By Rob Parkinson – ImpactAlpha
As the host of two historic UN summits on sustainable development in the past 25 years, it should come as no surprise that Brazil is actively engaged in testing innovative approaches to reach the sustainable development goals.
Supporting small and growing businesses (SGBs) can be an important part of this agenda, contributing to advances in education, healthcare, sanitation, clean energy, economic equality and sustainable cities, among others.
Recent research shows that impact investing in the country is growing, with more than US$70 million being invested in 2014 and 2015. But foundations and institutes have struggled until now to overcome legal, financial and operational barriers to making impact investments directly. That may be changing.
“We understand that impact businesses can provide solutions that are totally consistent with our mission, but if we think about contracting them, they still need to pass the same rigorous procurement procedures that we apply to any potential supplier,” explains Americo Mattar, president of Fundação Telefonica, which seeks to align technology, education, knowledge and innovation in the search for new solutions to social challenges.
“Since many of these impact businesses are relatively new in Brazil, it’s very common for them to lack a track record of working with other large clients, or sufficient cash reserves. And although recent opinion is positive on the legal basis for foundations investing directly in impact businesses, we need concrete examples to test the situation in practice, thereby reducing the risk.”
The discussion on legal implications for foundations and institutes making impact investments has been enhanced by the publication of a recent report by Derraik & Menezes, a Brazilian law firm specializing in impact investing.
“The report shows how foundations and institutes can be legally covered when investing in social businesses,” explains Rodrigo Menezes, a partner at the firm. While the report is positive regarding potential legal and accounting risks, many organizations are still wary of the prospect of being the first to test the situation and potentially becoming mired in lengthy legal procedures.
Another example of this collaborative approach is ‘Foundations and Institutes for Impact’—described in a report released this week—which is a recently established investment initiative to test different impact investment mechanisms.
As part of the initiative, 21 organizations have each committed to invest US$10,000, with the pooled funds being managed and invested by specialist intermediaries that will work with the project participants to document progress, results and learning. At a workshop in October to kick off the project, the participants decided to split the funds among debt, loan guarantees and crowdfunded equity, allowing them to observe and learn from different investment mechanisms. They also created a management and governance structure to ensure that the project objectives are met.
“We hope that this collaborative project will create concrete examples, helping us to make the case for increased involvement both within our organization and by other foundations and institutes in Brazil,” explains Americo Mattar.
For Fabio Deboni, executive director of Instituto Sabin, participating in ‘Foundations and Institutes for Impact’ not only dilutes the risk for this type of investor, but also helps to build confidence between participating organizations, paving the way for future partnerships.
Instituto Sabin is a corporate institute whose mission is to encourage improvements in the quality of life in communities where Sabin Group operates. It has been funding the development of health sector businesses since 2014, through a partnership with Brazilian accelerator Artemisia. Deboni is also coordinating an impact investing working group within GIFE, the Brazilian association of foundations and institutes.
“Of course, impact investing can help to achieve the health and well-being goal, but we understand that we also need to build the overall ecosystem for impact investing, which transcends any specific goal,” he explains.
Another solution that has been tested is for foundations and institutes to outsource the investment process. SITAWI Finance for Good is a non-profit organization that manages philanthropic funds and social impact loans and bonds.
“Philanthropists know what kind of social impact they want to achieve and are looking to experiment with new investment strategies, but this requires different kinds of expertise,” says Rob Packer, the social finance manager at SITAWI. Since 2009, the organization has used this capital to make loans of more than US$1.1 million to businesses creating impact in the spheres of economic inclusion, healthcare and access to employment, among others.
Given the mission-driven nature of foundations and institutes, careful attention needs to be paid to evaluating the impact that investments are actually making. SITAWI has recently developed a new framework for evaluating the impact of its investments, with specialist support from Grameen Foundation’s volunteer program, Bankers without Borders. “We consider depth and breadth of impact, but also potential risks that might compromise that impact,” explains Rob Packer.
A word of caution from Sandra Ortiz-Diaz of the BMW Foundation, which helped to finance and organize the workshop for the investment group. “Impact investing should not be seen as a replacement to grant making” she explains. “We need to develop a robust way of supporting businesses to get to a stage where they can receive investment.”
Fabio Deboni agrees: “It’s important to convince foundations and institutes that they can also support impact businesses, and intermediary organizations, with philanthropic capital.
For Ortiz-Dias, equally important as the type of capital deployed, is the investment mindset adopted. “Foundations and institutes should consider a multi-year approach, and think about investees’ needs for non-financial support, such as pro-bono consultancy or nominating board members. Since many of these organizations in Brazil are linked to well-known and respected corporations, they should reflect on how they can use the power of their brands to mobilize other players.”
One of the 15 recommendations made by the Brazilian Social Finance Task Force—established in 2014 to mobilize more capital for impact businesses—is that foundations and institutes should allocate 5 percent of their annual investments to supporting this field by 2020. “More than a number, the 5 percent target is an invitation for foundations and institutes to experiment and learn how they can engage with this field, which is a natural ally to our mission to create positive impact,” explains Celia Cruz, Executive Director of ICE Corporate Citizenship Institute, which is coordinating the Task Force together with Sitawi.
Living up to Brazilians’ fame for creativity when facing complex problems, the country’s foundations and institutes are actively engaged in creating and testing new solutions to support the development of small and growing businesses. I hope that in 2017 more investors will get involved, exploring diverse investment mechanisms, and that they will continue to do so collaboratively. In this way Brazil will continue to be a leading light in global efforts to achieve the Sustainable Development Goals.