What You Need to Know About Impact Investing

Impact Investing is here to stay. Here is why.

Impact investing is a phenomena that should be reckoned with. A field not as young as one might think - arguably its history begins with the social unrest of the 1960s - impact investing came to prominence only a couple of years ago. Nevertheless, this newcomer at the intersection of financial and social sectors already has success stories under its belt. Take for example, Blue Orchard, a financial institution successfully investing solely into the microfinance organizations or Acumen Fund that has invested $83 million in social enterprises across multiple countries around the world, or Omidyar Network that has committed $611 million to both for-profit and nonprofit companies since its inception in 2004. But there are more drivers contributing to the success of impact investing besides a few financial figures and well-known nonprofit brands.

Much more important are the broad social changes that the world has been experiencing for a past decade or two. Today not only we are faced with ever increasing environmental, humanitarian, and social problems, but today we actually can do something about it. Technology, widespread and almost instantaneous access to information as well as rising incomes across the board (so called "flattening"of the world, the term coined by Thomas Freidman) turned many silent observers into philanthropists, volunteers, social entrepreneurs, ever demanding and conscious consumers.

Investing for Social & Environmental Impact

Business as usual rarely works now. You can attribute these changes to Generation Y-ers and their particular outlook on life, unprecedented numbers of young people single-handedly creating fortunes from scratch, or to the relative political stability the world has experienced since the breakup of Soviet Union. There are pragmatic reasons for the rising popularity of impact investing as well: the global financial crisis has shown just how ineffective and destructive traditional financial instruments could be. The subsequent need for minimizing risks made investors look outside the box. As it turns out researchers at NYU have found evidence that investing in microfinance institutions can help portfolio diversification. No matter what the reasons are, the point is that the world now has time and resources to effectively solve global problems and impact investing is one of the most useful and promising tools to do so.

1) Impact Investing will be worth $9 billion in 2013 according to JP Morgan industry report and could be worth some $500 billion in a decade by Monitor Institute's estimations.

2) Impact Investing is Data & Performance Driven, at least much more so than the nonprofit sector. As the formal definition of the sector is still in the works, practice remains extremely diverse, with some funds positioning themselves along their traditional financial-sector counterparts and others self-identifying as inherently pro-social. Intermediaries between financial and social sectors, impact investment funds have to produce both financial and social returns. It's easier said than done, however. "For the most part, evidence does not always look like that of conventional investing." Yet the large portion of the market still expects equity-style returns. (A Market Emerges: The Six Dynamics of Impact Investing.) In fact, majority of impact investment funds rated by GIIRS target 11-25% rate of financial return. Are these rates realistic? We just have to wait and see.

GIIRS Quarterly Analytics Report: Q3 2012

3) Impact Assessment is based on Social Impact Metrics. IRIS (stands for Impact Reporting and Assessment Standards) social and financial metrics seem to be the most widely used ones, some are industry-, some are company-specific, all can be implemented and tracked by nonprofit, for-profits, and social enterprises alike. Nevertheless, there is certainly no industry-wide acceptance of any standard.

4) Main challenge: aligning risk and returns (both financial and social). You thought you had it bad in the financial sector. Add a third unknown into the already complicated equation and you have a good picture of the impact investing field. So far we have talked only about the providers of the financial instruments, but what about the people and companies on the ground that put the money to work? It turns out that social entrepreneurs and nonprofits have the most difficulty raising funds from impact investors at the seed-level. There are simply too much risks involved. Time-horizons of potential investment returns are too long. There is so much more uncertainty in building a business in a developing country, much more so in a poor, underserved community! That is why the work of an impact investor never ends with writing a check, it is a much more involved, intricate process, like Acumen Fund's patient capital, for example. An excellent article from Stanford Social Innovation Review, Closing the Pioneer Gap, discusses this issue in much depth and is a read I highly recommend.

As you can see, there is a great deal to be done to make impact investing a long-term success. Yet, despite its young age, the sector has already disrupted both financial and nonprofit industries and challenged the status quo. Is it not a good enough reason to watch the industry closer, join the discussion, and maybe even help shape a financially-sustainable and powerful tool for social change?

Aid, Nonprofit, Public: Who Defines the Rules of the Game?

I am a big supporter of the view that nonprofits should be run like businesses. Because aid has to be sustainable. In every sense of the word. However, through my experience in the field I have started to notice that some practices of many aid and international development organizations remind me of the corporate world. But not in a good way.

