Investing for Impact: What will it take?
Social enterprises, NGOs and similar civil society organisations are experts when it comes to the creation of social and environmental impact – but when it comes to financing them, the credit risk models of banks and investors send red alerts, for understandable reasons.
As a result, such entities revert to grant and philanthropic funding, which in many cases is available to them only in small amounts on an ad-hoc basis, preventing them from scaling their operations and developing sustainable operations. This traditional approach effectively creates a glass ceiling for impact generators.
We are convinced that an outcome-based approach is a big part of the solution for rendering these entities more investable, and to achieve this we use, in particular, Social and Development Impact Bonds (SDIBs)
Not only has the bank decided to invest in such structures: for example, through its recent investment alongside the European Investment Fund in a EUR14 million Fund dedicated to SIBs managed by the French asset manager Citizen Capital. It is also developing structuring & advisory services for both French and International clients on deploying SIBs and DIBs.
While SIBs and DIBs have existed for almost 15 years, allowing social investors to finance NGOs and then be reimbursed by the given country’s government if pre-decided social outcomes are achieved, Societe Generale has pushed the frontiers of this niche sector through one of its recent transactions.
Private sector participation
The deal, centred on an enterprise collecting and recycling plastic waste in Nigeria, shows how the SIB and DIB model can also attract funding from large private-sector multinationals – in this case, Unilever.
The first of the three parties involved in the deal is Wecyclers, a for-profit social enterprise that provides convenient recycling services for ordinary consumers as well as the scores of informal, low-income workers who collect and sort plastic bottles from rubbish heaps for a living. Expanding rapidly, Wecyclers needs access to more capital to enhance its collection network, and this means expanding beyond the grant model to attract more private sector participation.
To solve this, impact investors, in this case via a fund managed by Bridges Outcomes Partnerships, have agreed to pre-finance Wecyclers’ next stage of expansion via an outcome-based $2m impact bond, with KPIs linked to the tonnes of plastic collected, the number of new jobs created, and sustainable wages.
We started with one bicycle and a dream, and through hard work and entrepreneurship we have built a scalable model that, thanks to the KPIs integrated in this Development Impact Bond, will create more than 700 waste-sorter jobs, help collect up to 30,000 tonnes of plastic waste over 5 years, and improve the income of thousands of sorters, who will earn 25% more than they do today,
The third party is Unilever. Acting as the outcome funder, usually a government agency, it will repay the impact investor based on the KPI outcomes that are achieved. Already working with Wecyclers, Unilever is keen to help develop a new financing model that can be replicated elsewhere to expand the work of social enterprises who take plastics out the environment, while improving livelihoods for the waste pickers who sit at the heart of many recycling efforts.
Aligning risk and reward
While the impact investors are taking on risk, since they can lose money if the KPIs are not met, it gains comfort from the fact that Wecyclers is a social business already known to Unilever and vetted by the financial adviser – here Societe Generale. Moreover, the innovative financial structure means the investors are not exposed to Wecyclers’ credit risk, since Unilever, as the outcome funder, will reimburse the investors along with a return if the KPIs are met.
I’m very proud that Unilever was able to work with Societe Generale, Bridges and Wecyclers to show how Africa can lead the way in using innovative financing to solve sustainability challenges like plastics waste. By helping entrepreneurs create wealth from waste we can support jobs that help build a more sustainable future and I hope this project inspires many other similar investments around the world,
A promising beginning
This is the first ever corporate-backed impact bond (Fig. 1). It goes beyond projects that have typically not been profitable and therefore remained grant-dependent, aligning CSR values with real business development. Deals such as this will help all participants in this area understand the new business models around the circular economy and secure the recycled feedstocks needed to establish a proper value chain. For the social business, this instrument serves as an excellent opportunity to demonstrate that they are an acceptable credit risk for larger follow-up fundraising rounds.
Fig. 1: The first ever corporate-backed development impact bond
That will naturally lead to bigger projects, though Ms Enguehard cautions this will take time. Nevertheless, the bank is confident enough to be expanding its Social Impact Solutions team and is about to sign a partnership agreement which will add more innovative products to its offering.
Most importantly, the financing solutions and business models being developed for the circular economy can in the future be applied to other sectors, from healthcare and renewables to agriculture – and that really should make an impact.