Want to fund global development? Tap into the 'heart' of markets

Sir Ronald Cohen (left), chairman of the Social Impact Investment Taskforce and Matt Bannick (right), co-chair of the U.S. National Advisory Board on Impact Investing and managing partner at the Omidyar Network. Photo by: personal collection and Moritz Hager / World Economic Forum / CC BY-NC-SA

Tapping into the “heart” of markets is expected to become an increasingly important development finance strategy in the post-2015 agenda to leverage more impact investing.

A new report published Monday by the Social Impact Investment Taskforce asserts that international development finance will be one of the fastest-growing elements of the global impact investing market — 70 percent of which is in developing countries.

The report, titled “The Invisible Heart of Markets — Harnessing the Power of Entrepreneurship, Innovation and Capital for Public Good,” tackles the challenge of what can be done to help unlock $1 trillion in social impact capital and offers a set of six broad tips to achieve this goal, including a potential fund for development impact bonds among other suggestions.

“I believe there is a heart to markets. I believe that up until now it’s only been able to allocate money according to donations without focusing very much on the outcomes that are achieved. I think in a way, what we are doing is shifting the emphasis from the act of giving to the results,” Sir Ronald Cohen, chairman of the task force established under the British presidency of the G-8, and known as the father of venture capital and social investment in the United Kingdom.

Devex recently sat down with Cohen and Matt Bannick, co-chair of the U.S. National Advisory Board on Impact Investing and managing partner at the Omidyar Network, to discuss the new report and the potential for impact investing in emerging markets. Below are a few highlights from our conversation on the sidelines of the Social Capital Markets conference in San Francisco.

What is needed in these developing countries and emerging markets to further impact investing?

Cohen: I think the unique position of these new tools in developing countries is that they can add momentum to existing private sector development efforts by focusing on place-based investment which achieves impact because it creates jobs in these places, and also tackling some social issues that can be tackled through private sector efforts.

The unique position of impact investment is in addressing the social constraints on economic development. I think you can see social impact bonds, which are funded by local governments or development impact bonds, which are funded by outcomes funders like international aid agencies, foundations and so on addressing issues like literacy and sickness. So I’m hopeful when the United Nations comes to reset its goals, it will look at the possibility of using impact investing in order to achieve its goals.

Bannick: When we look at a lot of the developing world, there is still a paucity of investment.  There is a paucity, I would argue, of philanthropic investment, there is also a paucity of private capital. I think one of the reasons is people have an exaggerated sense of the risk that exists in some of these markets. What we discover when we actually engage with entrepreneurs, because we invest primarily early stage, is that you can get a better assessment of risk and that our sense of the risk is usually smaller than people perceive it when they’re working out of some of the big financial centers.

I think government has a role here too of helping catalyze early stage investment. If we can get more early stage investment, it provides the capital to prove out a business model and once they prove out a business model I think they’re able to tap broader streams of capital.

What is the role of the global development community in helping spur impact investing growth and draw more of those funds to the issues they are tackling?

Cohen: I think there has been, within the development community, an increasing focus on setting outcomes objectives and measuring them and I think that’s something that has evolved over a number of years. Increasing the emphasis on that, I think, is of importance because there are going to be sources of capital opening up that are going to be motivated not just by financial return but by the achievement of measurable social return.

One of the basic tenets of the task force report is that there is huge latent demand for investment opportunities that can deliver in a reliable, measurable way, a combination of both financial and social returns. To the extent that you begin to attract that type of capital, it can obviously be leveraged up through the injection of capital from DfID or OPIC or USAID or others. I think we may be with impact investing on the brink of much greater cooperation among groups of investors. So there’s been an evolution and I hope we’re getting closer to a tipping point now where the flows of capital … which has been a challenge for decades, is eased by the fact that you have some place-based objectives — creating jobs, adding to economic growth in specific areas, but other social outcome objectives — the training of people and improvement of their literacy, improvement of their health.

Bannick: We shouldn’t overlook the role that various development agencies and organizations have played over time. For example, the IFC has done tremendous work over decades in supporting entrepreneurs, and business growth and activity. We sometimes still get stuck in this world where it’s financial returns is in tension with, if not in conflict with [social returns], but not necessarily. That is, one of the more nuanced discussions that we have to continue to engage on is, how do we ensure that financial returns and social returns are in fact aligned … what is the role of the market in doing that, and how do we ensure that is consistent over time?

What are some of the greatest challenges or gaps in the market?

Cohen: What has been lacking until now has really been instruments, which are outcomes based in one way or another and the constraints on economic growth are very real. My hope is that some of the money that is going to go now to achieving new development goals is going to act directly on these constraints in more complementary but also in more powerful ways than traditional philanthropy has been able to do. Although philanthropy is a sliver of total inflows in relation to remittances and foreign direct investments, it can nevertheless have a very big multiplier effect. I think focusing on improving levels of literacy, and of health, and of training will help to accelerate the rate of growth, and will lead us to greater short-term performance, which will lead to more money.

Bannick: Some advances can be made simply if government adopted more intelligent regulation. It doesn’t necessarily have to be billions and billions more dollars, sometimes smart regulation can make all the difference in the world. People talk about M-Pesa in Kenya and how something like 30 percent of the Kenyan [gross domestic product] now goes through M-Pesa because the government of Kenya had a very intelligent approach to regulating it. If regulators can introduce smart regulation that facilitates that sector, the impact can be massive. That’s a really good example of where regulation really matters, there’s no additional cost but massive impact.

What is the appetite, environment across the task force countries? Are there different types of challenges?

Cohen: I think across all countries there’s a feeling among development practitioners that we’ve somehow got to raise the game. The way we’re doing it at the moment is not 100 percent right. I don’t hear a single country saying we’ve really got to the best possible practice in the field and we’ve got to just continue doing what we’re doing. I would say across all countries there’s a feeling that you’ve got to get the private sector and the development agencies working together in more imaginative ways and I would say that there is a big question mark about how big development impact bonds can get. If development impact bonds can really manage to become as significant as philanthropic donations that would be a very significant thing.

One of the keynotes of the task force is this emphasis on innovation. When you move to pay for success whether it be a development impact bond, a social impact bond, a government contract of a different kind, you open the door to innovation which has been closed by traditional purchase of social delivery where everything is stipulated up front. If you look ahead 10 years, if you could see a flow of capital equal to all donations today into these countries on the basis of pay for success, it will bring innovation in its wake.

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About the author

  • Adva Saldinger

    Adva Saldinger is a Senior Reporter at Devex, where she covers the intersection of business and international development, as well as U.S. foreign aid policy. From partnerships to trade and social entrepreneurship to impact investing, Adva explores the role the private sector and private capital play in development. A journalist with more than 10 years of experience, she has worked at several newspapers in the U.S. and lived in both Ghana and South Africa.