Inclusive business and impact investing: A conversation with SNV’s Neil Ghosh

For Neil Ghosh, director of the U.S. branch of SNV, a Netherlands-based aid organization, solutions to development problems around the world lie in a multifaceted approach that marries private sector ideas with public sector involvement. In an article originally published in the Stanford Social Innovation Review, republished by Devex, Ghosh outlines SNV’s approach to development through its support of inclusive business models and impact investing. Devex sat down with Ghosh to learn more about SNV’s development models. In your article, you talk about the concept of inclusive business as a strategy for bridging the divide between proponents of market-based solutions to poverty alleviation and proponents of institution reform-based solutions. Under which set of conditions does this model work? The key concept you refer to is that there should be an enabling environment. As you know, I am relatively new to the development sector. I spent most of my time in the private sector and government and when I started attended seminars [on development], one of the things I found was missing that [participants] would talk about how business will solve the problem [without considering what role other actors had to play]. I strongly believe that the private sector alone cannot solve the poverty problem but the poverty problem cannot be solved without the private sector. We need an enabling environment to do this. So what does that mean? It means governance and the fact that there must be inclusive growth. There are three pillars to this inclusive growth. One is private sector, no question about it. One is civil society, no question about it. And one is, of course, good governance. How do you create this enabling environment? One place I write about in the article is Ecuador, where it just so happens that the government came out with an inclusive business policy. That enabled a much more scalable environment. A proper policy where you can engage the government at different levels is particularly important. A company can enter low-income areas, invest and help people, but without a suitable policy environment, [the company’s success will remain isolated]. It is also important to look at the role of the low-income citizen within the inclusive business model. They are not just one part of the value chain [as has been traditionally assumed]. They are not just a consumer. They are a supplier, an entrepreneur and a distributor. You mention the example of Ecuador, and it’s a very interesting one. Could you tell us more about the different levels of government engagement that were involved with this particular negotiation that took place? Anytime you are trying something like this, you need a partner with legitimacy. SNV has been known for developing capacity on the ground for years, but very honestly speaking, if you asked about SNV and the private sector? Not really. This transition to partnering with the private sector happened within the last four years. We needed a partner when we began looking at inclusive business. We teamed up with the World Business Council for Sustainable Development, which has local arrangements with local business entities in partner countries. That was a critical element to our Ecuador success. Ecuador’s business community felt comfortable with that alliance and so those types of partnerships are critical at the local level. We brought credibility from a development perspective and they brought creditability from a business perspective. Similarly, you talk about impact investing as an emerging industry. Can you give us an example of how successful impact investing works? We have been working on value chains for many years. We look at the entire value chain. One of the things we have repeatedly seen, the missing element, was access to finance for small to medium-sized enterprises. We felt that as an organization, we had a role to play. We call these small but growing enterprises the “missing middle.” Microfinance is a strong, robust industry helping millions of [low-income] people [with small microenterprises] and financing for large businesses exists, but not so much for this middle. For example, I visited a dairy farmer in Kenya. I went to where they milk the cows, where the milk is processed and packaged and where it is sold. I went through the whole chain. I could see that if this person could access just half a million more for his business, it could have massive benefits for the local economy in terms of creating jobs and improving quality, among other things. That’s a real example of what is possible. We looked at what role SNV could play in this. We are not a fund manager. Our role is to identify which organizations are ripe for this kind of investment. We help them with “investment readiness.” We offer many different services to help take these organizations and help them from a governance perspective as well as addressing their business plan, among other things. If they do get an investment, then we’re talking about triple bottom line return. The investor wants a financial return. But the reason we are talking about impact investing is that it is not just about a financial return. It’s about a social return and it’s about an environmental return. We provide capacity development and technical assistance to help with this. [In short], SNV serves an advisory role in all of this. We want to make sure we move this small to medium company to investment readiness. We are hoping with our mission that we will create an enabling environment for investors as well as others so we can work with companies to ensure everyone gets their return as expected. There is a lot of this type of work going on now. Recently, for example, OPIC [Overseas Private Investment Corp.] announced its first impact investing fund. In Asia, SNV is actively developing a partnership with the Asian Development Bank to broker financial services for SMEs, while in Latin America, SNV has provided deals to the Inter-American Development Bank and Andean Development Corp. More than half of these deals have already been financed and SNV has provided pre- and post-investment technical assistance. Also, realizing that we are not fund managers, we have teamed up with two small ones. In Africa, we have signed two partnership agreements – one with the Nairobi-based InReturn Capital focusing mainly on Kenya, Tanzania and Uganda and the other with the Zurich based responsAbility [Social Investments] AG. What other roles can non-traditional actors play in the development sector? People want accountability, results, impact and that is a critical [role] that non-traditional actors can play. People want to see tangible results. From SNV’s perspective, we are spending a lot of resources on [monitoring and evaluation] and measuring results. We are looking at the ultimate outcome of projects we get involved with. More and more collaboration is needed. Lines between the private sector, government and citizens are important. Social entrepreneurs are bridging this gap. Our focus going forward will be in three sectors: (1) agriculture/food security; (2) renewable energy and (3) WASH [water, sanitation and health]. We are going to focus heavily on these sectors, where we think we are going to be able to make the maximum impact in terms of poverty alleviation and good governance, keeping in mind that although everything we do, women and girls and environment, play a role. They are cross-cutting issues. The private sector will play an important role in all of this and monitoring and evaluation will be important to this as well. Accountability and checks and balances are important. We are trying to engage with organizations globally that are interested in results so that we are looking at global best practices relating to accountability. How can development professionals get involved in impact investing or inclusive business practices? Aid has not ended poverty and traditional strategies need a radical rethink. Innovative models like Inclusive Business and Impact Investing will only succeed when an increasing number of development professionals [and] organizations start embracing them, improve upon them and subsequently help them to scale. This means getting involved in the dialogue, promoting these concepts within their own programs as a means to addressing poverty issues, and identifying creative partnerships that can bring the needed financing and expertise to make these deals happen. In less than 24 months, the people and concepts behind impact investing and inclusive business have been receiving increasing recognition and attention, and are on the way to being mainstreamed to a degree that is almost incredible. Interested and motivated development professionals should reach out to organizations that are at the forefront. There are many blogs, websites and white papers dedicated to these subjects. We maintain one blog on Inclusive Business and planning a blog on impact investing. Although there are many success stories on inclusive business implementation, a lack of market infrastructure is a major impediment to the development of the impact investing sector. This is a challenge but also an opportunity for development professionals. I sincerely hope these innovative models would encourage professionals from the private and financial sectors to join the development sector and vice versa. New thinking, implementation, impact and accountability are all imperative. Have you worked on impact investing or inclusive business development strategies? Please share your thoughts below on what works and what doesn’t. Read more social enterprise business news: - Building Bridges - Fundraising Basics: The Successful ‘Elevator Pitch’ for Social Entrepreneurs - What Aid Agencies Can do to Boost Social Enterprise - Anti-Poverty Model Taps an Unlikely Partnership in Latin America Read more international development business news.