Social investors as game-changers

Alejandro Litovsky

June 23, 2010

On Wednesday 16th of June we launched the special issue of Alliance magazine on how foundations and social investors are rethinking scale. The event was hosted by the Commonwealth Secretariat in London.

Over 50 social investors came together, from investment banks looking at impact investing to philanthropic foundations, to take part in a conversation with Jean Oelwang, CEO of Virgin Unite, and Chris West, Director of the Shell Foundation.

What type of agenda is beginning to emerge for social investors? If this conversation was anything to go by, I found at least four important themes:

1. Consider strategies for scale. Being strategic to create large-scale change implies:

• Looking at the economy and market failures that are behind the social or environmental problems. Selecting particular market failures (e.g. carbon emissions in shipping), and then focusing on breaking down the specific barriers that prevent progress (e.g. the financing of upgrades for ships by creating new co-finance agreements between owners and customers). See the Carbon War Room, which was started by Virgin Unite.
• Looking for leverage points in the economy. Typical levers that can produce system change include: changes in economic incentives, new standards, or increasing the transparency of markets. Cultural change matters too, but didn’t profile in the discussion as much. See this work by Donella H. Meadows, a pioneer of systems thinking, which identifies “12 leverage points to intervene in a system.”
• Working with governments to help them understand the barriers to greater investment in these areas and what they can do to address them (e.g. how to improve investment opportunities for small enterprises in Africa). See GroFin, a fund started by Shell Foundation which has began to change the international perception of ‘opportunity’ for investment in small and growing enterprises in Africa.

2. Find the right partners. The best partnerships are likely to benefit from:

• Being specific about the partners you need. Being aware of the networks you cultivate in order to find the right people. Projects or partnerships that wish to tackle large-scale changes should do so from the outset and focus on large economic and market levers. I liked Chris West’s phrase: ‘You cannot retrofit scale into an initiative.’
• Being open to unlikely alliances with the private sector that are geared to change markets. An example I find indicative of things to come is the partnership between the Rockefeller Foundation and the re-insurance company, Swiss Re, among others, to mainstream climate resilience strategies into the global financial sector.
• Investing time in consolidating partnerships on the ground. Be weary of putting together coalitions too quickly without proper incentive structures for individual partners to sustain their engagement.

3. Focus on growing a new economy. Creating changes in markets and the economy needs:

• Supporting innovative business models that show that it is possible to do things differently at scale (e.g. city-level sustainable transport systems) and support the finance innovations that demonstrate how to finance the solutions (e.g. co-financing agreements that blend private and public funds). See Embarq, which has leveraged an investment of $16 million from Shell Foundation into more than $800 million in private investment for sustainable transport around the world.
• Leveraging the assets and capabilities of the private sector to accelerate momentum for those solutions (e.g. expertise in business development, marketing and consumer culture, cutting edge thinking in distribution and logistics, value chain management, and financial and resourcing models). But also making a case for companies to engage with entrepreneurs to rethink their own business models.
• Being selective in what you subsidize. Subsidize an organization to create a new business model and help absorb the early-stage risks of new ideas. Invest in a partner and in creating a market (e.g. the guarantees or interest rates that can create a new finance market for new solutions), but don’t subsidize product or services, as you’ll be distorting the market and destroying the potential for scale.
• Be persistent and try to mobilize large investments that stick with your goals and strategies over longer-term periods.

4. Rethink what you measure. Because you manage what you measure:

• Define what you mean by ‘scale’ in your impact, and what you mean by the ‘performance’ of your investments.
• Be aware of the cost-efficiency metrics for doing what you intend to do. If someone can do it more efficiently, direct your funds accordingly.
• Be conscious and careful of the metrics you impose on your partners. Encourage people to report on indicators that make sense to.
• Be open to discuss failure and embrace the learning that comes from it, and be open to adapt your strategies and programs accordingly

For more information on the special issue on scale of the Alliance Magazine, click here. To find out more about the work of the Pathways to Scale program at Volans visit www.volans.com/pathways