What is impact investing and why is it important for the charities and the development sector?
Impact investing refers to investments that seek to generate both a financial return as well as generating a positive, and measurable, social or environmental impact. Traditional financial investments would have only been concerned with making a financial profit – and traditional charity and development work would focus on “doing good”. Impact investing and social finance bring these two worlds together and create a huge opportunity for using global finance mechanisms to have a positive impact on the world.
It is estimated that there is a $2.7trillion annual funding gap to achieve the Sustainable Development Goals. Charities and the development sector have to accept that traditional approaches to philanthropy and development will never close this gap, so new approaches must be embraced.
Why did the British Asian Trust decide to launch Impact bonds for education? What was the rationale behind it?
Ever since the British Asian Trust was created it has been in the DNA of the organisation to challenge traditional approaches, for example by embracing the positive role that the private sector can play in bringing about positive change. Looking at different ways of using finance was a natural development, hence the decision to explore social finance and Development Impact Bonds (DIBs). The DIB we have launched is the largest education DIB in the world and, in addition to benefiting hundreds of thousands of school children, we believe that it can play a role in changing the way development works and improving the way that education is funded.
What were the challenges?
The main challenge was getting people to understand how this new approach could work. Very simply, traditional approaches involve donors paying upfront and NGOs then delivering the activities and inputs they are funded to deliver. With a DIB the donors only pay once success has been achieved – and this has to be measured and verified by an independent evaluator. If it is not successful the donors don’t pay. This is made possible by risk investors providing the up-front working capital, that they lose if it is not successful and get back if it works. It is actually not that complicated – but it is a different way of working and most organisations (donors and delivery NGOs) are not set up to work in this way.
Would you encourage other NGOs to do the same?
Absolutely yes! Driving organisations to focus on data, evidence, outcomes and success should be something we should all embrace. But NGOs have to understand that social finance is not a fancy new way of fundraising, it is about a total change in culture and approach.
How do you measure the impact of the work being done by charities on the ground? Can you please share an example?
A very simple example is the education DIB we have launched. In a traditional education programme, donors might pay for a range of inputs and activities but it is unlikely anyone would have really clarified from the start what success would look like and how it would be measured. With our DIB, from the start, we determined that success would be improved outcomes in literacy and numeracy. So we could measure literacy and numeracy levels, establish baselines and measure improvement.
What are the obstacles to bringing more capital into impact investing? Does change have to happen primarily on the investor side or does more have to happen on the investee side? Or both?
Change has to happen on both sides. The biggest obstacle is getting all parties (investors, donors and delivery organisations) to understand and embrace different ways of working – most importantly getting everyone to understand the importance of being able to determine and measure outcomes and impact.
Can you share your views on the current trends that you think will shape the sector’s future in terms of financing philanthropy and charity work?
There will be huge changes over the coming years. Until recently poor countries tended to be treated in a charitable way by rich countries, with donors and NGOs providing aid, technical assistance and funding. But increasingly it is the private sector that will have the potential to have the biggest impact on poverty. In 1980, foreign aid comprised roughly 70% of US capital flows to developing countries. Today, US Official Development Assistance comprises less than 10% of overall US capital flows to less developed countries, with 90% coming from the private sector. As the private sector gains experience on development issues the shift towards development efforts that create both business value and social goodwill continue to increase. These changes will fundamentally challenge the way that charities and NGOs work, forcing all organisations to question why they actually exist, what they exist to achieve and how they are going to do it. And that can only be a good thing.
Will you be looking at launching impact bonds for other sectors?
Richard Hawkes is the Chief Executive of the British Asian Trust. He has held a range of senior roles in the UK and international not-for-profit sector for more than 20 years.