A version of this post originally appeared in Bloomberg View.
At next week’s General Assembly meetings, the United Nations will formally announce 17 ambitious new sustainable development goals. The 15-year program will tackle vital issues ranging from global poverty to women’s rights to sustainable energy. The first question the world will ask is:
“How do you expect to pay for them?”
The U.N. has put a price tag of accomplishing these goals into the trillions. Meanwhile, donor governments and philanthropies only have billions to spend. There is no question, then, that we’ll need to tap into the estimated $210 trillion now invested in global financial markets. Unfortunately, the world’s “social businesses”—companies that exist to solve humanitarian problems and reinvest all profits to remain financially self-sustainable—remain shut off from these commercial investors.
Over the years, innovative finance mechanisms—including microfinance, impact investing and results-based financing (in which organizations must reach established goals in order to receive funding from development banks or other sources)—have helped channel some of this capital toward social good. One successful example is social impact bonds, which get commercial financing for social programs with a promise for a “bond-like” return on capital, paid by a government if the ventures achieve their desired outcomes. Examples been launched in countries, states and cities around the world, including New York City (prisoner rehabilitation), Massachusetts (at-risk youths), the U.K. (homelessness) and Australia (child protection). (Bloomberg Philanthropies, established by Bloomberg LP founder Michael Bloomberg, is a partner in the New York program.) Private-sector investors have included Goldman Sachs. Development impact bonds, similar instruments geared toward problems in the poorer nations, have also shown promise.
Building on these initiatives, Yunus Social Business—Global Initiatives and the Rockefeller Foundation’s venture-philanthropy Zero Gap project have jointly developed a new tool: the social success note. This innovative financial instrument brings together the interests of commercial investors, social businesses, and donors to achieve concrete and measurable social outcomes. In this arrangement, a private investor agrees to make a concessional loan or provide equity to a social business. While that organization is responsible for paying back the investment, the twist is that if it hits a predetermined social target, a philanthropic donor will give the private investor an “impact payment” for the social good that would not have been possible without the initial investment.
Here’s how it might work in practice: A foundation interested in rural energy access could seek out a social business that has developed a sustainable model for a decentralized solar off-grid or mini-grid that can power homes and businesses at an affordable price. Together, the foundation and the solar business would determine what success looks like, in terms of the number of households or businesses that should feasibly get access to this energy. They would then go in search of commercial investors to provide a low-interest loan for the project. If the social business ends up reaching its customer target, it repays the loan and the foundation adds its impact payment for the investors. If the social business doesn’t reach its target, it is still on the hook for repaying the loan.
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.
Social success notes are just one of the cutting-edge ideas in philanthropy and investing that, together, have the potential raise hundreds of billions of dollars for self-sufficient programs that are taking on the largest challenges facing both the developed and developing worlds. Innovations in finance won’t solve all of our global problems, but they can play a key role in bringing about lasting and transformative solutions.
Leave a comment