Making Finance do Good…
I had a simple goal in life — to make finance do good for the world. That is why I joined Morgan Stanley at 21 and saw how finance brought amazing opportunities to the society (it did some bad things as well but let’s not go into that today). I wanted to take the magic of capital markets back to my poor country Bangladesh. Thus, with a head full of idealism and heart full of optimism, I left Morgan Stanley and returned to Bangladesh. There I joined Grameen Bank and worked on Grameen Bank’s first financing round, in effect bringing Grameen Bank to the world of capital. All this was almost 25 years ago and I am still at it. I still ardently believe that the right kind of investment capital and the emergence of social capital markets can make the world a more equitable place. Interestingly it is happening now and it is happening through what is known as ‘impact investing’.
As many of you know, the concept ‘impact investing’ refers to investments with the intention of generating positive social impact over and above financial returns. Over the last six years, impact investing has moved from the margins to the mainstream with an estimated market size of $60 billion in 2015, shifting the paradigm on how the world blends impact with financial returns. But there is more to be achieved to reach the target market size of $1 trillion by 2020 (J.P. Morgan, 2010). This can be achieved only by unlocking mission-oriented capital at scale, by bringing in new actors from the private sector to support sustainable development and by developing innovative financial products that can channelize resources to high impact entities — which in turn can deliver scalable and sustainable market-based solutions.
The world is impatient and we need to show the world quickly that scale can be achieved through impact investing. Thus, relying on innovative finance, we at IIX set out to achieve scale by developing a new financial product that will scale to impact investing: the IIX Sustainability Bond (ISB). ISBs are debt securities that pool together in a single portfolio, a group of high-impact entities that have undergone a rigorous due diligence process based on both social and financial criteria. This unique pooled structure allows underlying borrowers to access large amounts of capital that they would not otherwise have been able to raise individually. ISBs are designed to be sustainable instruments, offering attractive rates of risk-adjusted returns to impact investors who are interested in a double bottom line.
IIX’s commitment-to-action to the Clinton Global Initiative, the first ISB, is the Women’s Livelihood Bond (WLB), a ~$16 million debt security designed to unlock capital for Impact Enterprises (IEs) and Microfinance Institutions (MFIs) that are part of the sustainable livelihoods spectrum for women in South-East Asia. WLB will empower over half a million women with access to credit, to market linkages, to natural resources and to affordable goods and services. This will, in turn, help them transition from subsistence to sustainable livelihoods and redefine the dominant narrative from viewing women as victims to recognizing them as solutions to development, change and progress.
WLB is designed to finance change and change finance via three overarching objectives:
- Availability of mission-oriented capital: To open the floodgates of mission-oriented investment capital by leveraging existing donor capital from USAID and DFAT to guarantee the bond and unlock far larger amounts of investment from private sector players by de-risking the security
- Accessibility of mission-oriented capital: To bring together capital supply from investors with demand from high-impact organizations through an innovative, replicable financial instrument
- Affordability of mission-oriented capital: To provide high-impact organizations access to relatively low-cost capital that is more affordable than capital available from public debt markets
WLB will pioneer bringing the IEs and Microfinance Institutions (MFIs) together in a single structure to allow impact investors to leverage on the strengths of both entities to mitigate risk, maximize returns and catalyze impact. Additionally, the basket of borrowers are all financially sustainable entities that are able to repay the loan amount along with interest by using market-based solutions to address development issues. These entities are geographically diversified, spread across four countries: Cambodia, Indonesia, Philippines and Vietnam.
The WLB focuses on not only unlocking large amounts of capital from new participants, but also effectively utilizing this capital to create scalable and sustainable impact. This mandates balancing social impact with financial returns throughout the bond structuring process, starting with conducting social due diligence on potential entities during the pipeline development and continuing rigorous measurement and reporting of social outcomes achieved the final borrowers through the life of the bond. This will be further ensured by listing the bond on IIX’s social stock exchange: Impact Exchange. In addition to the usual listing requirements, Impact Exchange requires that all issuers demonstrate positive social and/or environmental impact, and adds an additional layer of secondary liquidity, mission protection and transparency.
The WLB will serve as a blueprint to open the floodgates of private capital that is earmarked for creating large-scale impact, be a catalyst in the impact investing space in Asia by bringing in new private sector players into the sustainable development equation and using the power of capital markets to transform the lives of women across the region.
Thus, it is not only about achieving financial scale but it is also about creating enormous magnitude of impact — Women’s Livelihood Bond managed to do both, proving that it is possible to make finance do good in a very large scale….