How NGOs can collaborate with Impact Investors to help beneficiaries and maximise Social Impact as well as Financial Return
There is a huge demand in India for tapping the Social Sector and thus it is receiving much attention. It is also garnering the much needed stimulus from global organisations such as ‘The Global Steering Group for Impact Investment (GSG)’ which launched two funds of $1 billion each in 2018.
However, the area remains nascent and there is a dearth of people and institutions that understand the Social Sector in India properly. Thus, there needs to be collaborative effort in achieving the goals as outlined by the UN’s Sustainable Development Goals (SDGs)(1)
The Sustainable Development Goals (SDGs)(1), also known as the Global Goals, were adopted by all United Nations Member States in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030(1)
I believe Nonprofits and NGOs have spent years focussing on creating a positive impact and thus have the required knowledge and expertise of the sector. They know which strategies can achieve maximum impact and how they can be achieved. Private institutions, on the other hand, have focussed primarily on financial returns and thus have an expertise in understanding business models that can generate a return.
By combining the expertise of these 2 groups, I believe we can collectively create ventures that not only provide a financial return but also create a positive social impact. An example of the same would be the ‘The Educate Girls Development Impact Bond’, where an investor (UBS Optimus Foundation), an NGO (Educate Girls) and a foundation (Children’s Investment Fund Foundation), all came together to achieve not only financial returns of 15% but also a huge social impact (significant learning gains over the 3 year period)
Development Impact Bonds (DIBs) or Social Impact Bonds (SIBs) can help the NGO get the required funds, provide the flexibility to achieve high impact, and also provide a financial return based on pre-defined outcomes.
Currently, most people consider their investments separate from their corpus for donations. This leads to a problem in which people end up setting aside minuscule amounts for donations and keep the larger chunk of the pie for their investments from which they wish to earn a financial return.
NGOs lack the funds necessary for them to achieve scale and generate a greater impact. Given that Impact investments have the potential to bridge this gap of scarcity of capital, I believe nonprofits can achieve a greater social impact, as well as generate financial returns for their investors.
Additionally, private investors are becoming more and more socially responsible and are paying greater attention to where their money is being invested in and the societal impact their investments are creating. Investors are now motivated towards achieving high social impact with their investments, viz-a-viz, not sacrificing a huge return in the process. Thus, socially responsible and high impact ventures are likely to get more funding than the traditional business models in the future.
We have already started on this journey and India is at the forefront of this change. I believe the next generation is looking not just towards risk and reward, but also towards having a positive social impact via their investments. As we become more and more aware of the impact of our investments, and understand its importance, this will lead to an environment where only socially positive businesses would thrive and thus we would have been able to create an equitable and harmonious environment.
Previously successful example: Microfinance in India(2)
The Indian microfinance sector is a good example of how the narrative of impact investments went from purely social outcome-based to strong commercial-based models.
Microfinance initially started as a not-for-profit model trying to solve the problems of bringing finance to the unserved masses at the bottom of the socio-economic pyramid, where traditional financial channels were unable to reach. But with the liberalization of the Indian economy in 1991, the microfinance sector witnessed strong growth. Private sector actors leveraged the self-help group lending model, and created business models that were commercially viable and scalable. The strong repayment rates among these (often women-directed) self-help groups, along with Micro Finance Institutions’ (MFIs’) joint-liability lending model addressed credit-risk issues and increased the availability of capital in the form of credit from the private sector. Meanwhile, equity capital from investors – among them Caspian, Aavishkaar and Elevar – contributed to the growth of this space.
As of March 2017, the total gross loan portfolio of India’s microfinance sector stood at approximately US $16.4 billion, and it had attracted cumulative investments of approximately US $1.5 billion from April 2011 to that date. This represents almost 30% of the total impact investments in the country, and these investments have led to some of the most profitable exits by investors. For instance, impact funds Aavishkaar and Caspian (India Financial Inclusion Fund) saw 13x and 4.5x return, respectively, on their exit from Equitas through an initial public offering in 2016.
Going Forward: How Can we Achieve Success?
Case in Point: Setting up a Vocational Training School
Recently, especially with the Covid-19 crisis, there has been a shift in the focus areas of NGOs as well as investors. Both players are now realizing the immediate concern of skilling and empowering the underprivileged to prevent a potential collapse of the economy. The lockdown has exposed several harsh realities that the underprivileged face, and organisations are revamping their programmes and strategies to account for these. I believe we can achieve a positive social impact for the beneficiaries as well as create a lucrative financial return for the investors by setting up a vocational training school, thereby imparting vocational skills to the underprivileged.
This can be achieved in the following way:
Step 1: Setting up a ‘Vocational Training School’ – The investor would provide the funds required for the set up and upkeep of the facility. The money would be invested in procuring land, setting up of infrastructure, purchasing white goods and raw materials, and onboarding professionals that will carry out the training.
Step 2: We would then partner with NGOs and other institutions that can help us connect with the beneficiaries interested in availing this program. The key features of the program would be that the beneficiary would not pay anything for the training or the material required during the course of training. However, they will need to sign a bond in which they shall be liable to share a fraction of their earnings post the completion of their course for a period of 5 years. This will help the underprivileged get vocational training at no cost and also aid the investor in earning returns after the completion of the training. Beneficiaries would include children aged 16 and above as well as young adults who show aptitude for the skill/opportunities in question.
Step 3: Helping the now trained professionals sell their art/product by leveraging the vast network of the NGOs and the private investor. Exhibitions could be planned to showcase the art/products of these young talented professionals, thereby not only generating revenue for these professionals but also help in paying back the investor. The same products could be used as in-house merchandise for the investor, thereby increasing the circle of visibility.
Accomplishment: The investor will not only achieve a positive social impact by making several young underprivileged become self-reliant but also achieve a financial return in lieu of the paybacks received from the sale of the goods. After a period of 5 years, the professional no longer has to pay anything to the investor and thus can significantly increase their earnings and are no longer dependent on anyone for their livelihood. In addition, the youth gains access to employment opportunities, thereby averting a social disaster. The ultimate goal would have been achieved via this project- providing skills to the underprivileged thereby ensuring they have access to income to meet basic needs, and empowering them to escape the vicious cycle of poverty.
- 1.https://www.undp.org/content/undp/en/home/sustainable-development-goals.html
- 2.https://www.intellecap.com/the-end-of-a-debate-india-highlights-the-dominance-of-for-profit-capital-in-impact-investing/
About the Author
Manik Bahl is a CFA® charterholder. He has 5+ years of work experience in the financial services industry. He is passionate about finance and has always wanted to help the society, thus he left his career in Investment Banking to pursue social work. He aspires to leverage these learnings to enter the Impact Investing sector. While at leisure, he could be seen spending time with his family, listening inquisitively to the stories his grandparents share.