Between foundation corporate social investment and private giving, South Africans contribute billions of rands each year to developmental programmes and causes. Much of this funding provides essential support to worthy causes, yet it remains limited in terms of scale of impact and influence.
It has become clear to some donors that they cannot hope to put a dent in social and environmental problems unless they partner with large institutions to scale programmes or with more commercial investors to pool more money. And philanthropists and foundations have many more options to enable their giving than there were 10 years ago. Not only can they do good with the grants element of their portfolio, but they can also align their endowment investment with their values. In this way, all of their money is used in a way that can benefit people and the planet.
Impact investing is investing for social or environmental impact that is both intentional and measurable and also comes with the expectation of a financial return. It is capital that is used to fund businesses in underserved areas of the economy where entrepreneurs are contributing to solutions that are in line with the United Nations Sustainable Development Goals.
Although there is no inherent tradeoff between impact and return as demonstrated in multiple academic studies, there are high-impact business models that need time to come to market and scale. For example, the off-grid energy and microfinance sectors required multiple iterations and innovations before these sectors became viable for commercial investors. Those sectors now provide services to millions of low-income communities around the world. This is where concessionary capital was needed to build the market.
Concessionary capital is the flexible, patient capital that is able to take more risk at a lower return and draw in other types of investors – exactly the type of capital that comes from foundations and philanthropists.
Much of the capital provided to kickstart sectors such as affordable housing, last-mile health, equitable education and the impact investing market at large has come from huge international foundations such as the Omidyar Network, Big Lottery Fund, Rockefeller Foundation, Ford Foundation and Gates Foundation.
They have been able to use a mix of grants and investments to:
- develop a proof of concept;
- leverage more commercial funding by absorbing the risk through first loss;
- provide business development support in the early stage of small and medium enterprise development; and
- provide flexible capital for impact investments.
Some local foundations are on the pioneering edge of this global movement, including the First Rand Foundation, Standard Bank Tutuwa Community Trust and Nedbank Eyethu Community Trust.
Falling within the impact investing field are impact bonds, a type of outcomes-based contracting instrument where payment is based on positive social outcomes. Socially motivated investors provide upfront capital to enable organisations to participate where they otherwise would not be able to take the risk of failure. The model represents a departure from the traditional funding regime that requires organisations to carry out a set of activities, regardless of whether they are working or not. It also offers an opportunity for public-private collaboration, which is attractive to donors as they correctly perceive an increase in transparency, accountability and potentially sustainable government funding flow after the ink on the contract has dried.
The Foundation for Community Work (FCW) has such a model, which is being tested and refined through an impact bond in the Western Cape. Just over a quarter of children under five in South Africa are nutritionally stunted, which has a direct effect on cognitive development. This, along with the fact that less than half are attending an early-learning programme, means that most are not ready for learning by the time they get to school. Children of this age are supported by government only if they attend a registered early-childhood development centre, which may be out of reach geographically or financially for parents.
The model being tested consists of home and community-based programmes as alternatives to formal crèches and is funded by a small portion of the Department of Social Development (DSD) budget. More than 3 000 children from Delft and Atlantis who would otherwise not participate in an early-learning programme are visited regularly by trained field workers. The hope is that a low-cost model of care will emerge to capture those children falling through the cracks in the system.
Once a model has been established, opportunities for other participants can occur. For example, the ApexHi Charitable Trust agreed to fund a programme aimed at improving childrens’ cognitive, motor, social and language skills alongside the Western Cape DSD. Not only is ApexHi supporting a sustainable programme that will continue to be funded through the departmental budget, but their contribution was instrumental in convincing the province to pilot the initiative. This does not mean that the model is guaranteed to work but it does enable all parties to innovate and be held accountable to pre-agreed performance targets. This model is something the province may consider in other service areas, and the philanthropic contribution enabled them to take a pioneering step.
The jury is still out on whether these contracting models are cost-effective, mainly because contacting terms are long and data have yet to be made available or comparable traditional contracts set up in tandem. What is becoming clear from the multiple impact bond evaluations from around the world is that the impact bond model is starting to show positive results.
These types of catalytic donations provide opportunities for private funders to tackle the root causes of social problems and pursue systemic change. While this may appear out of reach to individual philanthropists and family offices, the time has arrived where we can all start paying for verified impact. Crowd funding platforms are emerging where those who want to pay for social or environmental outcomes can participate. Allia in the UK first tried this by opening up their impact bond to retail investors, falling just short of their target but demonstrating a clear appetite. Impact marketplaces such as Alice.si and ProofImpact.com have taken up the mantle, so watch this space for growing levels of activity and precision giving.
Susan de Witt is the Innovative Finance Senior Advisor at the Bertha Centre for Social Innovation and Entrepreneurship at the Graduate School of Business in Cape Town. Susan heads up the secretariat for the Impact Investing National Advisory Board. She holds an MBA from the UCT Graduate School of Business and a BVSc from the University of Pretoria.
Source Details: Nedbank Private Wealth Giving Report IV