Last week, hundreds of Latin American leaders from the public and private sectors descended upon Rio de Janeiro to join former President Bill Clinton for Clinton Global Initiative Latin America.
Former President Clinton has long demonstrated his admiration for this corner of the world. But convening CGI here for the first time turns a new page for the former U.S. president’s philanthropic NGO. And for Latin American advocates of financial innovation, it amplifies an important conversation.
A meeting looking to address global problems is nothing new to Rio, or anywhere else for that matter. But what’s fresh about CGI’s forum is what it’s willing to ask about Latin America’s most pressing challenges—is there an opportunity for the impact economy to solve them?
That question is an important one, especially considering the region’s struggle with social inequity and systemic poverty. While traditional models of charity, corporate social responsibility and government subsidies have had some success lifting people out of poverty, they have repeatedly failed to improve Latin America’s status as the most unequal place on earth.
The impact economy rests on the belief that social problems can be solved through enterprising strategies—but making this happen doesn’t take good intentions, it takes some good risks. We need to enter the hybrid world where companies—impact enterprises—are formed to sell a product or a service that improves the quality of life of a marginalized person and where investors—impact investors—are willing to use capital to support these socially focused businesses, even if the returns are limited.
In the last several years, impact investing has grown by leaps and bounds. The industry is currently valued at 9 billion dollars, according to a recent study completed by the Global Impact Investing Network (GIIN) and J.P. Morgan that interviewed 99 investors[1]. However, this growth has not been reciprocated with an equivalent increase in investment opportunities. The pipeline of impact enterprises that are investment-ready is very slim.
The reasons for this are many, but what is most unsettling is that they seem to be founded on the same aversion to risk that we see with traditional social change models—an unwillingness to commit substantial long-term resources toward models that are still unproven.
A hopeful sign is that this gap is now being recognized: recent studies and publications like Priming the Pump[2] and No Free Ride[3] identify key opportunities to build and foster impact enterprises. There are six pillars identified by NESsT in No Free Ride that will provide the foundation for this to happen.
The first is sound policy. For the next five years, the focus should be on developing procurement and incentive policies that create opportunities to grow impact enterprises. The need to document, learn from and replicate best practices in this regard is essential.
A critical second pillar involves building capacity for impact enterprise development. We need to capitalize on the economies of scale and efficiencies created by intermediaries such as incubators reducing risks and creating greater opportunity to document and build on lessons learned.
A third pillar is to help impact enterprises move from the idea stage to consolidation and scale. To do this successfully, impact enterprises need help building their middle management teams and measuring their social impact
Pillar number four requires that more philanthropists enter the earlier stages of impact enterprise development and reach out to their peers in Latin America to convince them to adopt these practices. This will unlock more impact investing, since a pipeline will finally exist.
The fifth pillar requires building financial instruments that are appropriate for each stage of enterprise development. Grants are important for underwriting the additional “social” costs incurred by these enterprises, such as the costs of rehabilitation and training. Offering softer and more attractive lending schemes with longer repayment periods, or repayment based on performance at the $200-500K range, will go a long way toward developing impact enterprises.
The sixth pillar involves creating the next generation of impact entrepreneurs and sector leaders, which is critical to the ultimate consolidation of the sector in emerging market countries. More academic programs in emerging market countries need to be developed. There is a very concrete opportunity to endow professors and provide scholarships for students who wish to pursue social enterprise as a career.
Underlying these recommendations is the need to build a homegrown impact enterprise movement in the region while leveraging the best practices of the global community. The world is too small, resources too scarce and the potential returns too great not to pursue a multi-sectored local–global strategy to build the impact economy.
[1] Perspectives on Progress Impact Investor Survey, GIIN and J.P. Morgan, Global Social Finance, January 7, 2013.
[2] Bannick, Matt and Goldman, Paula, Priming the Pump: The Case for a Sector-Based Approach to Impact Investing, Omidyar Network, Redwood, California, 2012.
[3] Comolli, Loic, and Etchart, Nicole, Social Enterprise in Emerging Markets–No Free Ride, Palgrave-MacMillan, New York, 2013.
