Yes, this is a provocative headline.
Offering a critique of a Nobel Prize winner who revolutionized financial inclusion and positively impacted the lives of tens of millions is not something we take lightly. Nor would we flippantly critique the Rockefeller Foundation, an organization that quite literally wrote the book on impact investing, and, in this case, has partnered with Yunus Social Business on its new “social success notes”.
That said, we have found that constructive criticism is sorely absent from most dialogue on impact investment. As a community of practitioners, we are quick to celebrate intention and innovation rather than outcomes. Because we must work collaboratively and demonstrate momentum, we can too often hold our tongues. At Ceniarth, we prefer a more direct approach. The problems that we all hope to solve are too big and too important for us to offer pleasant courtesies when we could be working together for solutions.
Mr. Yunus co-authored an article last month with Rockefeller President Judith Rodin entitled, “Save the World, Turn a Profit”. They begin by succinctly explaining a problem that we all hope to solve. Namely, that the world’s development challenges are expensive to fix and that there is not nearly enough international aid and philanthropic money to adequately finance solutions. As a result, we must find ways to mobilize a portion of the world’s $210 trillion in commercial capital toward these issues. On this, we could not be in more emphatic agreement.
Our disagreement is centered on how to catalyze a shift in large, commercial pools of capital. The authors cite rural energy access as an example of a market where “social success notes” could be useful. The premise behind “social success notes” is that philanthropic institutions would provide “impact payments” to subsidize investments in social enterprises. For example, if a social enterprise were to hit a particular impact target (e.g. number of households served), the contingent payment would be triggered, thus improving an investor’s financial return. If all goes as planned, the authors suggest, “it’s a win-win-win: Investors receive a risk-adjusted commercial return, thanks to the impact payment; foundations achieve far greater leverage for their philanthropic dollars while achieving a desired social outcome; and social businesses receive access to low-cost capital, allowing them to focus on improving the world without the pressure of offering market-rate financial returns.”
It is this last statement that we find most contentious. We feel strongly that when markets such as energy access begin to move in the direction of commercial viability, we, as investors, should be focused on preparing companies for the rigors of this path, not developing mechanisms that artificially reduce these pressures. We have come to this belief through a number of observations that we have made as active energy access investors.
First, there are currently a growing number of sophisticated, commercial investors beginning to deploy capital in the energy access market. Why? Because the economics are attractive. From growth stage equity deals to sophisticated securitizations, the conversations in the industry are maturing. Energy access investors in maturing markets do not necessarily want subsidies or charity. They want professional, financial deal structures and rigorous business diligence. The implication that even large, growing markets requires social subsidies or product give-aways (see the unfortunate example of Sky Power in Kenya) is damaging to the efforts of real investors who stand on the precipice of demonstrating that proper, commercial transactions will work.
Second, the authors believe that these impact payments provide foundations an opportunity for greater leverage on their philanthropic dollars. Everyone loves leverage, but in the energy access market, there are far more catalytic ways for foundations to participate that do not harm the integrity of commercial financial transactions. For example, currency volatility remains a critical risk factor in many energy access deals. Grant-funded reserves that provide a backstop in the case of unexpected devaluations would give many investors comfort to increase deal sizes and would provide leverage without requiring non-standard deal structures. Grants that help seed fund vendors and distributors in new geographies would also be highly catalytic in laying the groundwork for future, commercially viable companies. Organizations such as the Shell Foundation and DOEN have played a particularly important role in grant supporting pioneers to test concepts and run pilots.
Finally, the author’s state that these impact payments will allow social enterprises to receive low-cost capital without the pressure of offering market-rate returns. This is the most disheartening conclusion in the piece. The only way that companies will attract commercial capital is if they are subjected to the rigors of commercial investors. Impact investors have done a great disservice to many social enterprises by shielding them from these rigors. The pool of impact investors willing to offer concessionary terms with limited pressure is well intentioned, but very small. In many cases, pursuing these funders leads to stranded entrepreneurs that find cheap, impact money is an irresistible drug in short supply.
This is not to say that “social success notes” are a bad concept for all markets and sectors. As founding investors in Goldman Sachs’s Social Impact Fund we are active supporters of the social impact bond market (though there is absolutely nothing bond-like about these instruments, but that is for a different post!). We think that innovations such as social impact bonds and social success notes are very interesting tools for rethinking how public-private partnerships can work in financing interventions in childhood education, healthcare, job training, and other markets that, for various reasons, will never be truly commercial.
That said, we must be extremely disciplined about using the right tools in the right context. Our view is that in markets with true commercial potential we, as investors who care about achieving commercial scale, need to focus on transaction structures that will ultimately appeal to professional investors. This means applying the well- established tools of commercial finance to our markets, not reinventing our own.