Social Finance: What will be the hot topics in 2016?

Everybody is talking about Social Entrepreneurship and Impact Investing entering mainstream. But what are the trends and challenges behind this move? The FASE team gazes into the crystal ball and shares its readings on Social Finance: new models, more impact, differentiated strategies.

Whether it’s the big banks and investment giants such as BlackRock who discover the huge appeal of Impact Investing or the next generation of entrepreneur-philanthropists like the Chan-Zuckerbergs who are no longer happy with simply handing over their wealth to foundations. The excitement around Social Entrepreneurship and Impact Investing is spreading. And rightfully so. Unimaginable sizes of investments – US$ 4.5 trillion per annum according to the World Economic Forum – need to be made internationally, if the global community wants to achieve the Sustainable Development Goals. In other words: more Social Finance is needed. Reducing poverty, empowering women, feeding an ever growing world population and solving longstanding problems in education, inclusion, environment and health won’t be possible without strong commitment – and huge sums of capital – from individuals who are driven to change the world.

But there are some concerns for those who’ve been engaged in the Social Finance sector for quite a while. Do we have to be afraid of ‘impact-washing’? Will the move to mainstream seduce some to jump on the bandwagon without living up to the real mission? Will the hype make us forget what Social Entrepreneurship and Impact Investing are mainly about – i.e. disruptive innovation and filling the pioneer gap? What are the solutions that will provide the missing links? Will traditional investors start to focus on measurable impact? And how about the social entrepreneurs: are they ready to take impact investors aboard?

At the beginning of the New Year, FASE dares to look into the crystal ball. We’re of course projecting from our own experiences, encounters and insights in 2015 – as any honest psychic would admit. We have no special gift other than our knowhow and network plus a sense of urgency for what the ecosystem needs most – predominantly in Europe. So here come our readings of the Social Finance market in 2016 – with good reason, but without guarantee:

New solutions addressing market failures

Dr. Markus Freiburg: “What inspires me most this year are brand new models for Social Finance. Especially high-impact and early-stage social enterprises desperately need better solutions to finance growth. So far, they always seem to fall between the cracks. But there is an increasing number of innovative solutions that will fill the gaps in the ecosystem – with more to come from players who care a lot about advancing the market. At FASE, I’m currently working on pilots for two models:

  1. A pay-for-success model with a German social enterprise. It will offer a direct reward to the social entrepreneur for the impact he creates and will be less complex than e.g. a Social Impact Bond.
  2. Another innovation that we plan to implement is an early stage co-investment fund. It is meant to provide social enterprises with repayable financing at an early point in their lifecycles. The capital will come from sources committed to be frontrunners, e.g. business angels, foundations and institutional investors.”

A closing of ranks between commercial and social investors

Ellinor Schweyer: “It’s quite obvious that in some impact sectors, the barriers between types of investors begin to fade. In 2015, we introduced several traditional investors to social enterprises with a strong ecological impact and were really surprised by the echo. There was a very sizeable demand. In general, I see institutional and private investors – who previously focused just on commercial sectors – starting to peek into the social scene. This is a good sign. It demonstrates that all the groundwork promoting Impact Investing and Social Finance is finally starting to pay off.”

More evolution from philanthropic funding to impact investment

Cecilia Bunnenberg: “Last year, I’ve been actively screening initiatives that address the huge refugee problem. What struck me most was that there is a plethora of inspiring projects, but the entrepreneurs hardly had time to think about a financing that will support them on the long run. Everyone was too busy coordinating helpers and volunteers and solving the problems at hand. This is perfectly legitimate and had to be top priority. But I hope that 2016 will bring opportunities for these social entrepreneurs to stand on much more solid feet. Donations and grants alone won’t take them very far. The next logic step will be to develop a viable business model and to attract impact investment. I anticipate that this will be true for many social enterprises worldwide that look for a transition in their financing models and are ready to take impact investors on board.”

A better understanding of social versus financial returns

Christina Moehrle: “I was a bit concerned when the catchphrase ‘impact without sacrifice’ was making the rounds last year. Judging from talks with pioneer investors, I had a sense that it’s too early in the market to expect full house on both hands – impact and IRR. To me, it ‘smelled’ a bit like fancy labeling for a liquid that is less innovative than it may seem. Meanwhile, I had a closer look at the new Impact Investing Benchmark introduced by GIIN and Cambridge Associates and listened to several experts. My take is that it will become much more transparent in 2016 that there are multiple strategies within the impact investing scope. Some may offer both, market-rate returns and compelling impact, but many will not. At least not yet. That doesn’t mean that they should be ignored by investors. On the contrary: this is where impact investing can fulfill its most important promise. Filling the pioneer gap. Proving that there is a case for investment. Creating the future.  Of course, this requires innovative thinking, risk taking and a measurement of the real impact achieved. But there are several ‘impact-first’ investors in the market and I’m sure there will be more to come.”

 

Now, would you like to dive deeper into the ocean of Social Finance? Here comes our fresh FASE reading list with lots of inspiring insights from experts around the world.

Reading list / links:

About trends in philanthropy: “Six trends that will set the pace for philanthropy in 2016” by Bruce DeBoskey – http://www.denverpost.com/business/ci_29361415/deboskey-six-trends-that-will-set-pace-philanthropy

About the major challenges in impact investing: “The four p’s of impact investing” by Justin Conway from Calvert Foundation – http://www.justmeans.com/blog/the-4-key-parts-of-impact-investing

About the German impact investing market (in German): “Social Impact Investment in Deutschland” by Bertelsmann Stiftung – https://www.bertelsmann-stiftung.de/de/publikationen/publikation/did/4647/

About social entrepreneurs and their Impact: “5 powerful ideas for global impact from social entrepreneurs” by Katherine Milligan from Schwab Foundation – https://agenda.weforum.org/2015/12/5-lessons-from-social-entrepreneurs-on-making-the-world-a-better-place/?utm_content=buffer8c44c&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

About the essence of social entrepreneurship: “Let’s stop calling everything ‘social entrepreneurship’” by Willy Foote from Root Capital – http://www.forbes.com/sites/willyfoote/2015/12/17/lets-stop-calling-everything-social-entrepreneurship/

About challenges and solutions in impact measurement: “The power of lean data” by Sasha Dichter and Tom Adams from Acumen and Alnoor Ebrahim from Harvard Business School – http://ssir.org/articles/entry/the_power_of_lean_data

About pay-for-impact financing models: “The payoff of pay-for-success” by Kasturi Rangan and Lisa A. Chase from Harvard Business School – http://ssir.org/articles/entry/the_payoff_of_pay_for_success

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