When nonprofit leaders are striving to streamline day-to-day communications and management within their organizations - it is excellent. When CEOs promote transparency and accountability within their companies, it is great. When nonprofits look for social investors instead of grant-makers to find their way to financial sustainability, it is superb! However, when nonprofits start paying more attention to their PR campaigns and fundraising, forgetting their original goals in the process, it is not aid anymore. A nonprofit is a business with mission. When mission is lost, nonprofit turns into a traditional business with a donate button on its homepage.

One of the articles that really inspired this post was tweeted by the mysterious @TalesFromthHood. AlertNews Can aid agencies afford to be honest? is talking about nonprofits' fundraising & PR practices that too often take general public (a.k.a. potential donors) for simplistic and narrow-minded people, pushing simple messages such as "a starving child" and forgetting to tell the not-so-pretty truth from the ground.

The article quotes OCHA's Mark Turner: "I still get the impression that the simple tale of 'give a pound save a life, here's a child with a begging bowl' is still by far and away the most effective fundraising exercise and I'd be interested see if there's any research to be done in terms of complicated messages and fundraising -- whether this public that supposedly wants a greater, more complex understanding of the situation gives money when you present it in that complicated way."

The question I want to ask is: Who started this myth that the public does not want the "messy truth"? Who defined the rules of the game that the nonprofit world is running by?

Correct me if I am wrong, but aren't the most educated people - traditionally the biggest donors? Then why do nonprofits need to simplify their messages so much? Why can't they afford to be honest? Since when fundraising and PR are more important than work on the ground? Since when is it acceptable for aid agencies to claim to "do good" without knowing their original mission or end results?

Is it because admitting failure is so hard in practice? Is it because we venerate success so much, but prefer to omit the "dirty details"? Or is it because monitoring & evaluation are legging behind, while PR machine is always on its high horse? When did nonprofit industry switched gears from need-based solutions to corporate-like, huge but unaccountable programs?

Now, I am not saying that fundraising and PR are not important. Many big nonprofits are able to receive grants namely because of the successes of their PR and fundraising departments. Working for more than 2 years for a nonprofit run by volunteers, I KNOW how important they are. However, I take comfort in that my organization is mission-driven, that it exists simply because it truly helps the people in need. THEY are our main focus, their needs is the base of our existence. Because aid is about helping others, not about my professional success, a CEO's self-promotion, or organization's ratings. Aid is about doing good, honestly, effectively, selflessly. A very idealistic view, I agree. But aid itself is by definition idealistic.

I look forward to your comments! Do you agree with me or not? Can nonprofits really combine idealistic and altruistic motives with business operations? Can aid agencies be grassroots-oriented and still financially sustainable?

Three Cups of Tea: Another Wake Up Call for the Nonprofit World?

I have been following closely the developments around Three Cups of Tea and accusations against its author, Greg Mortensen in the lastest "60 Minutes" episode. The documentary as well as the ebook Three Cups of Deceit (downloadable for free until April 20th) written by Jon Krakauer accuses Greg Mortensen seemingly of all the worst sins: falsification of the story of how he came to the idea of building schools in Pakistan and Afghanistan, lying about being taken hostage by Taliban, mismanaging CAI funds (Central Asia Institute, the nonprofit Mortensen founded to fund building schools), and worst of the worst lying about how many schools CAI has built and how many of them are functioning.

I have to admit that I haven't read Three Cups of Tea (and probably never will), even though I did get a copy of it for inspirational and enlightening reading. Ha, little did I know... Nevertheless, I have been introduced to Mortensen's work through Half The Sky, a truly wonderful book by Nicholas D. Kristof and Sheryl WuDunn as well as reading and hearing about Three Cups of Tea on the TV and online. Just last month I was absolutely thrilled to learn that Mortensen was scheduled for a speaking engagement at my university. However, I learnt about it too late and the event was all booked as all his events are. So, you see, as many of you, I was his fan even without reading the book.

Then I hear about the upcoming documentary (couldn't watch it-no cable) and then I read the ebook that the documentary was probably based on, as Brett Keller suggests in his post The Tea Test. It felt as if I could see Mortensen falling off his "hero throne", truly saddening and devastating, not for him, but for me and for the whole nonprofit world. Because if he really did lie and did mismanage donors' money, and didn't build the schools he said he would, I can't imagine such a person being touched or upset by the situation he currently finds himself in. I would imagine he is scared for his reputation and money, but not upset. One question that really bothers me is WHY? Why did Mortensen do all this? If he really didn't give a damn about kids in rural Pakistan, why did he promise to build a school there? Even if the promise was given "in the heat of the moment", like sort of a revelation, why did he actually followed up on it? Surely the men from rural Pakistan were not going to follow Mortensen all the way to America and demand him to fulfill his promise?!

