Investing in Social Innovation

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By Elly S. Brown

This post was originally published on Next Billion.

Image via Next Billion

“You, as the asset holder, have to challenge the status quo and provide the leadership necessary to co-create the world you want to see. It is that simple,” Lisa Kleissner, co-founder of KL Felicitas Foundation.

After successful careers in Silicon Valley, Charly and Lisa Kleissner founded KL Felicitas Foundation in 2000 with a vision to scale social innovation through impact investing. The foundation supports social enterprises everywhere along the spectrum from the seed stage to startups that are rapidly expanding. Led by visionary social entrepreneurs, these companies are addressing some of the most challenging issues in society including climate change and environmental destruction.

Along with capacity building assistance, KL Felicitas Foundation offers a wide range of investment vehicles including grants, social loans, loan guarantees and private equity. The foundation has committed to allocate 92 percent of its portfolio to impact investing vehicles by 2013. Placing a strong emphasis on knowledge-sharing and partnerships, Charly and Lisa are committed to building the field of impact investing. Along with Morgan Simon and Sean Foote, they co-founded Toniic, a global network of impact investors. Complementing GIIN, the industry-wide standards and frameworks for impact investing, Toniic provides a forum for members to learn how to be effective impact investors and to aggregate capital for investing (Click here for past NextBillion coverage on GIIN and TONIIC).

You can meet Charly and Lisa Kleissner from KL Felicitas Foundation and learn more about impact investing at the Columbia Social Enterprise Conference session titled “Impact Investors Spreading Social Innovation” on Friday October 7th between 9:45 a.m. and 10:45 a.m.

Taking Stock of IRIS

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By Marin Kaleya ’12

This post was originally published on Next Billion.

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The last decade has given rise to tremendous growth in the impact investing sector. With such growth comes increasing recognition of the sector, but it also brings to light questions of impact investing’s ability to effect substantive change. Stories about upwardly mobile farmers in remote villages are no longer enough to attract savvy socially minded investors. Instead, firms are being held to ever more robust standards to demonstrate the positive implications of their investments. More importantly, with the proliferation of organizations seeking to finance these projects, firms must demonstrate that their social returns are better than the next guy’s. But how can we report standard measurements? There is no EBITDA (earnings before interest taxes depreciation and amortization) equivalent for social impact.

As many NextBillion readers are no doubt familiar, the Global Impact Investing Network’s (GIIN) Impact Reporting and Investment Standards (IRIS) is a proposed response to these new developments in the space. First introduced in 2008 as a joint venture between Acumen Fund, B Lab and the Rockefeller Foundation, IRIS is a proposed methodology for standardizing measurement across the impact investing sector. IRIS offers a standard framework for reporting social, environmental and financial performance of impact investments.

What that means is that instead of different projects reporting different measures for the same thing, each organization will report their metrics using the same descriptive metrics within a standard taxonomy. For example, let’s take two investments that finance mango-growing operations. IRIS provides a guideline for reporting — both investments will report number, not pounds, of mangos produced in accordance with specific IRIS performance indicators, which makes the two investments more easily comparable.

Of course, mangos are easy to measure. What becomes more difficult is measuring the actual social impact of an investment. How do you determine the number of lives impacted by a given investment? Do you count the people who have been employed by the investment? How about their families? What about the consumers and their families? IRIS provides a methodology for dealing with some of these questions. For our mango growing operation, we can measure full and part-time employees, broken down into various descriptive demographics. We can also measure new customers during a given reporting period. Thus, reporting is aligned for all companies and firms can no longer overstate their impact. At the same time, new impact investors have guidelines for where to start when measuring and evaluating their investments and IRIS intends to compile submitted data to provide industry benchmarks.

Despite all the hubbub about IRIS, there are still many questions regarding its efficacy and whether social impact measurement can truly be standardized. In an effort to provide some transparency into the model, the KL Felicitas Foundation (KLF), and the GIIN jointly published a case study in April 2011 that discusses KLF’s motivation for adopting the IRIS framework and details its application of IRIS across its active investment portfolio.

