Paving the Path: Unlocking Inclusive Impact Investment in Latin America

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Nearly 20 years ago, the term “impact investing” was coined and advocated with the promise of generating positive social and environmental impact along with a financial return.

However, according to the Sustainable Finance 2024 report, the global financing gap for development is growing, reaching $4.2 trillion per year compared to $2.5 trillion before the pandemic. In the face of this great challenge, it is necessary to reflect on the importance of exploring new ways to overcome the barriers that still hold back the impact sector. Only then can we create a truly inclusive and effective investment ecosystem.

In the early years of “impact investing,” organizations such as the Impact Management Project (now Impact Frontiers), the Global Steering Group for Impact Investment (now GSG Impact), Toniic, the Aspen Network of Development Entrepreneurs (ANDE) network, among others, were created to drive the flow (capital providers) and use (ventures and organizations) of investment capital to contribute to measurable improvements in people’s quality of life and the health of the planet.

Almost 20 years later, many have reconsidered a path that goes beyond impact investing to focus on a broader impact narrative. For example, GSG Impact has recently prioritized transparency through the harmonization of impact standards to address the sector’s barriers. To this end, it has decided to focus on two main barriers: the lack of incentives for decision-makers and organizations to optimize impact, and the lack of know-how among entrepreneurs and companies to implement impact effectively.

We believe revisiting the “impact” aspect of what we know as “impact investing” is relevant and necessary. However, we also argue that there are still latent barriers in the “investment” aspect that deserve to be evaluated to meet the objectives set by the sector 20 years ago, and, most importantly, for its growth to become even more accessible and inclusive.

We identified three main barriers to impact capital investment:

1. The size of impact investment is still small in the South, leading to a limited supply of investments that fit the diverse needs of entrepreneurs;
2. There is still little interaction between investors and entrepreneurs, and a misalignment of the “impact-financial return” expectations; and
3. There are few financial instruments suited to the specific contexts of entrepreneurs, and the countries, economies, and communities where these enterprises emerge.

While there are several debates about the need to rethink the global impact investment narrative, Latin America (LatAm) should not be the exception.

First, in LatAm, there are many entrepreneurs with innovative ideas who seek to achieve social or environmental goals or simply provide solutions to the people of the communities where they operate.

However, materializing these ideas into specific products or services or scaling these businesses to serve a larger population requires financing options that might not be the most common. Often, the capital accessible to these entrepreneurs, mainly venture capital (usually from venture capital funds) and debt options (usually from microfinance institutions), does not fit their needs, even if their businesses are healthy, have growth potential, and provide effective solutions to their communities.

Second, unlike investors who usually have various options to diversify their risk, entrepreneurs have likely used all their savings and dedicated all their time to creating a single venture, which may or may not succeed. This results in an unequal risk and negotiation position, which, from a social standpoint, is far from achieving a more equitable world, thus reducing the wealth gap.

Third, one of the main problems lies in the traditional venture capital business model, which seeks the “unicorn” or “home-run” that can leverage the financial return of the fund’s portfolio. This, combined with the fiduciary obligations that often restrict flexibility, prevents financial instruments from adapting to the real needs of the enterprises and their operational contexts. “Out of the box” investment instruments are needed to find the “how-to” so that entrepreneurs can access financing options that drive innovation, generate solutions for their communities, and, in turn, meet the investment returns required by investors.

Fortunately, various financial solutions exist that can adapt and align with the risk-adjusted financial and impact requirements and expectations, providing opportunities for both the investor and the entrepreneur. The spectrum of these instruments is broad. They have already been successfully implemented in LatAm and globally. These include revenue-based financing, supply chain financing, redeemable equity, employee ownership, convertible grants, and social impact incentives, among others.

The choice for an investor to offer any of these instruments and for entrepreneurs to accept the terms will depend on many factors. However, flexibility, creativity, and clear communication between both parties are key factors for the success of this implementation. We believe that increased awareness and use of innovative financial instruments can bring considerable benefits to both entrepreneurs and investors:

• Entrepreneurs can access financing aligned with their business control interests and capabilities without requiring collateral or fixed payments that could jeopardize their operations, providing flexibility that suits their growth stage. For example, implementing electronic invoicing in LatAm has enabled the proliferation of factoring, potentially reducing financing gaps for small and medium-sized companies.
• Investors can broaden and diversify their investment portfolios with these instruments beyond fixed income or equity. Additionally, they can help reduce systemic risks their investments might create, such as wealth inequality or unemployment, by preventing the formation of wealth for other segments of the population or putting pressure on enterprises with excessive debt that puts their operation at risk.

As does GSG Impact, we believe that increasing capital flows to emerging markets like LatAm is essential to achieve a more just, equitable, and stable world. According to its recent study, current financial market volatility and rising interest rates have put a lot of pressure on investors, highlighting the need to turn their attention to emerging economies, which are likely most in need of a greater capital injection.

Therefore, to increase investment flows to LatAm and ensure their more distributive use, we propose thinking outside the box, finding the “how-to,” and being bolder with the use of innovative financing instruments that diversify investment portfolios and help reduce systemic risks in the region.

Who we are

We are professionals in investing for impact with a combined 30 years of experience, committed to reducing the impact finance gap through innovation for more inclusive development in Latin America.

Álvaro Espitia is the Latin America Director of Athena Global, a consulting firm specializing in impact finance. His expertise is in innovative finance, international development, and social entrepreneurship.

Alejandra Garcia is an impact investment specialist with over 13 years of experience working with multilateral organizations, venture builders, and social enterprises to create solutions that connect innovative finance, entrepreneurship, and social and environmental impact. Her expertise spans projects in South Asia, West Africa, and Latin America.

Juan Jardon is an Associate Directorat the Predistribution Initiative, a multistakeholder organization designed to co-create improved investment structures and practices that share more wealth and influence with workers, entrepreneurs, and communities. His background is a mix of public policy, investment banking, impact investing, and innovative finance.