How social finance helps unlock sustainability – Kiran Dhanapala

Sustainability initiatives create positive environmental, social and governance (ESG) related impacts. Implementing sustainability initiatives takes money, time and skills, and not every investor is interested in creating nonfinancial returns or profits. Sustainable finance accounts for these ESG impacts to varying degrees in addition to the rates of return expected on funding such initiatives.

Investors are led by their relative interest in impact and profits, which can be viewed along a continuum.

At one extreme are traditional and venture philanthropists who invest for social benefit. In the middle are impact investors, including angel and social venture capital investors. At the other end are conventional return oriented investors like traditional lenders, including those who err on the side of social caution by seeking socially responsible investments.

Impact investing takes place in social enterprises that emphasise both purpose and profit. Enterprises may emphasise one over the other or both operationally. But they’re financially sustainable and use markets to generate revenue while fulfilling explicit ESG mandates. They differ from NGOs that only focus on social and environmental benefits, or returns from grants and donations.

Organisations that pursue these twin drivers of a social impact mission alongside financial returns may be structured differently. Some are more mission driven, and structured as businesses and self-financing nonprofit organisations. Others are mission oriented ‘for profit’ organisations or businesses.

Globally, impact investing is an emerging trend that will increasingly finance sustainability and Sustainable Development Goals (SDG) related initiatives. While small, it is growing; and it’s ambition is to seek to create major positive change.

Impact investors only fund projects or firms where the precise impact can be quantified and measured – such as a reduction in CO2 tonnes emitted by a factory; the number of girls educated and trained as a result of a particular project; or when quantified, the social returns in dollars from US$ 1 of investment.

Intermediaries must provide analytical inputs to offer investors greater information on impacts. Developing impact metrics and their monitoring is often a key area for improvement in social enterprises.

In Sri Lanka, social enterprises are a small but growing trend as reported by Lanka Social Ventures, British Council Sri Lanka, and the UN Economic and Social Commission for Asia and the Pacific (UNESCAP).

Many don’t know or use the ‘social enterprise’ label but create specific positive impacts while earning revenue. Of 386 enterprises surveyed, 44 percent self-identified themselves as social enterprises. The report estimates that there are between 6,000 and 15,000 local social enterprises.

In Sri Lanka, social enterprises provide direct services to local communities and some do so nationally. In the absence of a specific legal structure, these include private businesses, companies limited by guarantee, cooperatives and associations.

Local challenges include a legally binding structure for social enterprises; impact reporting; funding during specific stages especially the startup phase, and development and expansion; public recognition; uptake of financial and personal risks in startups; and affordable and appropriate support especially marketing.

An ecosystem for social enterprises is evolving and government support – rather than regulation – in the form of supportive policies and incentives will take it to the next level.

Sri Lanka hosted an international conference on social enterprises organised by Lanka Social Ventures and British Council Sri Lanka in January. Based on the theme ‘Think Social, Produce Social, Buy Social,’ it demonstrated how far this third sector has come.

Indeed, the financial services industry must integrate ESG into all aspects of operations. This is already underway in the local banking sector through the Sustainable Banking Initiative, which will result in financial flows moving away from environmentally and socially risky or destructive business activities to promoting positive investments.

The ecosystem for sustainability services requires intensive collaboration. More specifically, it demands growing capacity to do new and old things differently, as well as accelerators, incubators, innovative financial structures, technical assistance and intermediaries.

On the demand side, incubators and accelerators must collaborate to transform sustainability ideas into high impact businesses with funding, training, coaching, networks etc. Technical assistance support – particularly business skills and sustainability as a business strategy – is needed.

And on the supply side, intermediaries will channel capital efficiently. The social capital market value chain reveals that different types of capital can be absorbed by social enterprises at different stages of maturity.