In 2012, Goldman Sachs Group laid down a bet on young, male criminals. The Wall Street icon, which earned $8.04bn in 2013, wagered nearly $10m on a four-year plan intended to slash the rate at which convicts jailed at New York’s notorious Rikers Island prison reoffend after their release; a so-called social impact bond. If reincarceration slides by 10 per cent, the bank stands to break even. An even bigger drop in jail time would see Goldman turn a profit, reportedly up to $1m. For New York City, each participant kept out of jail signifies a cash saving, money able to shore up other areas of its strained budget. It is a model, say adherents, where everyone wins.
“This investment paves the way for a new type of instrument,” Lloyd Blankfein, CEO and chairman of Goldman Sachs, said at the time. “It enables the public sector to leverage upfront funding from the private sector.”
“Increasingly, investors are seeking to invest their dollars in a way that actually creates positive change” This, say some, is the future of double bottom-line investing: profits, plus a social pay-off. Being returns-driven, social impact investing has the potential to drum up the sort of attention and entrepreneurial flair usually reserved for the private sector, and the scope to leverage trillions in private capital. Banks and investors get to keep their focus on profit, only netting a return if the project works, while governments gain the capital to make shrewd, social investments.
As an asset class, this approach has gained traction in the wake of the global financial crisis, which threw a spotlight on the role of the private sector in fixing social woes. A Global Impact Investment Network and JP Morgan Chase & Co study found a 20 per cent leap in 2014 in the amount invested in sustainable investments, to $46bn: capital that can be pumped into causes as diverse as preschool education and financial services for the poor.
Goldman’s Social Impact Fund claims to be the first of its kind in the US. But similar bets are springing up elsewhere. When the Bill & Melinda Gates Foundation was looking to shore up capital for a health-focused fund, it was JP Morgan Chase & Co that rode to the rescue. The largest US bank helped raise $108m to back the development of technologies to fight killer diseases in poorer countries, through the Global Health Investment Fund. The instrument seeks a financial return for investors, by targeting high-impact technologies with public health uses in both developed and emerging markets.
The bank launched its Social Finance division in 2007, as one arm that generates positive impact alongside traditional returns. “Increasingly, investors are seeking to invest their dollars in a way that actually creates positive change as well, so not just avoiding or divestiture,” says Amy Bell, head of principal investments, Social Finance.
Bell believes the rise of microcredit – the doling out of small sums of money to the world’s poorest to help them earn a living – marked a sea change for the financial sector, proving at once that certain models could both make money, and spur change.
“The success helped further revolutionise thinking about the power of the private sector to create social and environmental good, and that it wasn’t strictly the domain of the public sector or philanthropists, but that the private sector can also play a huge role,” says Bell. “That set of circumstances, plus what I described as the evolution of corporate responsibility, is what compelled us to get involved in this business.”
Abraaj Group, the largest private equity firm in the Middle East with $7.5bn in assets under management, espouses sustainable investment as a way of doing business. The Dubai-based firm takes a five to 10-year view, screening all potential investments based on sustainability performance.
Frederic Sicre, managing director at Abraaj, says rising inequalities in the world are accelerating demand for new ways of investing, and generating questions over the private sector’s role in that change.
“There is an increasing allocation of dollars by investors looking to place their capital with companies in this space,” says Sicre. “An investor can choose among the whole variety where he wants to be. We will provide best-in-class returns in the industry, but will also leave the city and village in a better way.”
“We use an investor’s lens to manage our philanthropic portfolio” Dubai-based Legatum, an investment firm, says it has funded thousands of small, community-based players across the developing world for more than a decade. Pairing an investors’ approach to philanthropy with almost 30 years’ know-how of investing in capital markets, the company says its aim is to generate and allocate the capital and ideas that can help people live more affluent lives.
“Our vision is to see a more prosperous world for all and we use our capital to help make that a reality,” says Alan McCormick, managing director of Legatum. The company claims to have impacted close to 100 million people. “Banks are the vascular system of the global economy,” says McCormick. “A well-functioning banking system should enable capital to flow to entrepreneurs best qualified to manage and multiply it.”