But enough about Mortensen: his personal motives and repercussions are not that important. For me, there is a bigger lesson to learn from this scandal:

If even the best of us, fall so low, if even the most renown and admired nonprofits turn out to be so poorly managed and do so little good (in comparison with what they claim), what about the rest of us? How does an average nonprofit worker perform his/her duties, how does an average nonprofit CEO manage donors' or taxpayers' money, how much good does an average nonprofit actually do?

These are the questions we, as a nonprofit community, have to think about and try to find answers for.

Please, check out the following wonderful and really insightful posts on the subject from my fellow aid bloggers:
What Mortensen Got Wrong by Peter Hessler
Three Cups of BS by Alanna Shaikh
Lessons learned from ‘Three Cups of Tea by Akhila Kolisetty
Three Cups of … by Penelope M.C.
Three Cups of Lies? by Tom Murphy
A great compilation of posts and articles on the subject on Good Intentions Are Not Enough by Saundra S.

How Can We Raise Awareness In Darfur Of How Much We're Doing For Them?

How Can We Raise Awareness In Darfur Of How Much We're Doing For Them?

Can microfinance be both moral and profitable?

I have recently stumbled upon a CNNMoney article on microfinance that talks about SKS Microfinance Ltd., India's biggest microlender', debut on Bombay Stock Exchange.

At first, I saw no problem with SKS' Initial Public Offering (IPO). By going public SKS will attract more money to its business that means more loans for India's poor. Yet, I forgot that as a public company SKS now will be accountable to its shareholders, who are interested in profit-maximization, not in serving the poor. How does a microfinance organization boosts its profits? You got it - by increasing interest rates on its loans. Now, this, of course, has been the main criticism of the founder of microfinance, Muhammad Yunus. He affirms that any microcredit organization charging its clients more than 15% interest rate does not truly serve the poor, rather it is in a profit-maximizing business.



So, is there a way for MFIs to get investment without raising their interest rates? The answer, yet again, lays in creative and unconventional thinking of Muhammad Yunus. The answer is social business, a business that functions in every way as a regular profit-maximizing enterprise except that it is not. Instead of profit maximization a social business' only goal is to serve a cause. Thus, a social business uses all its profits solely for the expansion of its operations. Moreover, a social business can be social in a different way, having poor people as its shareholders. In the beginning though social business has to be supported by regular investors, who will put their capital into a social business as into any other one, the only difference being that they will not receive any dividends. As soon as a social business becomes self-sustainable, investors will get their money back and will be able to decide to reinvest the sum or spend it on something else. The motivation behind investing in social businesses is simple: the desire to do good, which is in human nature and which brings if not material then emotional and spiritual benefits.

Therefore, only if SKS was operating as a social business and if its shareholders had altruistic and idealistic minds, then SKS could have continued to truly serve the poor at the same time getting enough investments to run its business and expand its operations. Yet, in the business of serving the poor there is no place for self-enrichment. That again proves Muhammad Yunus' position, arguing that any hybrid business model will ultimately sacrifice its altruistic values for profit maximization.

And yes, did I mention that Vikram Akula, the founder of CEO of SKS, has recently sold his shares of the company for $10 million? He says he is not ashamed of it, stating that rewarding microfinance employees is part of his business strategy. That's a nice reward, isn't it? Especially that much of SKS' original capital came from public donations and grants.

Now, where do you stand on this issues? Do you sympathize with Mr. Akula's strategy or admire Mr. Yunus' altruistic position? If you haven't made up your mind yet, you will probably be able to do so after watching Muhammad Yunus' and Vikram Akula's debate on September 21st at the Clinton Global Initiative.

Microfinance: Propoor Nonprofits

There ARE ways of making microfinance work even without raising interest rates and truly serving the needs of the poor. One such example is EARN, a nonprofit putting microfinance to work for low-income Americans in the Bay Area. 100% of donors’ money go towards changing someone’s life and are matched twice, by federal grant and Earn Savers program.

Another nonprofit that I can personally ( as I am interning with them) recommend is Color Me In!, organization combining microfinance and tree-planting. Rural Zambian enterprise groups receive microloans for small business development that can be partly repaid by planting trees, 1 tree per 1USD borrowed. As a result, CMI not only empowers the poor, but also helps counter deforestation that has been plaguing the country for many years. CMI is currently raising $6000 to fund two enterprise groups in Zambia. One loan will help fish farmers expand their business, while another will go towards building a community school for 30 orphans. 90% of donations will go straight to support these loans, while 10% will be spent on communications and reporting over the next year. Finally, Color Me In! does not charge any interest rate on its loans in most cases, while in others lets the recipients define the interest rate themselves (which is usually 5-10%.)That is just one example of how smaller nonprofits without much publicity can have much more effective and transparent programs than their big media-loved counterparts.

