Social Impact Financing Should Emphasize Problem Solving, Not Return

Photo by Yorick_R.

Last year one of GBC-Education’s founding members, Reed Smith initiated the first cross-border social impact bond (SIB) to reduce dropout rates and increase education quality for some of the most marginalized children in India. In the rural region of Rajasthan, for example, where the SIB is directed, 40 percent of girls drop out of school before reaching the fifth grade. Reed Smith employees also contributed significantly to the #UpForSchool petition, providing pro-bono legal consultation to help the petition secure more than 10 million signatures by the 2015 UN General Assembly.

Reed Smith’s dedication to rethinking traditional models of social impact was shown again last week in London. There they hosted an event through their Social Impact Finance group called The Road Ahead for Private Sector Funding Toward Social Impact – Opportunities and Challenges, bringing together leaders from businesses, foundations, and nonprofit organizations to explore approaches and innovation in social impact financing.

Sarah Brown, GBC-Education Executive Chair, gave the keynote speech at the event, illustrating the Coalition’s support of innovative approaches to social financing and explaining how it is supporting private-public partnerships to reach more children with education.

Sarah Brown highlighted that Theirworld is working closely with the Lebanese government, UN agencies, and business partners to identify and roll out innovative approaches to education provision in emergency situations to support the education of Syrian refugees in Lebanon. Theirworld has been supporting the development and scaling of a double shift school system which has expanded educational opportunity to more than 200,000 refugee children in Lebanon, and is now working with partners like Rumie and GBC-Education members like Kano to pilot interventions which improve quality of learning for students in these schools.

In her speech, she set the scene for the panel discussion that followed by emphasizing the need for private sector funding to support education in emergencies, especially in response to the Syrian crisis, and highlighting the disconnect between education spending and learning outcomes.

The panel, chaired by Reed Smith Partner Ranajoy Basu, included interventions from Sam Mendelson, Financial Inclusion and Off-Grid Energy Specialist at the Financial Inclusion Forum; Katy Jones, Associate Director at Social Finance; and Cameron Goldie-Scot, Co-Founder and CEO of Musoni Services.

The discussion addressed the challenges facing social entrepreneurs in emerging markets, where many ideas chase a limited pool of funding and there is often misalignment between investors and entrepreneurs. Panelists highlighted the need for social initiatives to establish funding diversity through a combination of donations, government funding, and new grants in order to support the sustainability of projects, as well as to focus on simplicity of concept to encourage investment.

The panelists agreed that investing in social impact in developing markets is inherently risky due to weak institutions, lack of infrastructure, and instability. They stated that projects are most likely to succeed in countries where government institutions create an enabling environment for social investment, and when investors themselves have local knowledge and expertise to develop a hands-on relationship with social entrepreneurs.

Measurement of success was highlighted as a challenge for both social entrepreneurs and investors, with the need to move beyond the quantitative measurement to look at, for example, improvements in learning over the number of children in school as a result of any given initiative. It was suggested that the innovative funding mechanisms used to target education and health require flexible and adaptable metrics of success, as well as simple approaches to assessing innovation.

The discussion ended by looking back at the development of social impact financing, from the early seed funding provided by anything from foundations and organizations, to high-net worth individuals and angel investors seeking 100 percent impact, both for CSR objectives or due to the business case of investing. More recently, the emergence of crowdfunding has revolutionized social impact financing, speaking to the increased appetite among socially minded, highly literate young individuals to see the ultimate impact of their lending. Basu highlighted the case of GBC-Education member Kano, who raised $1.5 million for its low-cost computer kits making it the most crowd-funded learning invention of all time, a watershed moment for social impact financing.

Ultimately, as Mendelson concluded, social impact investors should be seeking to back ideas with the goal of solving a problem, rather than back business plans with the goal of making a return.