Impact Investing is a relatively new term, coined at The Rockefeller Foundation's Bellagio Center in 2007 to describe investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Today impact investment gets ample media coverage and is on the top agenda of many finance leaders and politicians for its claim to provide capital to address the world’s most pressing challenges. According to a yearly industry survey by the GIIN (Global Impact Investing Network) the estimated market size is at least USD 115 billion, growing at 25% per year.[i]
The idea of using investment capital next to grants to solve social problems is not only compelling but a real paradigm shift for many actors who used to make a clear separation between their financial investments and the giving side. Still, there is an urgent need for new solutions to eradicate poverty and reduce global inequality in a world where, according to Oxfam, the richest one percent still own more than the other 99 percent combined.[ii] According to economists of the United Nations there is also a huge funding gap in excess of 2.5 trillion dollars per year to meet the Sustainable Development Goals that can’t be funded through philanthropy money and government aid alone, both worth about USD 200 billion a year (to be replenished).[iii] Though capital markets enjoy some mistrust with their focus on quarterly returns rather than long-term value creation, private wealth is a huge pool of assets estimated at about USD 170 trillion according to the Boston Consulting Group.[iv] If we are to address once for all the most pressing social and environmental challenges our people and planet face there is definitively need for (responsible) private investments to work alongside philanthropic grants and government aid. Already, by mobilizing 1.5% of total wealth for impact investing it would finance the seventeen global goals set by the international community.
Large NGOs like Opportunity International, which has been grant-funded ever since its foundation in 1971 to promote entrepreneurship and create jobs in developing countries, are confronted with the promise of impact investing and the question of how it may influence their model going forward. Though there is still some scepticism in the sector, there are a variety of ways NGOs can benefit from impact investing and leverage their skills to generate additional funding, as acknowledged as well by INGO (International NGO Impact Investing Network).
"NGOs can be both contributors to and beneficiaries of the impact investing sector. As the magnitude of socio-economic challenges continues to outstrip the availability of philanthropic capital, impact investment becomes an important and sustainable source of much needed financial support to achieve growth and scale, attracting new types of funders,”
comented Laura Hemrika, Credit Suisse Global Head, Corporate Citizenship & Foundations;
“NGOs also have the opportunity to provide their unique expertise and knowledge to different players in this field, further expanding their own impact and income.”
Clearly NGOs have multi-faceted capabilities including a deep knowledge of local environments, strong technical expertise, trust-based relationships with local communities, as well as track record and credibility in impact measurement, all of which makes them an attractive partner for any impact investment initiative. There is also widespread consensus that many of the innovative market-based initiatives addressing basic needs require not only funding but also dedicated technical assistance to provide for example training to end customers or help around product design and delivery. Many impact investment funds will rely on NGOs to manage local relationships, provide some of the technical assistance required, and add credibility.
Of course, impact investing also raises some fears among NGOs of cannibalizing the existing donor base as large longstanding supporters might substitute their yearly grant funding with an impact investment, or smaller donors feel there is no need for their yearly USD 100 cheque any more as the NGO is embracing impact investing. In reality, impact investing can never really substitute grant funding. The building of basic infrastructure, the education and training of low-income families, the provision of nutrient food or the support of destitute families can only be financed through grants and donor funding, not investments. However, impact investing can contribute to strengthen and increase the impact of certain programmes, by either bringing it to scale, raising awareness or introducing more self-discipline in the path towards sustainability.
Also, NGOs have meanwhile recognized that the private sector can be a good partner to bring forward the development agenda and deliver access to basic goods and services; for instance in places where governments lack adequate funding or are unable to keep up with population trends and struggle to develop effective responses. Private actors are better at innovation: they respond to a clear demand in the market and find ways to deliver products even in remote areas. Often, they build a local presence close to their customers whilst always operating based on principles of sustainability. Impact investment can definitively allow NGOs to leverage their expertise and local networks and originate new streams of funding to strengthen their work in the field in a time where the global development finance architecture is changing and government budgets are increasingly tied. However, this implies that the private and the social sector start speaking the same language and build mutual trust so to overcome some of the existing cultural barriers.
Education Finance is one of the areas that could hugely benefit from impact investing as millions of children are still not going to school and there is urgent need for new and timely solutions. Globally still 263 million children - adolescents and youth between the ages of 6 and 17 - are currently out of school, including 61 million primary school children.[v] Even when they go to school millions of children do not learn the basics, as the infrastructure is often very poor and teachers are either not resourced or not held to account. For example, the average class size exceeds 70 pupils per class in Malawi, the Central African Republic and in Tanzania. On average, 14 students share the same mathematics textbook in Cameroon. 70% or more schools in Mauritania, Comoros and Chad do not have toilets. Half of primary schools in Sub Sahara Africa do not have drinking water. [vi] Most children do not start Primary education until age 8, placing them well behind the curve in difficult environments to play catch-up.