Heifer International is an example of a different kind of microfinance organization. It gives microcredit loans in the form of domestic animals, such as cows, chickens, and goats. This way famers are not only able to feed themselves, but can also achieve stable income by selling surplus and breeding domestic animals for sale.

Another great nonprofit is Women For Women International that ultimately connects women-donors from the developed world with the women in need in conflict and post-conflict countries. Their Sponsorship Program has truly changed lives on both sides of the world, because as women in Africa, Asia, and Latin America benefit financially and become empowered, women in the US become inspired and happy that they are contributing to a greater cause. Not only a donor knows a recipient’s name, but can exchange letters with her that truly creates life-long relationships.

I was planning to include Kiva.org in my list of microfinance organizations, but, first of all, it doesn’t need much introduction as a top peer-to-peer microfinance organization and, second, I was not satisfied with the interest-rate they charge their recipients: average interest rate among Kiva's partners is 38%. Kiva, no doubt, does create change, yet it could have been much more effective and less bureaucratic.

In the end, the hardest part in identifying effective and transparent microfinance nonprofits is that most of them do not openly state their interest rates and, thus, you have to do an in-depth research. Doing and donating to charity work is not enough, effectiveness is the key if you want to create the most change for your money.

My next post will cover social business as coined and defined by Muhammad Yunus and that may be the long-awaited answer to aid effectiveness.

Microfinance: Helping the Poor or Making Profits?

As I noted in the previous post, there are virtually thousands of microfinance organizations out there nowadays, yet they are not equally transparent and effective. Even more so, some so-called microfinance organizations have trailed-off from the original mission to help alleviate poverty and became regular profit-maximizing businesses that exploit the poor. That is exactly why microfinance movement was started by Muhammad Yunus in 1976: to give people an opportunity to lift themselves out of poverty and break their unhealthy dependence on money-lenders who were living off them.

Mr. Yunus divides all microfinance organizations into 2 categories:

1. Poverty-Focused Microcredit Programs, ex. The Grameen Bank.
These programs charge loan recipients interest rate starting at the market price of the cost of funds up until additional 15% to that price.

2. Profit-Maximizing Microcredit Programs.
These businesses charge more than 15% on top of the market price of the loan and, thus, in Yunus’ words, operate in moneylenders’ territory.

To the defense of the latter, Kiva.org, one of the most famous microfinance organizations, explains why microloans have to have high interest rates. It all makes sense, but in a nutshell, the poor have to pay for the bureaucracy of NGOs, i.e. transactions costs, staff meetings, monitoring, etc. While it is an undoubtedly reasonable argument, for me, low interest rates define an effective microfinance organization, such as Grameen Bank that somehow managed to do so. Another explanation of high interest rates, as Muhammad Yunus notes, is that it helps microfinance organizations become self-sustaining in a shorter period of time. Again a very logical reason, however, the poor should not have to pay for that. Intensify your fundraising outreach, write more grants, what have you. The poor should be nothing but the beneficiaries of the program! Besides, there are other ways of reaching self-sustainability, such as establishing savings accounts for the poor or giving the loans for all the upper classes with regular high-interest rates.

The list of exemplary (and not-so much) organizations based on the criteria I outlined above is right in the next post.

Microfinance and The Grameen Bank - Revolution in the Aid World

To put things into perspective, microfinance has simply revolutionized the development world. The reason is that it has proved that with really small amounts of money, truly big results could be achieved. Yet, even this is not the major benefit of microfinance. As Muhammad Yunus, the inventor of microfinance, says:

"[Microcredit] lets individuals explore their own creative potential […] Microcredit turns on the economic engines among the rejected population of society. Once a large number of these tiny engines start working, the stage is set for big things.”

Indeed, Muhammad Yunus set the stage for big things: in 1983 he founded The Grameen (“grameen” means “rural” or “village” in Bangla language) Bank in Bangladesh that gave microloans for small business development to the country’s poorest and neediest, the ones who were rejected by the formal economy. In 20 years the bank became a self-sustaining social business. Even more so, The Grameen Bank has grown and spread out to become The Grameen Family of Businesses that include 25 for-profit, non-profit and social business enterprises, all of which aimed to alleviate poverty in bangladesh and worldwide. In 2007 80% of poor Bangladeshis were reached out with microcredit (with the help of other microcredit NGOs.) By 2012, Yunus projects, 100% of poor Bangladeshi families will be able to obtain microloans.

