Interesting Conference about Impact investing – Fondazione Cariplo

Impact Investing for Social Enterprises: The solution for poverty alleviation?

Can Impact Investors together with Social Entrepreneurs provide meaning-and impactful solutions to improve health, to ensure access to basic services, and to deal with the depletion of our natural resources all over the world?

During the conference “Disruptive thinkers: shaping solutions for poverty alleviation. A case of Impact Investing for Social Enterprises” on the 28th January at the Cariplo Foundation Congress Centre in Milan, social entrepreneurs and representatives from the Impact Investing Industry, from all over the world, talked about their experiences of creating innovative and long-lasting solutions to poverty and about the creation of successful business models, which benefit the poor by engaging them as costumers and suppliers.

New business models for market based solutions and their financing problems

Different social entrepreneurs spoke about their experience of creating new business models with the aim to provide long-lasting solutions to poverty.

Harvey Koh, Associate partner at Monitor group, Monitor Inclusive Markets (MIM), who presented a few of their market based solutions (affordable housing initiatives by building a scalable low income housing company, which constructs smaller units but perfectly adequate for families; save drinking water for slums with a price of 5 euro cents per 20 l; husk power systems generating electricity, channels for its distribution and simplified pay  per use system;), explained also the difficulties which those solutions (social enterprises) encounter and focused especially on the pioneer gap. The pioneer gap is as a critical gap ,which describes the early stages of a pioneer firm, characterised by difficulties in obtaining financial resources. This results not only from the lack of financial return but also from the risk profiles of these companies, which are pioneering a new business model in the BoP environment (BoP is the Base of the Pyramid which is considered as the population earning less than $2 per day, per person, per household). Firms, which are working in this environment, will need to be prepared to face challenging situations. They will need to try out, refine and change their new business models to meet the poor people’s needs and they will have to accept that they will also suffer from set backs and failure. Furthermore, they need to educate costumers and stimulate new demand for ‘push solutions‘ (Push solutions are products or services, for which there is no demand, because the costumers do not know them. These products need to be pushed to the costumer by training and informing them) and train suppliers.

These tough challenges call for a strong support. A support that understands the so called pioneer firms’ needs and that accompanies the firms over the course of their journey from start-up to eventual scale. Unfortunately there are only a few impact investors who seem prepared to provide financial resources and technical assistance for these pioneer companies in their earlier stages which are: the blueprint stage during which more sophisticated capabilities are needed for business innovation, the validation stage during which firms need up front investment to be able to realise market trials and tests and to refine their core business, and  the preparation stage during which heavy investment is often needed. Harvey Koh pointed out that this pioneer gap needs to be addressed, otherwise much impact capital will continue to sit on the sidelines. He sustains that philanthropic funding can play a critical role in closing the pioneer gab. Grants can support pioneer firms to develop, validate and establish new business models. They are considered as the ultimate “risk capital” because they are not based on the likelihood of financial return. They can also tolerate uncertainty around commercial viability and support the creation of public goods. This means that philanthropy can support the establishment of business models into which return seeking capital can be invested, not only to get financial return but also to help them scale and obtain social and environmental impact.

During the debate “Creating successful business models: from blueprint to scale” The following social entrepreneurs underlined the challenges mentioned by Harvey Koh: Sundeep Kapila co-founder of Swasth India Services Private Limited, a social business working towards improving the health of low-income segments in urban and rural India; Abubaker Musuuza, co-founder and Director of Village Energy, a company which empowers communities in Uganda economically and socially by assembling solar products; and  Dr. H. Harish Hande, Managing Director of Selco which empowers the lives of underserved population throughout the world by selling, servicing and financing products that continuously improve their quality of life. They also talked about the importance of promoting the creation of assets by poor people which need to be characterised by longterm financial, social and economic sustainability.

