The range of innovative finance tools available

The Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town is interested in market building around impact investing; has designed a number of blended financing instruments, and is providing the secretariat for the National Task Force for Impact Investing. Dr Susan de Witt from the Bertha Centre shared insight with Trialogue Business in Society Conference delegates on the range of innovative financing tools available.

Mapping the global investment landscape, according to Dr de Witt, 75% of investments go into traditional markets, with no regard for impact; 25% consider the environment, their employees and the way government decisions are made, and just one percent of this goes into businesses that specifically aim to address the UN Sustainable Development Goals.

Plotting the investment spectrum

Dr de Witt spoke about the alignment of CSI and corporate foundation funding with the Broad-based Black Economic Empowerment (BBBEE) Codes. She explained that a BBBEE trust is usually endowed with a single underlying stock of a corporate, making it difficult to leverage that investment strategically and thereby classifying this more as a responsible business investment. Skills development and enterprise supplier development (ESD) levies could be considered to have philanthropic impact. Socioeconomic development (SED) funding – the one percent net profit after tax – could be classified as grant funding.

Catalytic capital

Blended finance is about leveraging public philanthropic money to increase private sector investment in sustainable development. “We call it catalytic because it’s basically transformative – it does more than what the direct investment would suggest. The money mushrooms and creates a market effect that others can follow,” explained Dr de Witt, going on the say that “blended finance is a structuring mechanism … it’s how you add commercial funding to philanthropic funding to make more than the sum of the parts”.

Blended finance instruments

A design grant is “a grant that goes to an organisation to help them design their [blended finance] instrument,” said Dr de Witt. So, why should grant funders contribute to the design of blended finance instruments? Dr de Witt cited the Rockefeller Foundation’s funding of 45 instruments.  “What they hope to do is attract $1billion into each of those instruments,” said Dr de Witt, giving an example of one:  African GreenCo is a guarantee extended towards investors when they invest in renewable energy projects across Africa, in case the state utility does not buy their electricity. This encourages the renewable energy companies to seed and grow and, in environments where the state utility may not be reliable customers, it ensures that there is offtake.

Guarantees are put into market for various reasons, according to Dr de Witt:

  1. To create a demonstration effect: If an organisation believes that there is a business model for a social cause (e.g. social housing) that no one is prepared to invest in because the commercial viability is not clear, then grant funding can be invested to attract commercial investment. For example, an inner city property developer attracted a Jobs Fund grant with a first loss guarantee which aided in the raising of billions of rands which was on-lended to small-scale entrepreneurs who then went on to develop the properties.
  1. If you believe the market is never going to be viable, but want to generate significant investment: A relatively new example of this is an international finance facility for education. Aid to low-middle income countries – much of which is often used to fund education – is being cut, so other governments are providing first loss guarantees to attract development finance capital four times the amount that was provided as a guarantee, and this money is then lent onto those low-middle income countries.

Concessional funding is investment that is lent out at a lower interest rate with more flexible, longer terms than commercial funding. For example, a commercial funder may loan at prime plus five percent, while a concessional funder (ESD funders would be relevant here) would loan their money out at zero percent. When those loans are combined, they can be loaned to SMEs at a preferential rate. Dr de Witt shared Absa’s interesting ESD model: “They’ve attracted their retail bank funding to augment their ESD funding; doubling the amount that is available to black-owned SMEs in corporate supply chains”.

Technical assistance: When an SME is invested into, an average of 10% of that money should go to business development support, to ensure that they not stay in operation and grow. The USAID PACE Initiative estimates that technical assistance increases revenues and job creation by an average 70%.

With a new world of development funding options opening up, Dr de Witt encouraged corporates to upskill themselves on innovative finance; get involved in collaborative initiatives in the space; drive internal discussions within their own organisations about how they can identify synergies and best leverage the various pots of corporate funding for development and, finally, to invest when stock in initiatives like Bonds4Jobs becomes available on the market.

IMAGE: Dr Susan de Witt, Bertha Centre for Social Innovation and Entrepreneurship

Article written by Zyaan Davids

Photo taken by Cobus Oosthuizen

 

2019-05-21T17:14:50+00:00 May 14th, 2019|Business in Society 2019, Uncategorised|