An investment in India’s Share Microfin several years ago is an example of social impact blending with risk capital to achieve a healthy rate of return. Share is one of India’s largest microfinance institutions, giving tiny, unsecured loans to low-income communities in 19 states. Buoyed by capital from Legatum, Share was able to grow its customer base to more than 3.5 million from around 1.18 million.
“In many cases, only a modest initial grant is required to build upon an existing project and to ensure its sustainability,” says McCormick, adding that projects are typically clustered into strategic initiatives, each lasting between three to five years. This amplifies the impact of the grant and provides enough time to produce measurable results, he says.
In recent years, the firm has launched several philanthropic investment funds that focus on tackling a global burden such as the abolition of modern day slavery through the Freedom Fund, or ending neglected tropical diseases through the END Fund.
“These philanthropic investment funds borrow ideas from the financial world in terms of their low-cost model and focus, but enable collaboration with external investors, thereby increasing impact and learning,” says McCormick. “We use an investor’s lens to manage our philanthropic portfolio. We… provide follow-on funding to organisations only when we see results.”
The Global Health Investment Fund, backed by JP Morgan and other investors, has given rise to projects such as an oral cholera vaccine, which enables health workers to dispense with injections for easier delivery in rural areas. The company behind the vaccine, South Korea-based EuBiologics, benefited from financing to support the production and distribution of the vaccine, which is priced at just $1 per dose. The drug is also delivered in plastic vials, replacing glass, making it easier to transport in low-income countries where demand is highest.
“The models we have at the moment are insufficient so one has to really think outside of the box” “If successful, this is a vaccine that will have a market in the developed world as well, providing an ability to generate a return and also deliver very high impact in terms of lives saved around the world,” says Bell.
Still, scepticism remains around the role of profit-driven actors in a space traditionally held by philanthropists, nonprofits and governments. Some argue social investing is primarily a way for financial institutes to polish their reputations, dented by the credit crunch, and to reap public relations benefits. This drift could lure much-needed funds away from aid agencies to the more opaque channels of investment banks.
JP Morgan’s Bell argues the trend is not a shift away from non-profits and philanthropists to the private sector, but rather towards closer ties between the two groups.
“Every fund that we’ve invested JP Morgan capital into, the partners, and co-investors in the fund, are often a mix of foundations, multilateral development banks, individual and institutional investors,” she says. “I wouldn’t want to do these kinds of deals without having partners like them because they are the ones with in-depth expertise working with those underserved populations, and figuring out the potential solutions for delivering the products and services that they really need at a price and quality that is appropriate to them.”
Bo Viktor Nylund, senior advisor on corporate social responsibility (CSR) at the UN’s children’s agency, says the involvement of financial heavyweights bodes well for the humanitarian sector’s future. Innovative financial tools will be critical in courting fresh capital, and in scaling up existing initiatives, he argues.
“In order to really drive development, we need to look at new modalities, new ways of funding these type of initiatives that must be taken to scale in order for us to come beyond scratching the surface. The models we have at the moment are insufficient so one has to really think outside of the box and come up with new things, but carefully so.”
There is greater understanding by governments that they need support, says Sicre. “I don’t think business on its own or government on its own can solve these issues,” he says. “Governments need to work with the resources of the private sector.”
Sicre believes companies who do this for branding or “feel good” reasons will eventually fail to provide good returns to their investors. He argues that traditional CSR is dead and sustainability principles have to be embedded in the company’s operations to prove effective.
“There is a concern that as you bring in profit-seeking capital to a structure that is meant to be delivering impact, how do you as an investor ensure that impact is not forgotten in pursuit of these profits,” observes Bell.
She sees structures being developed whereby the governance that manages how a fund or business is operated “captures explicitly those commitments to impact”. This means failure to deliver becomes a violation of what the business has set out to do. Additionally, there should be a “rigorous” process involving metrics to ensure a mission drift doesn’t occur as responsibility is handed over to the private sector, she says.
“To me the primary challenge we face in building and scaling this market is finding ways to protect that mission, to protect the people we are trying to help in bringing capital and investors,” says Bell. “We want to ensure we are doing all the good that we set out to do.”