Impact Investors in Asia

Characteristics and Preferences for Investing in Social Enterprises in Asia and the Pacific

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• Publisher: Asian Development Bank
• Year: 2011
• Print ISBN: 9789292570668
• eBook ISBN: 9789290924678
• Topic: Politics & International Relations
• Subtopic: Social Policy
• Index: Politics & International Relations

This report provides insights to investors keen to invest in the region, financial intermediaries that advise social enterprises (SEs) on capital raising, and developers of platforms seeking to connect SEs in the region with impact investors. Impact Investment Exchange Asia (IIX), an SE based in Singapore, is applying the final outputs of this research as it finalizes the operating features of Asia's first social stock exchange, which it is creating. The outputs of the research will also aid policy makers and institutional actors to better understand and foster an environment for sustainable development through impact investing.

Impact Investors in Asia

APPENDIX

APPENDIX

Defining Impact Investing

Impact investing can be defined as making investments intended to create positive impact beyond financial return.²¹

Over the past decade, an emerging base of investors with a global focus has sought to make investments that generate a double or triple bottom line. These investors are now broadly designated as impact investors – that is, actors making market-based investments that generate social and/or environmental value alongside financial return. Emerging from traditional philanthropy, private investment and venture capital backgrounds, impact investors are driving an innovative movement with cross-sector and cross-regional investment portfolios that focus on creating and scaling social impact.

The convergence of philanthropic social motivations and intimate knowledge of financial markets is fast creating a new asset class – and with it, a new global industry.

One of the earliest publications dedicated to this movement is the Monitor Institute’s report, “Investing for Social & Environmental Impact: A Design for Catalyzing an Emerging Industry”. With sponsorship from the Rockefeller Foundation, the report coined the term impact investing, and recognized the joining of investing for social impact (as opposed to giving) and the impact that innovative approaches have on traditional investing.

Impact investors distinguish themselves from traditional investors not with the investment vehicles or products they employ, nor the markets or sectors in which they concentrate, but rather through the motivations behind their investment behavior and the factors they consider when making their investment decisions. Impact investors are flexible in their provision of capital in order to suit the needs of the investee in question. A single impact investor may in some cases invest equity capital in one entity, while providing credit or guarantees to another. Impact investors are also willing to provide soft funding to entities that lack asset sizes or revenue streams considered adequate for traditional investors.

Soft funding is sometimes paired with significant direct or subsidized technical support from the investor to the investee.

Impact investors commonly rely on patient capital using a range of instruments that are committed as longterm investments. Investors typically pursue investment opportunities that require a longer time frame to generate return of capital than traditional investments.

Defining Social Enterprise

While there are many definitions of “social enterprise”, this report uses the term to refer to an entity that meets the following key criteria:

Exists primarily to create specific positive social or environmental impact (vs. an ancillary or secondary development, such as a company’s Corporate Social Responsibility program);

Adopts a market orientation;

Focuses on financial sustainability.

An SE meeting these criteria may be structured as a for-profit or a not-for-profit.

Given the present surge of global interest in SEs, one may think that SE and social entrepreneurship are emerging phenomena. However SEs, primarily in microfinance, have existed for over three decades. Some SEs have overcome barriers to scale and successfully merged an explicit and intrinsic social mission with commercial viability. Faced with challenges such as sunk costs in establishing their organizations, razorsharp margins in serving marginalized communities and challenging the hegemony of multinational and mega-corporations, and operating with a permanent lack of available capital and credit, SEs such as BRAC and Grameen Bank in Bangladesh have successfully scaled to become multi-million-dollar-enterprises.²²

SEs may employ market-based solutions to tackle a given social or environmental challenge, but SEs often operate in the intersection of private, public and charitable sectors – relying to a greater extent on the concerted efforts of parties in all sectors. Such SEs may take growth capital from commercial investors as well as impact investors, while also attracting donations from traditional philanthropic organizations, receiving support from governments and corporate social responsibility initiatives.

Social Enterprises in Asia

When market-oriented approaches to social problems were first raised, there was no capital available for SEs. Entrepreneurs (social or otherwise) either used their own funds or applied for bank loans. Bank lending, however, relies heavily on collateral for disbursal, which curbed the availability of funding and restricted the ability to start an SE to all but the upper echelons of society. The only other option, and one that continues to play a large role, was to receive grants. Grants came from two main sources: foundations and religious organizations.

The role of foundations in developing SEs is historically grounded and immense. Even today, most SEs in Asia are established as not-for-profit non-government organizations (NGOs, legally registered as societies or trusts), in order to communicate their social goals and tap available funds. As Northern countries became more economically and socially stable, more funds found their way to the “third world”, particularly for “development” purposes. The tax systems of Northern countries allowed for funds to flow into the NGO sector in Asia. Consequently, Asia is now replete with NGOs of various sizes and shapes that often compete with each other to attract financial support in the form of grants and donations. This continues to be an extremely popular form of financing social missions. In Bangladesh alone there are over 20,000 NGOs, and countries like India or Indonesia have several times this number.

Another source of funding for social ventures is religious organizations. Asian countries such as India, Indonesia, Pakistan, Bangladesh, Malaysia, Singapore and Thailand have substantial Muslim populations, and giving zakat (required yearly donation of one-seventh of one’s wealth) is an important part of the Islamic tradition. Though much of the giving is to the religious institutions, funds have been used to support a range of social missions, including the establishment of madrasahs to provide basic education for the masses. The same is true for other religious followers in the region including Hindus, Jains, Parsis, Christians, Sikhs and Buddhists.²³

A few years ago, a new source of capital was added to these traditional funding sources: the market. Market sources were (and to some extent still are) initially limited to business activities initiated by NGOs such as organizing fund raising events (marathons, concerts, sales) and identifying products and services that could be sold to reduce dependency on donations and grants. Some of the best examples of these activities are from Child Relief and You (CRY), which produced greeting cards and stationery to support child rights advocacy work, and Aarong, the retail arm of BRAC, which works with over 50,000 women across Bangladesh and generates an annual turnover of over $60 million.

Reliance on philanthropy and foreign aid has its limitations. As seen across the globe, grants and donations tend to be infrequent and unpredictable, they create enormous dependency on donors, and are often too small to support scaling-up efforts. Furthermore, many are highly restrictive. Initial efforts by NGOs to blend social activities with business plans were regarded with skepticism – after all NGOs were supposed to be about “giving”, not receiving. In some cases, market-oriented efforts of NGOs have run counter to their tax treatment, reflecting the idea that engagement on commercial terms was somehow antithetical to their mission or “altruistic goals”. For example, across Asia, tax laws require NGOs to keep assets in savings accounts instead of investing funds more productively. Some countries have begun taxing the revenue-making activities of NGOs. In Bangladesh, such activities are subject to taxes, though microfinance activities are exempt from taxes.

The aid and donation dependency of NGOs in Asia is slowly but surely changing. Demand from “bottom of the pyramid market”, external market forces, macroeconomic challenges and donor fatigue are forcing a lot of the Asian NGOs to become more market-oriented and financially sustainable, graduating from donor dependency to financial independence. There is also a recent trend in South Asia where a number of financially successful NGOs are changing their legal status and becoming for-profit SEs.

As NGOs, who continue to rely on traditional charity, struggle to reconcile dual philanthropic and commercial perspectives, the SE sector is bringing these two ideas together. Existing SEs in the ...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Foreword
• Table of Contents
• About the Project
• Executive Summary
• Project Context
• Analysis Of Findings
• Recommendations
• Appendix
• Back Cover