Council on Social Innovation at work in Abu Dhabi

Over the coming two days, 800 leading experts from around the world are descending on Abu Dhabi for intense discussions (Summit on the Global Agenda 2011) on everything from the future of governance to energy security to migration and human rights. Among them are a number of Schwab Foundation social entrepreneurs – such as Wendy Kopp, Co-Founder of Teach for America and Teach for All, who is a member of the Council on Education Systems; Juliana Rotich of Ushahidi in Kenya, who is contributing to the Council on Informed Societies, and Helio Mattar of the Akatu Institute in Brazil, a long-time member of the Council on Sustainable Consumption. (For a full list of social entrepreneurs attending the Summit on the Global Agenda this week, click here)

The Schwab Foundation also runs the Global Agenda Council on Social Innovation, which, unlike many other advisory or expert boards in the social enterprise sector, is a diverse group comprising social entrepreneurs, impact investors, heads of foundations, academics, and others who all have a stake in how the sector develops. “We all need to be involved in building strong foundations for the sector, which is an important message to send at this stage of the industry,” said Council member Alvaro Rodriguez Arregui, Chairman of the Board of Compartamos Banco and Co-Founder and Managing Partner of Ignia Partners LLC.

Over the past year, the Council on Social Innovation has focused on better understanding the key challenges and opportunities associated with the rapidly growing impact investment industry. Five main observations emerged from our thought-provoking year of debate:

1. Despite the current focus on generating returns, the crucial role of subsidized capital cannot be underestimated. Council Members generally agreed that below-market capital will play a dominant role in building the capacity and industry infrastructure for years to come.
2. Local knowledge remains the “x” factor. Trust and respect are key to managing the investor-investee relationship, and impact investors assigned far more importance to local knowledge than they originally assumed would be the case because they view their role as much more hands-on than simply providing capital.
3. Different types of investments alter the risk profile of an organization’s capital structure—and loans in particular may dampen the management’s risk appetite.
4. Anecdotal evidence indicates the industry is neglecting its future pipeline—young social enterprises that need smaller amounts of growth capital. Some Council Members voiced concern that the management fee structure of many impact investment funds is forcing the industry to consolidate towards larger deals.
5. The closer social ventures get to capital markets, the higher the risk of mission drift. Council Members discussed the trade-offs for social ventures as they transition away from dealing exclusively with the philanthropic world of grants and move into the realm of investment capital to scale their model.

For the full article “Taking a Realistic Approach to Impact Investing: Observations from the World Economic Forum’s Global Agenda Council on Social Innovation,” click here.

As we head into the summit discussions and challenge ourselves to build on our Council’s work to date, I keep returning to two thoughts. The first is that generating insight is only half the battle – we as individuals and as a group need to be much more deliberate about building bridges to top decision-makers in government, investment firms, philanthropic organizations and the corporate sector to shape their agenda and translate these insights into impact.

The second thought I keep coming back to is inspired by the theme of the World Economic Forum’s 2012 Annual Meeting in Davos, “The Great Transformation: Shaping New Models.” We are indeed in the midst of a great transformation: in developed countries, cash-strapped governments are increasingly forced to scale back spending on social services; and in developing economies, millions of poor people who have been on the sidelines of global growth are growing louder in their demands for access to opportunity.

For years, social entrepreneurs have been pioneering new models to provide cost-effective services. They have been working side by side with their beneficiaries in some of the poorest and most challenging environments to provide access to affordable energy, education, and health care. While we at the Schwab Foundation and many other organizations have long heralded these “innovators in the global public interest” for their pioneering efforts, the onus simply cannot be on them alone any longer. We all must become innovators in the global public interest. Donors and investors must innovate new models of capitalizing social enterprises; governments and international bodies must innovate the way they use the tools in their toolkit – tax policy, legal forms, procurement policy – to scale high-impact social enterprises; and corporations must innovate new models of strategic partnerships with social enterprises and other key actors to deliver social change throughout their value chains and retail outlets.

“What excites me most is influencing innovation and experimentation around a philosophy of investing that starts with understanding who the customer is and builds from their perspective,” said Council member Jacqueline Novogratz, Founder and CEO of Acumen Fund. “Part of the innovation is in partnering [to] articulate the overall stories. [One] of the biggest challenges we have is taking the lessons learned and converting them into understanding and execution throughout funding agencies, government aid agencies, and corporations.”

That is a mighty task. But the great transformation demands no less.

Katherine Milligan

 

Editors Note – Katherine Milligan, Director and Head, North Africa and Middle East, Schwab Foundation for Social Entrepreneurship