Of course, such success has been picked up by other bright minds, especially after the enterprise got a worldwide recognition in 2006, when Muhammad Yunus and The Grameen Bank were awarded the Nobel Peace Prize. Nowadays there are thousands of local and international nonprofits specializing in microcredit and its various forms. The true beauty and potential of microfinance is that it can be tailored to specific needs of any given community or a country.

In my next post I will list grassroots and international microcredit NGOs that proved to be the most effective and create real change on the ground, so that

“Our Grandchildren will have to go to museums to see poverty," Muhammad Yunus.

P.S. To learn more about The Grameen Bank and Muhammad Yunus' philosophy and approach to combating global poverty check out his books:

Banker to the Poor: Micro-Lending and the Battle Against World Poverty; Public Affairs; 2003; ISBN 9781586481988
A World Without Poverty: Social Business and the Future of Capitalism; Public Affairs; 2008; ISBN 9781586484934

I am reading the latter one and it's full of 30 years of experience, great ideas, and inspiration!

Girls' Education: Successful Grassroots Campaigns

Before I start listing NGOs that are promoting the cause of women's education, I should note that the programs that all these nonprofits support almost always transcend the formal educational process, addressing other women's needs and problems as well. These issues include sex trafficking, female genital cutting, maternal health & family planning, economic empowerment, AIDS/HIV prevention, and women's rights. The reason is that, as many of these problems have cultural roots, education turned out to be the key element in resolving all of them.

For example, one of the most effective ways of preventing girls from being sex trafficked is to keep them in school. Two great ways to achieve this is building schools in rural areas and "bribing" parents for the perfect school attendance of their daughters. Rural School Projects have been implemented around the world. In Cambodia, for example, where many girls end up being trafficked to brothels in Thailand, Rural School Project is supported by American Assistance for Cambodia/Japan Relief for Cambodia (AAfC). The project has built 470 schools all around the country. Donors pay $13,000 and the funds are matched by World Bank and Asian Development Bank; after the schools (with the donors' name on it!) are constructed donors are encouraged to support students by funding improvements for their school, such as computers, Internet access, a water well, or a vegetable garden.

While it is clear that not everybody can afford donating $13,000, this sum is very achievable if the ones who care unite their forces! One of the schools in Cambodia, for example, was fully funded by the Overlake School in America, whose students not only funded the school, but also visited and established life-long relationships with their Cambodian counterparts. Think about how easy and enriching it would be for (a) collegiate student organization(s) to raise this money! The importance of having a school in a village simply cannot be overstated, because a school is the only opportunity that these rural girls have for changing their lives for the better.

American Assistance to Cambodia has established another program, Girls Be Ambitious, that provides families with $10/month if their daughters have perfect school attendance. The logic behind this is that girls in poor rural communities usually have to abandon education and help their family survive by taking jobs far from home or even abroad, often ending up as sex slaves. This way, for $120/month you can fight sex trafficking and save one girls' life.

Tostan is another successful grassroots campaign that concentrates on education, but whose main objective is to stop female genital cutting and promote women's human rights. Cultural awareness of the founder and leadership of African women helped Tostan achieve what no international or governmental organization managed to do- create cultural acceptance of the notion that female genital cutting is damaging for women's health and that an "uncut" woman is no worse and deserves to be married as any woman who has been cut. Tostan was launched in Senegal in 1991 and slowly but surely achieved such results- 2600 villages announced that they had ceased cutting between 2002-2006 - that Senegalese government itself decided to adopt Tostan's approach on the national level. Now Tostan is trying to establish itself in Somalia, Sudan, Chad, Ethiopia, and Central African Republic.

The last two NGOs that I would like to note are:

Afghan Institute of Learning managed to hold classes for girls and boys even during Taliban regime (!) and now provides education, vocational training, and medical help for 350,000 women and children around the country.

CAMFED is a nonprofit that supports girls' education in Africa. Started by a Welsh woman, striving to help girls in Zimbabwe, it now helps girls and boys attend and stay in school, get college scholarships, learn basic economic skills, and start small businesses. Since 1993 Camfed improved the school environment for 1,065,710 children in Zambia, Zimbabwe, Tanzania, and Ghana. (The picture is CAMFED's "get involved" banner, so I suppose I can use it here.)

As usual most of the information, inspiration, and knowledge I found in "Half The Sky." Let me know, if you would like me to list more similar organizations or maybe NGOs working in specific countries or for a different cause. In my next post I will concentrate on microfinance and how it changes lives all around the developing world.