Why inclusive business for #globaldev has not (yet) taken full flight

A textile factory in Turkmenistan. How important are inclusive businesses to meeting the funding needed to achieve the Sustainable Development Goals? Photo by: Asian Development Bank / CC BY-NC-ND

During the adoption of the Sustainable Development Goals in New York last year, United Nations Secretary-General Ban Ki-moon highlighted in a speech the growing importance of one particular development stakeholder in pushing the long-awaited 17 goals and 169 targets of the framework further: the private sector.

And Ban is intent on having companies, firms and corporations play a more central role in global development.

Over the past few years, there has been much discussion about the need for increased development financing, in addition to identifying more diverse and innovative ways to bankroll the world's various development programs, including the newly minted SDGs. The Global Goals alone — as the world's most comprehensive development blueprint for development efforts over the next 15 years — will likely require trillions of dollars in investments.

Where can such vast sums be sourced? Various multilateral development institutions, in a discussion note in April last year, agreed that discussions around development financing would need to become broader in scope, expanding from the billions offered by official development assistance to the trillions available from other kinds of sources. The areas with the most potential for growth, insiders agreed, was through a redoubled focus on private sector business, finance and investment.

Just one example of how this narrative has continued since last year is the growing interest and discussion around inclusive business strategies — a form of private sector engagement that aims to put social impact at the center of business operations.

While the private sector is already active in global development efforts through myriad strategies including private foundations, philanthropy and corporate social responsibility, its level of engagement and potential impact still remains limited and largely unfulfilled.

“[Development players] understand that the government cannot deliver everything,” Armin Bauer, principal economist for the sustainable development and climate change department at the Asian Development Bank, told Devex. “Most of the [social services] are [provided by] the private sector, so the government understands that they need the private sector to deliver better to low-income people.”

“For me, inclusive business is the private sector contribution to inclusive growth,” he added.

Bauer, along with many other corporate chiefs, believes that the insistence of the development community to focus more on inclusive business, despite the private sector already having existing outlets for doing good, boils down to two things: scale and sustainability.

While existing mechanisms within corporations and businesses do good in their own right, they are often seen as isolated efforts and lacking in ambition and scale — with the impact most likely limited to adopted communities or a limited number of beneficiaries.

Speaking to this issue, the World Business Council for Sustainable Development, a CEO-led organization of private firms, said in a report that there is a “need to catalyze and scale up solutions that drive greater social inclusion and sustainable development in emerging markets,” especially those at the base of the pyramid.

“You have to understand what it means to do good,” said Bauer, who also heads ADB's Inclusive Business Initiative. “To do good doesn't mean to do good [just] to your neighbor, because that doesn't change anything in your society. Make a business model to go for scale … that also provides a solution to the relevant problems of the poor.”

Stumbling blocks

Despite the increasing emphasis on the advantages of pursuing a more inclusive business approach to development, the popularity of the strategy remains very limited. ADB, for instance, has a total of just 14 inclusive business deals over the past three years since it started investing in these endeavors, amounting to about $360 million.

Part of the reason why inclusive business strategies have not yet taken full flight may point back to the same issues of scale and sustainability. Indeed, large businesses remain cautious in pursuing a more inclusive business approach because it entails putting social impact and doing good at the heart of business operations — something that, arguably, could sacrifice profitability.

Insiders at WBCSD stated that while companies have been trying out inclusive business models, scale has so far proven elusive — even for large corporations that could take a much greater risk, given the resources, business infrastructures and systems that they have in place.

“Scale is a combination of the number of people reached, geographic footprint, and sales or procurement volume,” the group said in the report. “Scale is also very much related to break-even and return on investment, as only commercially viable ventures are truly scalable.”

The ADB’s Bauer also shared that aside from scale and sustainability, development stakeholders venturing into inclusive business strategies should also consider the concepts of commercial viability and bankability, particularly those who are seeking technical and financial assistance from private or multilateral banks. This, he said, is in addition to the entrepreneurial willingness to innovate and seeing the poor as a “main source of future revenue.”

While there is a case for creating a space for the private sector to do more for global development, there remains a question of how they can best contribute most efficiently and effectively. Bauer shared that a business which, for example, has a profit margin of 2-3 percent can be considered commercially viable. However, it may not be considered bankable depending on the lending institutions' requirements.

“If you go with [a] business to a bank, the bank will say 'I need a rate of return of at least 10 percent and I need scale in your business',” the ADB official said. “If you say you can only give 3 percent because that's your only profit margin then the bank will not give you money. Inclusive business has to be larger.”

The way forward

There are other stumbling blocks to pursuing inclusive business, according to Bauer, which include poor enabling environments for inclusive businesses to thrive in some countries, motivating more companies — large and small ones — to adopt inclusive business strategies in all of their operations, as well as the lack of understanding among stakeholders of what inclusive business strategies really involve.

“The number one [challenge] is understanding what inclusive business is and that is generally everywhere … with the banks who don't give money, with the governments who principally have different incentive systems,” he said. “I think banks need to come around and understand and assess the credit risk in a different way.”

But there are also a lot of ways that development stakeholders can address these challenges, the ADB official explained. Governments, for example, can set up a much more enabling environment for inclusive businesses through fiscal incentives and grant assistance, while better understanding the underlying concepts of the approach.

“If you want the government to help a private sector company, you have to prove that this company has real social value,” he said. “So you have to introduce a system in which you can distinguish that.”

For multilateral institutions like the ADB and the World Bank, Bauer said they can provide financial and technical assistance to governments and smaller groups, while also promoting a more streamlined and coherent approach to pursuing inclusive businesses.

Finally, for private sector players themselves: innovate and risk more, because the return on such investments will be high. After all, inclusive business creates opportunities for employment, entrepreneurship and company value.

As stated by the WBCSD in its recent report: “It is not about fighting for a larger share of a small wallet, but about increasing the size of the wallet.”

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About the author

  • Lean Alfred Santos

    Lean Alfred Santos is a former 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. He previously covered Philippine and international business and economic news, sports and politics.