Scaling Impact: Finance and Investment for a Better World

Description

The global challenges confronting us ― climate change, poverty, inequality, and many others ― can feel overwhelming. Those of us who believe in market-based solutions to these challenges get even more disheartened when we regularly see our existing capitalist system failing us, often causing more harm than good. Many examples show how the capitalist tools of finance and investment can and make real, positive impact. Approaches like blended finance and impact investing can help accelerate progress against the world’s biggest remaining collective challenges.  Yet use of these improved capitalist approaches remains far too subscale. Blended finance and impact investing remain 15 to 200 times smaller than traditional approaches to finance and investment.  How can we continue to make capitalism work better by scaling these approaches and others? This book looks at how we can start making these necessary changes using strategies, structures, and practices that take advantage of capitalism's strengths. Its goal is to demonstrate how a reimagined financial system can be more inclusive and accountable to all. By shifting away from extractive, short-term practices in the name of shareholder primacy, we can move toward a system that values the role of all stakeholders. About the Author Acknowledgements Preface Contents List of Figures 1 Introduction The global challenges we confront daily can feel overwhelming Is capitalism failing us? Does it need to be reimagined? Yet real and measurable progress is being made Example of progress: Expanding energy access to improve livelihoods in emerging markets Impact investing is still far too subscale Systems can change Capitalism is still the best solution, but we can do better Notes Part I Seek Financial Health, Not Financial Access 2 Reassess the Financial Inclusion Revolution Hypothesis 1: Fintech serves a large total addressable market (TAM) in emerging markets Hypothesis 2: Fintechs are growing faster than traditional financial services segments Hypothesis 3: Fintechs attract even greater investor interest due to their dynamic growth Hypothesis 4: Fintechs serve base-of-pyramid populations and small businesses Hypothesis 5: Fintech products are superior to those of traditional finance providers Hypothesis 6: Fintechs demonstrate impact on customers’ lives Summary of key messages from this chapter Notes 3 Design Services That Build Financial Health Segment to understand customer value Prioritize underserved segments, such as female clients Be holistic Create pathways for customer growth Listen to customer voices to assess performance Measuring financial health Summary of key messages from this chapter Notes 4 “Measure Impact with Client Voices”—An Interview with Sasha Dichter Notes Part II Provide Patient Capital, Not Venture Capital 5 Better Understand the Diverse Needs of Enterprises The growth and limits of the Silicon Valley venture capital model The Missing Middles A new way of segmenting enterprises to better understand their financial needs Four families of small and growing businesses12 High-Growth Ventures Niche Ventures Dynamic Enterprises Livelihood-Sustaining Enterprises Differentiating the four families Lens 1: Product Innovation vs. Market Scale Matrix Lens 2: Growth Curves Lens 3: Entrepreneur Behavioral Profiles Summary of key messages from this chapter Notes 6 Explore Alternative Approaches to Better Serve Enterprise Needs A new paradigm of enterprise financing Five alternative approaches to closing financing gaps2 Open-ended capital vehicles Blended capital structures Customized financing products Post-investment technical assistance Responsible exits Limitations Summary of key messages from this chapter Notes 7 “Reimagine Approaches to Provide Capital”—An Interview with Chris Jurgens Question 8: What are you focusing on now with respect to reimagining capitalism? Notes Part III Be an Impact-First Investor, Not an ESG Investor 8 The Difference Between ESG and Impact Investing and Why It Matters The ABCs of ESG versus Impact Investing Avoiding “impact washing” ESG and impact on a spectrum Achieving impact alpha Putting it into practice Step 1: Define impact thesis and identify associated performance metrics and targets Step 2: Develop an impact rating tool to classify and diligence investments Step 3: Drive value through performance improvement plans Step 4: Design relevant impact monitoring and reporting frameworks Step 5: Evaluate and reinforce impact at exit Is it working? Summary of key messages from this chapter Notes 9 Raising the Bar on Impact Management and Measurement Redefine value Incorporate broader stakeholder perspectives Increase standardization of impact measurement Improve transparency and rigor of measurement where standardization is not appropriate Integrate financial and nonfinancial performance Make high-quality impact reporting mandatory Summary of key messages from this chapter Notes 10 “Mainstream Impact Management”—An Interview with Olivia Prentice Notes Part IV Offer Catalytic Finance, Not Just Blended Finance 11 Unleashing Private Capital for Global Development The opportunities and challenges of financing SDGs Potential to mobilize private capital Making blended finance more “catalytic” #1: Demonstrate the potential of a new investment thesis #2: De-risk to better serve the needs of difficult to serve social ventures #3: Enhance the impact potential of investments with technical assistance Summary of key messages from this chapter Notes 12 Scaling Blended Finance Effectively Overview of blended finance Blended finance in practice Archetypes of blended finance When to Use blended finance Determining the right blending archetype(s) Choosing how to structure a blended finance vehicle Defining the level of concessionality Understanding financial and nonfinancial additionality Summary of key messages from this chapter Notes 13 “Challenge the Development Finance Status Quo”—An Interview with Joan Larrea Part V Measure Success Based on  Results, Not Activities 14 The Unrealized Potential of Results-Based Finance Charting a new path forward The rise of results-based financing A menu of results-based financing options Impact Bond: Social and Developmental Social Success Note (SSN) Outcomes-based contracts Outcomes-linked pricing Social Impact Incentives (SIINC) Challenge funds Awards and prizes Auctions Mainstreaming results-based financing Summary of key messages from this chapter Notes 15 When, How, and Why to Use Impact Bonds A hammer looking for a nail How do impact bonds work? Five myths about impact bonds Impact bonds are not bonds Impact bonds do not crowd in new money Impact bonds are not the only type of results-based finance Impact bonds are not suited to all organizations Impact bonds can work even when external risks are large and hard to manage An impact bond success story Summary of key messages from this chapter Notes 16 “Link Financial Incentives to Impact”—An Interview with Bjoern Struewer Part VI Provide Capacity Building, Not Just Capital 17 Enhancing Impact with Capacity-Building Services Making the case for capacity-building support Not all capacity-building support is equal Types of capacity-building services Capacity-building delivery models Digitalization21 of capacity building Summary of key messages from this chapter Notes 18 Fulfilling the Potential of Capacity-Building Services Select the right enterprise to support Charge enterprises to improve performance Address problems: focus on group-based problem-solving approaches to learning Learn by evaluating enterprise performance Lead by example Summary of key messages from this chapter Notes 19 “Scale Based on Evidence of Effectiveness”—An Interview with Nicholas Colloff 20 Conclusion—What We Can Do to Scale Impact Glossary Selected Bibliography