With these challenges in mind, some Italian private foundations incubated, a donor fund aimed at fulfilling the ambitious undertaking of closing the pioneer gap affecting the early stages of social enterprises. This fund, called Opes Impact fund which was presented during the conference, wants to support social enterprises during their stage of pioneering of business models who engaged in breaking the conventional solutions to poverty. Its funders and administrators are currently planning to establish two offices, one in East Africa and one in India. They are mainly working with very young social enterprises and believe in the importance of co-investment as leverage to improve accountability and capacity.

Hybrid financing strategies: the solution for social entrepreneurships

After the morning session, during which mainly social entrepreneurs talked about their experiences followed a debate about hybrid mechanisms as possibilities of providing financial resources to social enterprises. Different representatives from the impact investing industry from the Netherlands, North America, Switzerland and the United Kingdom took part in this debate, during which not only hybrid mechanisms were discussed but also the meaning of impact investing, the difference between philanthropy and impact investing and benchmarking problems in relations to social and environmental impact .

Dr. Maximilian Martin the Founder and President of the Impact Pledge foundation and Founder and Global managing Director of Impact Economy SA and its affiliates explained that impact investing has a broader meaning and does not just focus on market based solutions within the BoP environment. Impact investing can generally be defined as investment that creates social or environmental benefits by also providing a financial return. With regards to the difference between impact investing and philanthropy he pointed out that philanthropy is fantastic and powerful but also very costly and does not resolve all the problems which is also the case of impact investment.

Hence, Dr. Martin promotes hybrid financing strategies for social entrepreneurships which may include grants, equity, debt and mezzanine and explains that the types of instruments which are applicable in practice depend on the social enterprise’s legal form, business model and state of maturity.

Don Mohanlal, President and CEO of The Nand&Jeet Khemka Foundation, the philanthropic foundation of the Khemka family strongly believes that a sustainable ecosystem needs to be created which supports initiatives of social entrepreneurs. A system which focuses neither only on philanthropy nor only on impact investing. This ecosystem should provide a platform were philanthropist, impact investors but also governmental agencies and corporates, who aim at engaging in social responsibility, can work together in order to find the best solutions to help social enterprises scale and to support them in becoming sustainable. For the realisation of these platforms it is important that social enterprises, philanthropists, impact investors and corporates understand each other and create a common language.

William E. Burckart Managing Director of Impact Economy LLC who also guides special initiatives for the John Hopkins Centre for Civili Society Studies including the New  Philanthropy, Philanthropication through Privatisation and Non profit Value Proposition projects explained the problems that the impact investing industry encounters in relation to social enterprises. These are mainly benchmarking problems, and problems caused by the different measuring systems of social and environmental impact, which are not taking the different contexts into account.

World Toilet Organisation: From a Problem to a Business, an example of best practice.

Jack Sim, the Founder of the World Toilet Organisation completed this interesting conference by presenting the business model of the World Toilet Organisation. Jack Sim realized that the lack of adequate sanitation facilities account for much of the world’s social and health problems. WTO’s vision is to attain clean, safe, affordable, ecologically sound and sustainable sanitation for everyone by creating the social franchise model “Sanishop”, whereby WTO provides a quality brand free of charge to entrepreneurial thinking people on the ground. Social Entrepreneurs of the BoP environment are trained to produce and sell toilets while costumers are made aware of the importance of adequate and clean sanitation. Mr. Sim’s current project at WTO is to establish a BoP Hup in Singapore. The Hub acts as a trade centre for the poor in developing countries to formulate, cooperate and merge business solution to transform emerging markets into vibrant market places.

The conference was concluded with an appeal by Elena Casolari: The impact investing industry needs to remember to keep in mind their social mission. She also believes strongly that not everything that can be measured counts and that everything that counts cannot be measured.

Some considerations for the future: Social enterprises formed once the base of Italian’s historical society. How can we re-establish the importance of social enterprises in Italy for the satisfaction of people’s needs and for the reduction of poverty? Is it possible to consider impact investing and hybrid financial instruments for Social Enterprises in Italy?

Nadia Glaeserer