In recent years, especially since the onset of the Covid-19 pandemic, we’ve observed many philanthropists donating their wealth generously. We read about many multi-laterals, philanthropies, corporates, and individuals donating billions of dollars across the globe to overcome the various development challenges including (but not limited to) poverty eradication, improving quality of education, women empowerment, and combating climate change among others. Philanthropists like Bill Gates, Warren Buffet, Azim Premji are amongst the 231 ultra-high net individuals who have signed the ‘Giving Pledge’ to donate a majority of their wealth to solve the most pressing issues of the world. It is natural to question the impact all this money has had over decades and if it has actually reaped any benefit. India alone received an estimated USD $6.8 billion in philanthropic giving in 2018–19 alone. It surely has contributed immensely but two things could be missing: 1) An understanding of which models and service providers have created better social return; 2) concrete evidence that can be used by other funders or governments

In the absence of the above, one tends to rely on input or output-oriented parameters like human resource deployed, amount spent, number of stakeholders trained, etc. to gauge the social impact generated. But this model of social/development giving has many challenges, some of which are given below:

  1. Narrow scope of work: In the absence of measures of impact and outcomes, many projects focus only on immediate relief with little or no focus on tackling systemic challenges. Immediate relief, while having its own merits to meet urgent needs in the sector, often misses out on opportunities to tackle the root cause of issues. This incentivizes the grantees to focus on tangible inputs or outputs as against a focus on systemic change thus creating dependencies on external aid. Various women’s economic empowerment programs focus on various vocational training elements alone. These initiatives need to be supported with many other resources to achieve their desired outcome.
  2. Focus on tangible giving v/s actual benefit to the target groups: There is an obvious leaning towards giveaways in the form of food, books, clothes, etc., especially in the smaller donors. This is a classic case of giving a person a fish v/s teaching them how to fish. For example, one hears of many organizations distributing study material to students or philanthropies organizing x number of awareness events to engage y number of people, etc. The focus still remains only on engagement numbers as against outcomes of these engagements or opportunities that originated from these.
  3. Time period of programs in the sector is not enough to achieve systemic impact: In the absence of long-term impact indicators, programs which originate in the private sector are often short-term. This may translate to an inability to integrate good practices in the government systems as soon as the organisations driving the implementation move out. Various capacity-building initiatives across departments like education and WCD led by external organisations in the past were limited to a few days’ training with no impact assessments and remedial training.
  4. Processes and reviews focus only on inputs or outputs: Most programs, government-funded or otherwise, still budget programs to inputs under heads like human resource, travel, product costs, etc. While these are necessary expenses all organisations need to make in order to mobilise resources for impact, the impact itself doesn’t feature in the overall financing of the program. Whether or not these resources (and in turn the fund) were able to achieve the desired outcome is often left to chance. While implementing organisations have an incentive to ensure the necessary human resource is allocated or raw materials are put in place, the longevity and durability of the product or service being provided are left to chance.

A focus on improvement in learning levels as against the number of devices distributed, on improvement in average women’s nutrition levels as against the number of awareness events conducted across the state, is crucial if we want to get to the desired outcomes set out for any program.

The ongoing pandemic has put us farther away from our goals of poverty and hunger eradication, education, employment, etc. It is amply clear that impact has to take center stage. And we see the global ‘giving’ trends moving towards this direction by prioritising impact from the funding stage itself. An impact focus in the funding stage: The Social/Development sector ‘giving’ in the past rarely included the funding stage of the program into its impact cycle. And this thinking is rapidly changing for both government and private sector players. The funding models of the programs themselves are being experimented with across the globe to arrive at one that could not just achieve the desired outcome but also reward the investors with some returns. This shift is supported by:

  1. Focus on Monitoring and Evaluation: In recent years monitoring and evaluation of long-term programs have become a priority area for multi-laterals, governments, philanthropies, and corporate donors. Over the last decade, many multi-laterals, philanthropies, and governments have started taking an active interest in the evaluation of their programs with some establishing evaluation cells within their organisations.
  2. New Organisations with an outcome focus coming into play: The development sector has seen a spurt in social enterprises and foundations that operate with a focus on long-term impact instead of shorter stints in smaller geographies. Across the country, there are multiple systemic transformation initiatives running in sectors like healthcare and education which work on refining data systems, processes, structures, and effective communication to improve the departmental outcomes at large.

This (slow but steady) shift towards evaluation of outcomes of a project has also given rise to innovative models of financing within the social sector which creates scope of maximising social good and earning some predefined percentage returns depending on the degree of outcome achieved. Innovative financing in the development sector has put impact and outcomes at the center with all elements including the funding, strategy and implementation revolving around it.

What is impact investment?

Simply put Impact Investment is any investment made to earn some profits while generating social good. The purpose behind impact investment is two-fold: a) to mobilise additional resources from the private sector to fund developmental programs; b) increase effectiveness and efficiency of the capital by sharing risks, supporting longer duration capital flow, etc.

Over the last few decades, many such instruments of innovative financing have appeared which have tried to leverage private sector funds for social good. Some examples of these models include:

  1. Market-based instruments to raise funds from capital markets: Instruments like bonds and guarantees have been used for decades to introduce private sector capital in infrastructure-related projects like environment taxes.
  2. Equity stakes in social sector organisations: Microfinance and investment funds often make equity investments in for-profit social enterprises. While social enterprises may provide smaller profit margins, various private sector entities like philanthropies and social venture capitalists prefer these investments for the added social value they reap out of it.
  3. Impact Bonds/Pay-for-Results: These are financial contracts under which the government or another independent entity such as a multilateral/ philanthropy/ donor organisation, known as outcome payer, enters into a contract to pay only for demonstrated, measurable outcomes once achieved for the target population. Along with the final outcome payment, the investors also receive a predefined percentage return based on the degree of outcome achieved. One such good example has been the Educate Girls’ Development Impact Bond (DIB) successfully completed its predefined targets and then some. Governments too are exploring this new instrument, a good example of which is the Skill Impact Bond with National Skill Development Corporation (NSDC) as a risk investor and other philanthropies and CSR funds as outcome payers.

We are moving towards a new age of innovations in social sector financing and there is a lot more to come. Unless impact becomes the obvious outcome of all social/development sector work, no public or private funding can enable an equitable and inclusive world. At GDi, we are excited with the spur of financing innovation in the sector to fund not just impact but also reward those who bring this impact. Stay tuned to know more!