The public sector can do much to promote social impact investment in developing countries

This post is written by Manuel Sager, Director-General of the Swiss Agency for Development and Cooperation.  This article is one in a series of ‘In my view’ pieces written by prominent authors on issues covered in the OECD Development Co-operation Report 2016: The Sustainable Development Goals as Business Opportunities.

Partnerships between the public and the private sector can take on many forms. When it comes to leveraging additional resources for sustainable development, social impact investors are key partners for development agencies. They include private and institutional investors that seek not only financial returns, but also social and environmental improvements. The market for social impact investment has been growing steadily in recent years. It makes sense for development actors to pay greater attention to this investor segment and to look for synergies with it.

In Switzerland, for example, the volume of investments seeking social impact in developing countries is substantial: in 2015, assets under management for such investments in the country amounted to an estimated USD 9.85 billion.1 While the global impact investment industry is still in its infancy, it is set to grow significantly over the coming years. Investors are increasingly interested in returns other than purely financial ones and seek new investment classes to diversify their portfolios.

Given the close alignment between the goals of impact investors and those of the international development community, it seems only natural that the two sides should engage in more mutually supportive partnerships. This would strengthen the impact that socially oriented capital has on poor communities, particularly in lower income markets.

In my view, there are four key areas in which development agencies like the Swiss Agency for Development and Cooperation could do more to partner with the impact investment industry and support the transformation of social impact investment into a mainstream choice.

First, partner governments and development co-operation agencies should not neglect the important objective of strengthening the overall governance framework in developing countries. This is essential to create attractive investment opportunities, including for impact investment. After all, impact investment decisions are informed by the same factors that make a business environment attractive for other forms of investment. These include effective public administration, rule of law, a sound macroeconomic framework, low levels of corruption, and easy, transparent business procedures. Switzerland will continue to work with its partner countries to improve their overall business climate and promote good governance, including in the world’s least developed countries and in countries emerging from conflict.

Second, the public sector can support a number of activities to help reduce the cost of impact investment relative to other types of investment. Switzerland has created the Swiss Capacity Building Facility2 for this purpose. The facility is a public-private partnership that provides small technical assistance grants to financial service providers in developing countries. Its contribution reduces the entry costs for those seeking to offer innovative and affordable financial services to low-income earners, smallholder farmers and small businesses. Financial products such as agricultural input insurance or livestock leases allow clients to boost their income, employ more people and reduce their vulnerability.

Third, where it makes sense, public funds can be used to leverage private funds via guarantees or early-stage investment. One of the most successful microfinance funds in Switzerland – the responsAbility3 Global Microfinance Fund – was launched in November 2003 with initial capital of CHF 3.6 million from the Swiss State Secretariat for Economic Affairs. Today, this is a flagship microfinance fund worth over USD 1 billion in private capital invested in various microfinance institutions in developing and transition economies.4

Finally, development actors and the social impact investment sector need more platforms for exchanging knowledge and sharing experiences. This dialogue can help them identify what works and what doesn’t work, and to ensure that the right incentives are put in place on both sides to advance the goals of the 2030 Agenda. In Switzerland, the sustainable investment community, which comprises a number of impact investors, has banded together under the auspices of the Swiss Sustainable Finance5 organisation to help establish the country as a leading centre for sustainable finance. To date, Swiss Sustainable Finance comprises over 80 members from Swiss banking, insurance and financial services, and includes a working group on investment for development.

As we set out to achieve the Sustainable Development Goals by 2030, it is clear that social impact investors can make a big contribution. What we need now are smarter policies to enlarge the circle of contributors.

1. Swiss Sustainable Finance (2016), “Swiss Investments for a Better World. The First Market Survey on Investments For Development”. The classification used in the survey entitled “investments for development” summarises investments that combine three necessary elements: the intention to improve the social, environmental and/or economic situation in the investment region; target low or middle-income frontier countries; and aim for returns in line with other investment categories.

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