DFIs must 'shift mindset' to maximize impact, says Severino

PARIS — Development finance institutions need a “serious mindset shift” among their management and shareholders to make the most of the opportunities that impact investment and blended finance bring, the former chief executive officer of the French development agency, or AFD, said Monday. Speaking at the Organization for Economic Co-operation and Development’s first annual Blended Finance Conference, Jean-Michel Severino, now General Inspector of Finances at the French ministry of finance, said that even as impact-driven private sector investment grows, DFIs will continue to play a crucial role in mitigating risk in the impact market to help attract and maintain that investment. But to make the most of this role, DFI shareholders must relax their grip on maintaining a high return on investment, and evolve their thinking in a few key ways, he said. “For me what is quite challenging and surprising is that many of the DFIs rely not on equity but on grants to fund impact; it’s the case for many institutions,” he told 150 delegates from the public, private, and philanthropic sectors gathered for the conference at the OECD in Paris. “So I cannot understand the sheer meaning of a ‘return on investment’ when you have no cost of capital, it’s zero by definition. If you are even returning 1 cent, it’s an infinite return.” Severino said many DFIs, specifically the German Investment Corporation and Islamic Development Bank, continue to treat impact investment like any equity investment, albeit with a slightly lower expected ROI. “The problem is that they are completely different ball games: Measuring impact, and making a balance between financial returns and extra-financial returns, is completely different than investing in a regular firm, so all the mental categories that you have have to be changed, and that change is happening very slowly,” he said. Severino pointed to the new private sector window introduced last year to the International Development Association replenishment at the World Bank, and the new private sector instruments at the European Commission, as examples of positive, yet sluggish change. Asked how the development finance community can instigate that shift in mindset, Severino said that the development stakeholders in DFIs must use their resources to leverage a shift in how DFI staff and management are incentivized to achieve results. Because the majority of capital to DFIs flows from government, and often from the development budget, he said incentives on ROIs can be replaced with development-driven indices, for example, the quantity of small- and medium-enterprises invested in, or startups, or the volume of investments in fragile states. “So the correct index for the institution would not be and should not be the return, even if you need and you want financial sustainability, but it would really be the kind of development impact that you wish, [and] then the extra financial returns related to those targets should be highlighted,” he told Devex. “Staff or management decisions should be incentivized for financial returns the way they are right now, but for those impacts,” he said.