Just weeks after the collapse of Lehman Brothers in 2008 and as trillions of dollars disappeared from global capital markets, the makings of a new social capital market began to take shape. The Social Capital Markets(SOCAP) conference series, which began in September 2008 in San Francisco, has grown into perhaps the largest and best respected platform for socially minded investors and entrepreneurs. On October 1-4, the Aga Khan Foundation was proud to attend SOCAP12 as a Community Partner.
In years past the programming at SOCAP focused heavily on social entrepreneurs themselves, with large spaces and time slots devoted to pitch sessions and investor feedback. While social innovators will always form the backbone of the social capital market, the discussion at SOCAP12 shifted towards institutions and their frank assessment of lessons learned in working to deploy capital at the base of the economic pyramid — an economic term for the poorest; globally, the 2.5 billion people who survive on less than US$2.50 per day. The belief that this burgeoning sector is experiencing a critical moment was pervasive throughout the week.
Dr. Mirza Jahani, CEO of the Aga Khan Foundation U.S.A. (AKF USA), participated in a panel discussion entitled “Growing Opportunity: How Low-Risk, High-Impact Deals Can Scale a Sector”, where he and other distinguished panelists (Audrey Choi of Morgan Stanley, Lisa Hall of the Calvert Foundation, and Buzz Schmidt of the Heron Foundation) explored how more appropriate expectations of returns could help channel high volumes of patient capital into impact investments that carry lower risk. Given current low rates of interest, Dr. Jahani explained, “I think this is a moment of opportunity for us to invest in the developing world.” He added, “We need economic drivers to generate the resources to sustain social development.”
Referring to investors’ expected rate of return on impact investments, Audrey Choi, Head of Global Sustainable Finance at Morgan Stanley, noted that “we never talk about that one number, it’s about appropriate, risk-adjusted returns.” As a pioneer in this field, Morgan Stanley Wealth Management recently launched their Investing with Impact platform to satisfy demand from high-net worth clients seeking an on-ramp into the sector. “[Social] sectors get overlooked in bubble scenarios,” Choi continued, “but now is the time to make the case for them. People are looking for returns in many more places than they ever had to before.” Downward pressure on yields of traditional financial products enables savvy investors to create long-term value by investing in society’s infrastructure.
The evolution of platforms like Morgan Stanley’s, and financial products to sell on those platforms, was a core theme at SOCAP12. Other leading institutions confirmed Choi’s observation of a more engaged client base. “The individual investor is responding,” echoed Buzz Schmidt, Heron Foundation Chairman, on the same panel. Schmidt and others at the conference noted that typically families and high-net worth individuals are entering this sector ahead of institutions, since they are more flexible and autonomous in their decision-making than institutional investors. “At Calvert,” Lisa Hall explained, “we create a vehicle to empower investors to empower others.”
In a spirited discussion with Nonprofit Finance Fund’s CEO Antony Bugg-Levine, Monitor Institute President Katherine Fulton tied this with an impassioned call to action. In the wake of the financial meltdown, she said,
I think now we’re too hypersensitive to risk, and that’s leading us to do more incremental things. I’m really sure that it’s going to take some big acts of leadership to establish the credibility, people who are willing to put themselves out there. And I think that’s going to have to mostly come from living donors – not from institutional philanthropy (mostly, institutional philanthropy is silent on this) – the leaders who can themselves decide the tradeoffs they’re willing to accept, or the risks they’re willing to accept and stand by it.
Aga Khan Foundation USA is confident that an honest, holistic assessment of realistic returns will make for better decisions by both individuals and institutions when investing for durable social impact. “Augmenting the sources of capital for social purposes in Africa and Asia will be critical,” Dr. Jahani explained. “If you’re looking to be in these sectors for the very long term, the way you view the risk trajectory looks very different.” He explained, “We have experiences with social development in fragile states,” places where risks are high in the short- and medium-term, but “where if you look over twenty years, the risks can be mitigated.”
By viewing impact investing as a tool for applying financial rigor to solve social problems rather than a modified form of financial investment, in the long run we can create lasting solutions rather than simply new financial products.
Adam Caplan is a Development Finance Analyst with AKF USA’s Impact Investing Initiative.