Photo: Jane Miller/DFID
iforchange has been discussing social impact investment with international NGOs for years, and is proud to be a financial advisor to the Start Network of international NGOs.
“Impact investing” is a concept that has been gathering momentum for a few years now. It is the perfect vehicle to bring together investors, who want their money to do something more than achieving an economic return and are interested in generating a positive social or environmental impact, with international NGOs wanting to achieve their goals, whether they be in humanitarian response, in poverty reduction and eradication, or more generally.
In 2010, JP Morgan and the Rockefeller Foundation, in some oft-quoted research, estimated that total impact investment over the following decade could be $400bn - $1 trillion, with much of this investment in developing countries. There has been an explosion of interest in creating investments that bear the label “impact investment” since then. Although some appear to be using the label purely as a cynical marketing ploy, and many of the initiatives are merely opportunities to invest in small and medium sized business (where the social returns are the consequence of business growth), there is genuine growth in this sector too with impact investments targeted more specifically at poverty reduction.
This type of investment offers exciting opportunities for NGOs to access alternative funding sources and to build relationships with different people in order to achieve meaningful impact and work towards a shared goal of poverty eradication and sustainable livelihoods.
Photo: Russell Watkins/Department for International Development
There are various reasons that NGOs should be interested in receiving investment directly. For example, the sector is experiencing the challenge of changing expectations of some institutional funders (payment by results, for example), and the reduction in traditional funding sources. In addition, the increase in contract delivery roles, where NGOs are finding themselves in direct competition with the private sector, brings changing funding requirements.
Impact investment can be used by NGOs in two main ways: to get additional money into the NGO or to transfer risk from an NGO. Some examples include:
There are also services that NGOs currently provide – such as micro-finance – which could be directly funded through impact investing, and services that NGOs could provide to other organisations being funded through impact investment, for example, measuring, monitoring, or advising on impact.
While social impact investing presents massive potential for NGOs, there are also some challenges which play out at an ideological and practical level. For example:
These are all very real issues and must be considered carefully by any NGO considering looking for impact investment. At iforchange we recognise the importance of each of these issues, but also believe that well-structured, carefully planned and negotiated, transparent and accountable impact investments can bring important opportunities to NGOs, and contribute positively to poverty reduction. We can work in partnership with you to set up pragmatic structures that mitigate against these challenges, and enable you to access impact investment in a way that works for all your stakeholders.