Innovations in Finance for Social Impact
Judith Rodin

Judith Rodin President, The Rockefeller Foundation

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September 05, 2014

Innovations in Finance for Social Impact

For Money He Never Cared

When E. H. Harriman, the President of the Southern Pacific Railroad, heard the news about the 1906 San Francisco earthquake, he led the first train west to assess how the railroad might assist in the recovery.

When he arrived in Oakland, he immediately ordered tracks to be laid into the most devastated parts of town to carry out people and debris. He met with local officials to kick-start the rebuilding process, and sent telegrams across the country pleading for both private and public funds. He gave $200,000 of his own fortune directly to the cause.

“The rich and poor have to be cared for alike,” he wrote in a telegram home. Later, his friend John Muir put best when he wrote that Harriman cared for money “as a tool like a locomotive or ship.”

Indeed, private capital has always been a powerful tool for helping to solve humanity’s greatest challenges.

Which is critical, because philanthropy and government only have billions to spend, while private markets hold an estimated $210 trillion. To capitalize on this largely unrealized potential, a group of philanthropists and investors convened seven years ago at The Rockefeller Foundation’s Bellagio Center, where they coined the term “impact investing” and began to build the field to unlock greater amounts of private capital to do public good.

Where Investment Capital Lives

We have invested nearly $50 million over the last seven years into building the architecture and infrastructure for impact investing. And, of course, The Rockefeller Foundation hasn’t acted alone: The Bill & Melinda Gates Foundation and the Omidyar Network are using creative financial structures in exciting new ways.

New funds and old-line pension funds such as TIAA-CREF are building greater opportunities for social and environmental impact in their investment funds. Financial institutions such as J.P. Morgan Chase and Morgan Stanley have created impact investing units within their corporate structure, while Bank of America, Merrill Lynch, Goldman Sachs have led on investing in social impact bonds.

Thanks to these and other contributions, impact investing has moved from the margins to the mainstream.

But just as innovation propelled the growth of impact investing a decade ago, we’ll need a continuing focus on financial innovation if we are to mobilize capital on the scale needed to stimulate markets for social purpose. While continuing to help develop the field of impact investing, we see two distinct new opportunities for expanding the tools for innovative finance:

Innovations in the kinds of financial mechanisms that provide new investment opportunities, and innovations in the models that align actors in new ways that leverage each partner’s unique strengths, while also meeting their respective risk/return expectations and needs.

Capital and Opportunities

We believe that the goals of the next wave of social financing innovation are three-fold:

  1. Bring in new sources of capital, often from actors that were not focused on mobilizing capital for social or environmental purpose.
  2. Increase the amount of the capital marked for social or environmental purpose from existing sources.
  3. Or deploy existing capital marked for social and environmental purpose in more effective and impactful ways.

Take, for example, the social impact bond (SIB) .

The original innovation of the SIB was its straight-forward value proposition for each of the actors involved: it offered governments a way to fund proven preventative services without putting tax dollars at risk; it offered nonprofits running a successful, evidence-based intervention a way of accessing new streams of revenue to scale their services; and it provided funds and private investors with more investment opportunities.

The Social Impact Bond Structure

Since The Rockefeller Foundation started funding Social Finance UK to develop this seedling of an innovation, it has been adopted in more than a dozen countries and 19 states across the U.S. are in the process of exploring deals.

But what has made the SIB such a breakthrough innovation has been its ability to be repositioned and repurposed to fit different applications. For example, development impact bonds are almost identical to the structure of SIBs, except instead of the local or national government repaying investors, it’s the development finance institutions, along with international donors and foundations. These can be used to aid in the prevention of disease, such as malaria or sleeping sickness in the developing world, or other development outcomes where greater support for evidence-based interventions could improve outcomes.

The second area we believe is ripe for innovation is in the development and testing of new models that align disparate interests and actors to collaborate and share risk, and increase leverage.

One example is The Rockefeller Foundation’s work in India to reduce rural poverty, a problem which is exacerbated by the reality that large swaths of rural India are not yet connected to the electric grid and will not be for a very long time. Through our initiative, Smart Power for Rural Development, we are pursuing a model that would use new mini grid technology, powered by alternative clean energy sources.

Smart Power for Rural Development Model

The innovation is bringing together three types of customers:

  1. An anchor tenant, telecommunications companies that need electricity to run their mobile phone towers and are currently relying on expensive and environmentally polluting diesel;
  2. Small enterprises, such as carpenters or agri-businesses, that need electricity to operate and grow, and will pay for reliable electricity;
  3. And villagers who can pay only some tiny amount for electricity.

Our hypothesis is that securing the telecom as a contractually guaranteed customer can finally make it profitable for smaller-scale energy-services companies to bring electricity to rural parts of the developing world, when many efforts have previously failed. While it’s not yet a proven model that can attract private investors, we believe it can become a strong market-based solution.

By developing the MOUs with the telecoms, providing both grants and concessionary debt financing to energy-services companies, and by supporting the start-up and growth of local entrepreneurial enterprises, The Rockefeller Foundation is working to de-risk these investments for impact investors and prove that this model can be profitable and scaled in India and across the developing world.

This model could be transformative. But to solve challenges as complex as those facing humanity today, we often need a combination of innovations in both models and mechanisms. That’s what we’re learning through The Rockefeller Foundation’s resilience work—which over the course of the last decade has funded or committed more than a half-billion dollars—especially through our 100 Resilient Cities challenge, a $100 million commitment, which focuses on building urban resilience in 100 cities worldwide and has created a platform of resilience goods and services for the network cities from entities as diverse as Palantir, the IFC, Ushahidi, Sandia National Laboratories, and Swiss Re.

The 100 Resilient Cities Model

We’ve seen the power and the results of using our risk capital to test or to scale a new mechanism or model, and we have also seen that the best ideas have come from many places and many people.

And so in our search for the next leapfrog advance in innovative finance, we’re reaching out to broader communities of philanthropists, social entrepreneurs, finance professionals, and anyone interested in social impact who might have the next big idea. Whether it’s an innovative mechanism or model, something you’ve already seen in your work or a concept that you want to test, we’d love to hear about it.

Tell us by reaching out to us on Twitter and using the hashtag #BigIdeas—we’ll be monitoring that space regularly, hoping to spark illuminating conversations and promote the best ideas through our deep and expansive network of actors who share a deep passion for achieving social good. With your help, we can turn today’s new idea into the next great transformation.

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