Inclusive Business and Impact Investing

Is it taking advantage of poor people to try to make money from them? And do they even have any money to give?

The world needs to double or triple its current spending—estimated at about $400 billion a year—to meet the United Nations' goal of bringing clean and modern electricity to all people by 2030, says a new report by a wide group of international agencies led by the World Bank.

Although nations are succeeding in bringing power to more people, those efforts have barely kept pace with population growth over the past two decades, said the report, released Tuesday in Vienna. As a result, about 1.2 billion people—nearly as many as the entire population of India—still live without access to electricity, while 2.8 billion people rely on wood, crop waste, dung, and other biomass to cook and heat their homes. Unless the world addresses the widespread problem of energy poverty, the World Bank said, other efforts at economic development are likely to fall short.

Aavishkaar Venture Management, a venture capital firm focused on India’s rural areas and bottom-of-the-pyramid (BoP) space, expects to make the final close of its second venture capital fund Aavishkaar India II Company Ltd next month with around $95m.

Here’s the main argument for microfinance: Making small loans to poor women in developing countries will help them start businesses and escape poverty. A new, rigorous analysis of microfinance in India suggests its real effects are much murkier. NPR’s Caitlin Kenney points to a working paper by development economists at the Massachusetts Institute of Technology. Led by Esther Duflo, they attempt to study the effects of microfinance with randomized control trials, the same way medical researchers test whether a new drug works better than a placebo. The paper claims to be the longest evaluation of microlending.

Arun Gore is at the helm of Gray Ghost Ventures(GGV), a venture capital fund targeting technology initiatives and social impact. Some would say they’re part of the new “impact investing” movement. But Gore is not so concerned about the semantics. In their Atlanta-based office, removed from Silicon Valley and designed with frugal innovation in mind, the focus is on bolstering companies in emerging markets that have the power and capacity to develop the communities they serve. At Gray Ghost, business meets tech meets development head on.

More than 11 percent of investments under U.S. professional management were selected for companies’ financial performance and their social and environmental responsibility in 2012. That’s $3.74 trillion of the $33.3 trillion in investments scanned for environmental, social and governance criteria (known as ESG), according to a November report by the U.S. SIF Foundation.

Individuals and institutions are increasingly on the lookout for investment strategies that help them achieve environmental and social goals.

Call it what you like — sustainable investing, responsible investing, socially responsible investing, impact investing, green investing or just ESG — this practice is bringing new approaches into the traditional investment industry.

For more than a year, media outlets have posted stories on various major venture capital firms throwing their arms up in frustration and feeling woe over their cleantech investment portfolios. These down-and-out VC stories have been coupled with broader reporting on the drop in the total VC funds issued for cleantech after two years of growth in 2010 and 2011.

Indeed, Q4 2012 experienced a particularly low VC investment period for the alternative energy and fuels subset of cleantech, with just about $70 million in investment, the lowest quarterly mark in at least four years. Total cleantech investments in Q1 2013 were at an even more dramatic seven-year low.

LONDON — The divide between rich and poor is widening in developed nations, according to a new report released Wednesday by the Paris-based Organization for Economic Cooperation and Development.

According to the new data, economic disparity has risen more from 2007 to 2010 than in the preceding 12 years. Over this period, the OECD has documented increasing income inequality caused by the financial crisis, which it says is “squeezing income and putting pressure on inequality and poverty.”

In 2010, the richest 10 percent of people across 33 OECD member states earned 9.5 times the income of the poorest 10 percent. That factor is up from 9 in 2007.

Some interesting news came in earlier this week from the impact investing space. Nine impact investors, including Aaviskaar, Omidyar Network, Elevar Equity and Unilazer Ventures, have come together to set up a self-regulatory body called Indian Impact Investor Council (IIIC), reports The Economic Times. Unitus Seed Fund is also a founding member. The trigger for the initiative appears to be the recent microfinance crisis, which saw several impact investors (venture capital investors who focus their investments on opportunities at the bottom of the pyramid) burn or struggle to salvage a significant chunk of their investment portfolios.

IIIC proposes to make it binding for members to conform to certain best practices while pursuing their investment objectives. These could range from defining the sectors that qualify for impact investments, the tenure of investments and metrics for measuring returns.

IN HIS inaugural address in 1949 Harry Truman said that “more than half the people in the world are living in conditions approaching misery. For the first time in history, humanity possesses the knowledge and skill to relieve the suffering of those people.” It has taken much longer than Truman hoped, but the world has lately been making extraordinary progress in lifting people out of extreme poverty. Between 1990 and 2010, their number fell by half as a share of the total population in developing countries, from 43% to 21%—a reduction of almost 1 billion people.

Now the world has a serious chance to redeem Truman’s pledge to lift the least fortunate.

POVERTY is easy to spot but hard to define. America sets its poverty line at $11,490 of income per year for a one-person household, or just over $30 a day. Any income below that amount is judged inadequate for the provision of fundamental wants. Other rich countries set their poverty lines in relative terms, so an increase in the incomes of top earners results in more poverty if everything else is held constant. The threshold for dire poverty in developing countries is set much lower, at $1.25 a day of consumption (rather than income). This figure is arrived at by averaging the poverty lines in the 15 poorest countries, not because $1.26 spells comfort. This is the yardstick by which poverty reduction in poor countries is measured. Remarkably, this poverty rate has halved worldwide, from 43% in 1990 to 21% in 2010.

Worldwide, richer people express fears about handing money to poorer people. Giving poor people money is no way to stop them being poor, the thinking goes: Surely they will just waste it. Instead, we design complex, bureaucratic programs like SNAP, the supplemental nutrition assistance program (formerly known as food stamps), to help poor families buy food and only food. That way, they can’t buy a trip to Disney World with our tax dollars. A growing number of studies suggest that this is wrong-headed, that just handing over cash even to some of the world’s poorest people actually does have a considerable and long-lasting positive impact on their incomes, employment, health, and education.

World Bank Group President Jim Yong Kim called on private equity firms to increase their investments in developing countries to help generate the growth, jobs, and equality needed to end extreme poverty.

“We have a fantastic opportunity to work together,” Dr. Kim told hundreds of investors at the 15th Annual Global Private Equity Conference, hosted by the Bank Group’s private sector arm IFC and the Emerging Markets Private Equity Association (EMPEA).

“…Private equity is going to play a critical role in whether or not we can truly have high aspirations for the 1.2 billion people living in absolute poverty in the world,” he said in a speech that was liveblogged and followed on Twitter with #wblive and #GPEC2013.

Corporate philanthropy was once defined by the checks a company wrote to charities. But money, while critical, is only one of many assets a company can bring to bear – and often times, it is far less powerful than the skills and capabilities that companies can draw from their business operations and apply to solving big social challenges. That is why increasingly global corporations are rethinking their approach to corporate responsibility, evolving toward a model in which traditional donations are supplemented by innovative programs and initiatives that tap into the core strengths of the business.

The Social Enterprise Alliance is structuring Summit ’13 around seven “building blocks” identified as core principles in building a for-purpose economy. I think it’s extremely important that SEA is motivating us to reflect on what it takes to build markets for new social enterprise.

At Benetech, the nonprofit technology social enterprise I lead, we combine our passion for developing technology for social good with a pragmatic business approach—and we’ve developed an entire process that guides us in our work. Key to this process is our New Project Assessment Method that, coincidentally, is also built upon seven core elements. I discuss this method at greater length in my contribution to Ron Schultz’s latest book, Creating Good Work, and in this post I’d like to share some highlights.