In some of these environs, privately-led initiatives and enterprises step in starting to offer a service that is lacking in their communities. One such example is Rise to Shine School in Kigali, Rwanda, which was established by proprietor Beatrice Bamurange in a community where people cannot afford send their children to distant city schools. She mixes the fees of those who can afford to pay with tuition remission for those who cannot, resulting in a real education in everyone’s hands. Beatrice started by teaching children in her yard, and then built up Rise to Shine from Nursery to Primary level. Opportunity International’s loans, savings and training enabled Beatrice not only to expand the school, but to keep school fees low. Rise to Shine now attracts low income families from across the district, and Beatrice aims,
“to reach more and more children offering them the accessible and quality education they deserve.”
Low-income families start sending their children to a fee-paying school which provides lower teacher absenteeism, more engaged teachers, smaller class sizes and more individualized attention, all of which will allow these children to be better equipped to find adequate jobs. While most of these affordable private schools make enough money to stay open, they struggle to grow quickly as profits are low. These schools have two ways to increase income: accept more students, or raise school fees. Each of these options comes with its own challenge, including overcrowding or pricing low-income families out of the school. These trade-offs can be mitigated, taking a shortcut to improved social impact, with well-structured responsible lending.
Opportunity International started its Education Finance program back in 2007 exactly to respond to these challenges, and has been pioneering new solutions by lending small amounts of money to large numbers of schools and parents, while designing savings and insurance products tailored to plug the gaps in the pathway to educational access, quality and completion. The model is the following: Opportunity EduFinance raises donor funding that is being used to provide technical assistance to selected Microfinance Institutions (MFIs) through its EduFinance Technical Assistance Facility (ETAF), supporting them to design and deliver financial services tailored for education-related needs, such as helping a school proprietor build a new classroom, or parents afford the school fees to send children to school. A crucial element in Opportunity’s EduFinance programme is its Education Quality Framework, which is delivered through ‘clusters’ of schools, complemented by Opportunity EduFinance’s school leadership and teacher training, as well as school assessments. Opportunity’s Education Quality model is a voluntary add-on for schools with School Improvement Loans; they benefit from collaborating and sharing content and concepts related to quality improvement. The result brings positive joint practice development, teacher and proprietor mentorship relationships, effective shared classroom innovations, mutual accountability, and an increased sense of professionalism amongst all actors within schools. Progress has been impressive. What started 10 years ago through a small donor-funded technical assistance to cover for both capital and operating expenses has migrated now into a larger model where local banks are willing to contribute as they realize this is not only an area where they need to do something socially, but also a business opportunity. Over the last five years, Opportunity’s combined Education Finance lending via partner financial institutions has been over USD 85 million across 13 different countries in Africa, Asia and Latin America. The programme has reached 2 million children, creating 1.3 million years of education and about 250,000 new and permanent seats in schools.
Based on the success of its intervention and an increased demand from microfinance partners in the field for support, the key question for Opportunity is now how to bring this program to scale, reaching a much larger number of out-of-school children and ensuring that the model becomes sustainable in the long-term. Opportunity believes that a new approach combining grant funding with investment capital is required to scale up significantly the existing programme and increase access to quality education across the globe.
“No matter how well we utilize our donor funds, it will never be enough for systemic change. Aid to education has been falling for years, despite government commitments, and we can’t just wait for a miracle,”
said Nathan Byrd, Opportunity’s Head of Global Programs.
“We need new opportunities to leverage our donor funds into greater impact, and that’s going to come through blended capital funds – starting with an Education Finance Fund.”
An initiative combining an investment fund and a technical assistance facility, to improve the capacity and quality of schools in providing affordable quality education to children, and enabling children to attend these schools and complete their education would be a real game-changer. The need for donor funding would become even more crucial with such a novel initiative, in particular to roll out on large scale education products with new partners and to measure the educational outcomes, but the impact of these donor dollars would be super-charged through the creation of an investment vehicle that can finance the growth of education portfolio much beyond the initial technical assistance. Grant funding could also be utilized to provide for a modicum of risk coverage at the investment portfolio level, boosting confidence for investors in this innovative model.
The combination of grants and investment capital at the fund level is quite new for many NGOs – Opportunity itself having limited experience in the model – and is normally referred to as blended finance. Blended capital structures are one of the innovative mechanisms that combine both philanthropy and investments to structure initiatives in a way that it becomes interesting for both donors and investors to participate, ultimately allied to deliver a social good. According to the World Economic Forum, blended finance refers to the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets.[vii] Specifically, the intention is to strategically use these funds to mitigate investment risk and/or enhance returns for private investors that otherwise would not invest in such a vehicle.
It’s now the time to act and come up with an ambitious plan. If such an investments vehicle could raise something close to USD 100 million of investment dollars, this would allow Opportunity, over the next 10 years, to reach up to 45 million children with a quality education and to create 2.3 million new seats in developing-world schools. Still a long way to go, but 263 million children have no time left to wait, because soon their future will be gone.