KLF is a family foundation founded by Charly and Lisa Kleissner in 2000 to “address poverty through its support of global early-stage social entrepreneurs and social enterprises, with a focus on rural communities.” The Kleissners decided to implement the IRIS framework because they wanted to “illustrate the social, environmental, and financial success of the foundation; nurture their investments; evaluate future investments; and provide needed performance data to share with a growing community of impact investors.” With increased transparency and standardization into impact investments, the Kleissners hope to drive more resources toward and awareness for the sector.

The case is extremely useful as it explains in great detail how KLF fit its investments into the IRIS framework, chooses key performance indicators and transitions its portfolio into this reporting structure. While a more longitudinal study will be necessary to examine the efficacy of using the standards, the implications of this report could be huge. The case is more or less a “user manual” for IRIS: it handholds the reader through the implementation process, illustrating its benefits and challenges. Hopefully it will encourage more firms to use the methodology, because more users can help refine the system further – and create a standard that increasingly hits the mark for the impact investing sector.

The Kleissners will discuss the case study in detail, including their experiences and the implications of adopting of IRIS throughout their portfolio, at the 2011 Social Enterprise Conference at Columbia University.

Pay for Success: Social Impact Bonds Come to the US

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By Kimberly Parker

Social impacts bonds (SiBs), which launched in the UK in September of 2010, may be replicated in the United States this year, under the more optimistic name, pay-for-success bonds. President Obama has proposed $100 million, or .003 percent, of the FY 2012 budget to go towards piloting the program in the United States.

Social impact bonds, or pay-for-success bonds, place the financial risks inherent in social programs on private investors. Government agencies contract private organizations (both for-profit and nonprofit) to implement programs that improve social outcomes, such as preventing recidivism and managing childhood diabetes. The organization then issues bonds to private investors to pay for up-front costs, and if the program is successful then the government pays the return on the investment from the cost-savings attributable to the program. Going into further details, Harvard Economist Jeffrey Lieberman reported on the bonds and their actualization in the United States.

These pay-for-success bonds have been designed for preventative programs, and there have been numerous studies — including one referenced in the New York Times — that show prevention is less costly overall. Investing taxpayer money in new preventative programs, however, has been considered too risky because, if the programs fail, the government risks paying twice. Instead, unsuccessful programs that focus on the after effects of social ills remain in place for years.

Preventative programs, though, may still be too risky for traditional investors, but there is hope that social impact bonds can eventually attract commercial capital to the social sector. Currently, investments are coming from foundations and impact investors, who are much quicker to accept the risks in the hopes of achieving social good.

There are other limitations to the bonds: the programs they support must have clearly defined outcomes and a base of research that supports these outcomes. Also, because of the riskiness of these investments, there is incentive for targeting low-risk populations, instead of those that need the social programs most. It can also be unclear which government department will pay if a program is successful.

The bonds do, albeit, represent a step towards innovation and collaboration and a bridge between the private and social sectors. Whether you think invoking private capital for social programs is a good thing, or not, there is a pressing need for this type of innovation.

Responsible Banking: Making the exceptional the standard

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To most, the term responsible banking probably sounds like an oxymoron. But to the social entrepreneur it sounds like the future. And the future is happening now.

At the forefront of the responsible banking movement is Peter Blom, founder and CEO of Triodos Bank, and cofounder of the Global Alliance for Banking on Values (GABV). This sustainable banking network was established in 2009 with 11 banks across the world and is designed as a support system, a platform for sharing ideas, and a way to increase these banks’ influence on the mainstream financial system.

Banks involved in the responsible banking movement put people and the environment at the core of their operations. As a two-part article in Fast Company explains, it comes down to branding. When people trust a bank and know where their money is going, they invest more in that bank. The GABV, overall, did well during the financial crisis.

