By Brigit Helms and Oscar Farfán
Brigit Helms, the general manager of the Multilateral Investment Fund, also has served as the director of SPEED, a USAID-funded program in Mozambique, and a senior expert for financial inclusion at McKinsey & Company. She has a PhD in agriculture and development economics from Stanford.
A transformational movement is challenging the view that businesses exist primarily to maximize shareholder value. A growing number of businesses are keen to play a larger role in society, not simply by acting "responsibly," but also by becoming a true "force for good." They are harnessing the power of markets, entrepreneurship, and investment capital to tackle complex social problems in areas such as crime, education, health care, and clean energy.
This trend is just beginning, but is gaining significant traction. The B corporation concept is now present in more than 30 countries. Impact investing, the type of financing flowing to businesses generating social value alongside profits, has reached more than $60 billion in assets, and is estimate to grow at $10 billion a year. Major financial institutions--including JPMorgan Chase, Goldman Sachs, Black Rock, Prudential, Deutsche Bank, Citigroup, and BNP Paribas--are looking at businesses with impact and opening impact investing units, while a growing number of investment funds are specializing in this space.
Millennials, shift in philanthropy, technology are accelerating change
What we are seeing is not just a passing trend, but the beginning of a new form of business--a business that looks beyond profits to generate social value, the business of the future. Tectonic forces are accelerating this movement. At the global level, the most important one involves a cultural shift driven mainly by millennials. The new generation sees the main role of business as that of "improving society," and not just generating profits. Millennials are bringing a social conscience to the way we buy and run our businesses, and with more than $40 trillion to be inherited from baby boomers, they are redefining how we invest.
Another powerful force accelerating the emergence of beyond-profit business models is the paradigm shift in philanthropy, which in the United States alone represents more than $350 billion a year. Increasingly, foundations, corporations, and philanthropic organizations view impact investing as their "next frontier," and fund businesses with social impact.
Technology is yet another tectonic force. From solar energy, to mobile technology, to drones, new technologies enable businesses to reach low-income people with affordable and life-changing products and services.
In the developing world, where social needs are greater, businesses that generate social impact are naturally finding fertile ground. Latin America, the region we know best, has seen a 12-fold increase in impact investments in less than five years. The tectonic forces in this region are aided by a dynamic ecosystem. Latin America produces a large number of businesses that generate impact--the world's largest share by some measures--clustered around social innovation hubs such as Mexico City, Bogota, and Sao Paulo. The market for such businesses is quite significant, considering that nearly 400 million Latin Americans are at the base of the economic pyramid, with limited access to health care, education, housing, clean energy, and financing.
Multilateral Investment Fund
Dynamic new developments are unleashing beyond-profit businesses in this region, three of which deserve a special mention:
1. Tapping new investors. New initiatives are unlocking previously untapped capital for impact investments, enabling the 99% of small investors to step out of the sidelines. One example is the Calvert-IDB Inter-American Opportunity Facility, largely funded by retail-level notes as small as $20. Crowdfunding platforms, such as Fondeadora Mexico, are also reaching small investors, while vehicles such as the Essential Capital Consortium and Global Partnerships are diversifying their funding sources, using blended finance.
2. Crafting new investment tools. More investors, particularly fund managers, are moving from the "why" fund beyond-profit businesses, to the "how." They are crafting creative solutions that fit the specific needs of businesses seeking to create social value. Examples include financial products that use royalty-based payment structures or demand dividend arrangements, both balancing the flexibility required by investees with the liquidity sought by investors. Social Impact Bonds (SIBs) and social corporate venturing are other promising tools emerging.
3. Using new technologies. Perhaps the most intriguing trend in this space is the growing use of technology. Beyond-profit businesses are by nature highly innovative and prone to use new technologies when devising effective and affordable solutions. For example, Greenlight Planet taps solar technology to deliver low-cost energy to off-grid rural communities in more than 40 countries. Kuepa is a blended education company that uses digital technologies to provide affordable training to low-income students. And Matternet pilots drone technology to deliver essential health care to isolated communities.
The new generation of businesses is here to stay and bound to become a powerful force in the near future. While the road is not without hurdles, and much needs to be done to improve coordination and strengthen impact capital markets, the movement has taken root and is already bearing fruit. Businesses that create social value are not only making a difference, but also generating profits. A recent benchmarking conducted by the Global Impact Investing Network and Cambridge Associates shows that impact investments can achieve market returns similar to conventional instruments. Another survey of Latin American impact fund managers conducted by Bain & Company shows that the vast majority is expecting to meet or exceed market returns.
What can we conclude from all this? Social impact can make a business more competitive. In other words, value can be created by chasing values, and we can only expect more businesses going where value is found.
Oscar Farfán
Oscar Farfán leads investment projects in the sectors of technology, agribusiness, venture capital, education, and impact investing for the Multilateral Investment Fund. He sits on various advisory boards and investment committees for global and Latin American investment funds.
From the Multilateral Investment Fund Trends blog