Inclusive business or CSR — what's more effective for development

A woman selling fish at a market in Lombok, Indonesia, where the private sector and the Asian Development Bank help provide microinsurance to offset losses caused by disasters, thus preventing further poverty. Poverty reduction should be the core principle of businesses and companies, according to Armin Bauer, principal economist of the Asian Development Bank's regional and sustainable development department. Photo by: ADB

Private sector engagement and collaboration in poverty reduction have become one of the marquee trends in international development for the last couple of years, as more firms feel the need to share in the responsibility of governments to uplift the lives of the world’s poor.

From civic engagement and monetary donations to corporate social responsibility activities, corporations have assumed a more active role in the fight against poverty, appropriating a portion of their operational expenses to programs that benefit the people. But in the current situation, is CSR enough for the private sector to fully realize its potential to fast-track the world’s development progress?

The Asian Development Bank believes that firms with an “inclusive business” approach can offer much more than widely-practiced CSR activities — two different approaches that, if well managed, could really make a difference in achieving development goals, with the former anchoring the latter.

“Why is inclusive business an important factor in poverty reduction? Before it’s only perceived as the government’s responsibility, but now it’s also the work of the private sector,” Armin Bauer, principal economist of the bank’s regional and sustainable development department, told Devex. “Inclusive business is not [just] about corporate social responsibility or about giving a scholarship here and there to a poor person. That’s not what we’re talking about.”

He added: “[What] we’re talking about [is] making poverty reduction the core principle of the business or the company, not something on the sidelines.”

In the Philippines alone, about 20,000 companies have existing CSR programs, while select universities and colleges also offer CSR courses and certificates. Out of all of these, however, only 0.5 percent or about 100 firms are considered “inclusive” businesses, and even then banks would only be willing to finance 20.

Inclusive business, according to Bauer, offers much more because development goals and poverty reduction become the core principles of the firm compared to CSR, where only a fraction of the companies’ operational budget is allotted. By making poverty reduction the main objective of the whole business operations, achieving development goals becomes more sustainable and inclusive.

“Investors are increasingly interested in putting their money into things that also have societal value. Companies are also increasingly interested to go beyond [CSR] to create shared value for their business bottom line and for the society,” he explained.

Challenges

The importance of the private sector engagement in international development has been stressed countless times.

In a recent report, the World Bank detailed its strategy for private firms to fill in the expertise resources and gap in certain development projects, while Devex reported on Tuesday about how the European Union admits that only the business community can help unlock Africa’s energy potential.

The situation is no different in Asia. ADB has long been an advocate of private sector engagement in the region’s development, but experts insist the sector’s true potential has not yet realized. So how do we attain that goal?

For Bauer, the main challenge is not necessarily the lack of funding but the lack of businesses willing to try the inclusive business approach.

“The more challenging question is how many businesses are coming up with viable [inclusive business] proposals. If there are proposals, there is also money to invest in,” the ADB expert said. “The bottlenecks are the inclusive business proposals, not the financing.”

Bauer further explained that one of the reasons why there is a lack of good firms willing to assume the IB approach is the risk it poses to the viability of the business itself by putting the goal of “money behind.” This issue of viability also becomes a problem when prospective companies willing to do the IB approach don’t attract enough funding — especially from private banks — because of the non-profitability risk.

Other roadblocks include the absence of a business and investment climate necessary for start-up operations of countries in the region, lack of technical knowledge on how to (successfully) run an inclusive business, insufficient expertise and capacity both from the government (as regulators) and the private sector community, as well as informing all stakeholders of what inclusive business really means.

“There is limited public knowledge and understanding about inclusive business,” Bauer said, explaining that this lack of understanding contributes to the main issue which is the lack of good inclusive business plans despite the potential of the market living under the poverty line — about 60 percent of Asia’s population.

Viable solutions

To address these issues, ADB, in partnership with the Swedish government and Credit Suisse, has earmarked $3.6 million to help prospective inclusive businesses make their operations more viable and more sustainable.

The fund, approved in December last year, by the Manila-based institution, will focus on providing business feasibility studies, impact assessments, legal aid and advice to national governments in improving business and investment climate as well as knowledge work and capacity-building activities.

“We plan to make [the approach] more effective and push it a little bit further by making more of our private investments which we do inclusive business with. By [also] helping our partner governments create an enabling environment for inclusive business and addressing problems related to these, as well as expanding the knowledge base through training of all stakeholders,” Bauer explained.

The project is currently in place in four countries — the Philippines, India, Cambodia and China — and will expand to a total of 20 private businesses by 2017 where ADB will provide loans to cover up to 25 percent of capital and operations.

Although inclusive businesses is already a buzzword in the international aid and development scene, with many development agencies already supporting the idea, Bauer said he hopes the trend will continue and grow.

“There are discussions already with other agencies — like Canada, the EU and Australia — to help further [the initiative] especially in the case of the Philippines and in the Mekong region,” he concluded. “Other development partners can support this inclusive business initiative.”

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About the author

  • Lean 2

    Lean Alfred Santos

    Lean Alfred Santos is a Devex development reporter focusing on the development community in Asia-Pacific, including major players such as the Asian Development Bank and the Asian Infrastructure Investment Bank. Prior to joining Devex, he covered Philippine and international business and economic news, sports and politics. Lean is based in Manila.