In fact, since the beginning of the financial crisis, Triodos Bank actually increased business, and this past year it beat out 165 other banks to be named Sustainable Bank of the Year. The exception to the GABV’s success, the fall of ShoreBank, teaches us that sustainable lending, like traditional lending, still needs to diversify. Fortunately, the positive work of ShoreBank can continue due to purchase by the Urban Partnership Bank.

With that in mind, and a strong mission, the GABV announced at the 2010 Clinton Global Initiative (CGI) its goal to reach one billion people through sustainable banking by 2020. The network, which pledged to raise $250 million in three years at the 2009 CGI, exceeded expectations by raising $400 million in just one year.

“We need to raise more financial capital and train and equip the next generation of sustainable bankers so we have the human capital to use it to its full potential,” Peter Blom said.

The GABV aims to attract more members and more funding, thereby bringing the sustainable banking movement, long the work of patient and inspired individuals, further into the mainstream, and redefining the way we think about banking.

Peter Blom will deliver the lunchtime keynote address at the 2010 Social Enterprise Conference and receive the Botwinick Prize in Business Ethics, presented by the Sanford C. Bernstein & Co. Center for Leadership and Ethics.

Simplifying International Aid

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What if we simply handed cash to the poor? This is the question some economists are asking after recognizing that many aid initiatives, such as microfinance, are not quick to implement and often fail to reach the poorest of the poor.

Joseph Hanlon, a senior lecturer at Open University in England and author of Just Give Money to the Poor, argues that in making direct cash transfers, the poor are provided with a foundation that they can further build upon.

“You can’t pull yourself up by your bootstraps if you don’t have boots, and cash transfers are providing boots,” said Hanlon in an interview with The Boston Globe.

In Brazil, impoverished families receive a cash stipend to supplement their income

Although the idea of direct cash transfers has garnered new interest, it has been around for quite some time. Milton Friedman popularized a negative income tax in the 1960s, which would provide low-income workers with supplemental earnings. Currently, the U.S. uses a variation of the negative income tax, called the Earned Income Tax Credit.

In 2003, Brazil established Bolsa Família, a program that provides impoverished families with a monthly stipend. The program has garnered international attention and is regarded as a significant factor in reducing poverty in Brazil.

Proponents of direct cash transfer programs argue that initiatives like Bolsa Família reduce frictional costs by reducing the number of steps that it takes for funds to reach the poor. Unlike, for instance, a large scale irrigation initiative, which takes time to implement, direct-cash transfers benefit recipients immediately and also allow them to choose how the funds should be used.

Greed for Good – More than Just a Financial Return

 

“‘There’s a ton of pent-up demand in the investment community to put money into ways that generate a significant financial return alongside social impact,'” says Heidi Krauel in the WSJ article Meet Gordon Gekko’s Grandchildren.

Christina Reichers and Heidi Krauel working with D.Light in Uttar Pradesh, India

The article is a great overview of the growing movement of social entrepreneurs.  It is also a reference to Gordon Gekko, the fictional character in Oliver Stone’s 1987 film, Wall Street, known for the slogan “Greed is Good”.  Gekko, recognized as a symbol of the evil in the for-profit world, is being summoned by a new group of socially conscious entrepreneurs, who are placing a positive spin on the slogan.  They are using the allure of profits and the structure of traditional businesses to invest in the world’s poor.  Social entrepreneurs work towards not only monetary returns, but social returns as well.

The effectiveness of nonprofits and donations to the world’s 4 billion poor is evident in many circumstances, but the gaps that are left after these organizations and operations have taken effect, points to the need for further solutions.

Heidi Krauel, who has a background on Wall Street,  is highlighted in the article and is one of three Acumen fellows featured in the PBS documentary, “The New Recruits”, which premiered last month.  As an Acumen fellow, she went to Delhi, India where she worked with the company D.Light to develop their distribution and marketing strategy.  The documentary also follows Joel Montgomery who went to Karachi, Pakistan to work on increasing the sales of the company Micro Drip.  Finally, Suraj Sudhakar worked in Nairobi, Kenya with the company Ecotact, supporting the introduction of their product, the Ikotoilet, in the business district of Nairobi and the nearby slums.