develop a more holistic investment approach to ensure that the capital needs of all underserved communities were being met.
Today our investment model is built on three principals:
- Strengthening the financial intermediation of capital so that capital can flow in a more efficient way from an investor in Washington, D.C to an entrepreneur in Arusha,
- Collaborating and leveraging other impact stakeholders’ capital and expertise (investors, International Development Organizations, Non-Governmental Organizations, etc.),
- Creating a closed looped system to measure impact (financial, social and environmental) so that both impact and financial data are used intelligently to make business and investment decisions.
With this model, we have channeled nearly $1 billion to over 500 projects and social enterprises across all 50 states and 100 countries, fostering a movement in which innovation, entrepreneurship and access to financing can create opportunity for people to pull themselves out of poverty.
How can we reach impact at scale and why do you think financial intermediation is important?
Research continues to point to small and medium size enterprises (SMEs) as a powerful engine for growth. In high-income countries, SMEs are responsible for over 50% of GDP and over 60% of employment, but in low-income countries they are less than half of that: 17% of GDP and 30% of employment. This SME gap is frequently attributed to the lack of access to finance, especially early stage debt capital to entrepreneurs that are ready to take their company from the pilot to the growth phase.
While impact investors have taken a proactive approach at shrinking this gap (in 2015 alone they invested $15.2 billion ), much of this capital hasn’t helped the majority of SMEs move up to the next level. All too often investors will act on their own risk appetite, impact agenda and timeframe. This situation has led to investors “picking winners” rather than moving capital at scale in an efficient manner to address the capital needs of SMEs as a whole.
Take for example, the energy access sector, where we are seeing massive growth in the manufacturing and distribution of clean energy products and services. Solar energy systems and clean cookstoves are drastically changing the quality of life for “off-the-grid” families around the world, yet clean energy SMEs report that they spend enormous amount of time and resources fundraising rather than growing their business model and scaling their operations. With this in mind, and the reported $1.4 billion need for capital in this sector, Calvert Foundation has shifted our investment strategy in the clean energy space from direct enterprise lending to financial value chain strengthening. Over the past two years, we have built a portfolio of investments that aims to grow the sector by increasing access to capital to a variety of social enterprises at different stages of growth. The ultimate goal is to incubate and strengthen the funds and financial intermediaries that would provide a capital continuum to SMEs in this sector, thus investing in the sector’s financial infrastructure and intermediation rather than “picking winners”.
Calvert Foundation raises capital from both retail and institutional investors in the U.S through your flagship product, the Community Investment Note. Why is it important to engage different type of investors as agents of social change?
There is growing consensus that the complex, interrelated causes of poverty and climate change require multiple tools and resources. Philanthropic and public spending at the current pace will not be sufficient. The good news is that the concept and practice of investing for social impact is becoming more and more mainstream. This capital, if channeled in the right direction, promises to have a significant impact in achieving our ambitious Sustainable Development Goals.
The even better news is that a set of new actors, retail investors, and in particular Millennials and women investors, are demanding ways to manage their assets in a manner that speaks to their social and financial values. A recent report on women-investor preferences shows that 88% of women want to invest in organizations that promote social wellbeing and nearly 70% of Millennials are concerned with the state of the world and feel obliged to become actors of change
At Calvert Foundation we believe that now is the time to build bridges with non-traditional financial players, such as younger generations and minority communities, to radically expand the impact investing movement. If engaged well, Millennials (who are estimated to benefit from an estimated $30 trillion wealth transfer in the coming decade), and women (who are estimated to control $11 trillion in assets) can significantly add to philanthropic resources and governments’ commitment of 0.7% of their GNP to reach the SDGs. Crunching these numbers, if individual investors committed 5-10% of their assets to social change, and governments met their commitments, the $1.4 trillion need per year for the next 14 years seems more than doable!
Maybe I have drank the impact investor Kool-Aid, but in today’s world, if you were presented with the opportunity to invest in a way that improves peoples’ lives, preserves the planet, helps meet the SDGs and generates a financial profit, wouldn’t you join in this movement too?