Nalini Tarakeshwar Sheryl Fofaria

Human ingenuity has created a plethora of new tools and solutions to improve the way we tackle social and environmental goals globally.

These new approaches ally new social and blended finance tools to conventional grantmaking, in order to de-risk impact projects sufficiently to encourage governments and for-profit investors to participate. The end goal is to build an impact economy1 that seeks to balance people, planet, and profit.

It can be tempting to fall in love with these new tools, but it is important to recognize that they do not fit all situations or problems. So, when do they work best?

Adopting social & blended finance instruments

With an estimated USD 3.9 trillion needed annually to finance the United Nations Sustainable Development Goals (SDGs), philanthropy alone is clearly not enough. But philanthropy can act as a catalyst and attract commercially minded, return-seeking investors by de-risking innovative financial structures, through first loss capital or loan guarantees.

Let’s look at Jacaranda Health.2 The company operates a sustainable business model of maternity clinics in Kenya to support low-income women who face high chances of maternal and infant mortality. It received an impact loan to establish new clinics, with an interest rate that is adjusted to incentivize impact. This is measured by the share of low-income women patients, clinical quality, and patient satisfaction.

The loan is important to Jacaranda’s operations so it can continue to prove its business viability, whilst maintaining a focus on impact. This is an innovative use of philanthropic capital. However, achieving a broader level of impact requires greater scale, and that in turn needs larger amounts of investment.

Blended finance structures can help to achieve this scale, by increasing the amount of capital that is provided to impact enterprises. The structures typically contain a core of philanthropy, which plays a catalytic role. This funding is essentially used as the first-loss portion, soaking up any initial losses incurred from the investment. That de-risks the blended financial structure, often to the point that it becomes attractive for risk-conscious and return-seeking capital. In some cases, a successful blended finance project can leave the philanthropic funding intact, and available to be recycled into future projects.

The power of collective giving

While social and blended finance instruments offer a potentially powerful means to raise funds to meet the SDGs, they cannot (and should not) be used to meet them all. For example, child protection is a fundamental responsibility of governments and communities. Unfortunately, efforts to support and protect children tend to be fragmented, resulting in a lack of scale and impact. Supportive child policies often exist, but the ability to implement and enforce them is often inadequate.

Collective philanthropy models could offer one solution to this challenge.3,4 The concept essentially encourages multiple stakeholders to collaborate to tackle complex issues that have multiple root causes.5 Such models can be developed further by encouraging philanthropists to enhance their knowledge of the issue by visiting the projects and meeting a diverse group of stakeholders involved—such as non-governmental organizations working on the ground, policy makers, private sector actors, plus representatives from the local communities being targeted by these efforts.

Philanthropists who engage in this approach can learn the value of patient grant capital that is designed to support long-term, systemic change. They can also collaborate with a community of like-minded peers, and in doing so learn from and inspire each other to do more for specific causes. Involving multiple generations across philanthropic families can build stronger coalitions with similar-minded families.

Nothing without evidence of impact

This is an exciting time for philanthropy—the range of financing tools at our disposal can go quite a long way towards addressing the social and environmental financing gap and help drive the necessary scale of impact to achieve the SDGs.

Do these new sets of tools mean an end to traditional philanthropy models, such as grants and ‘pure giving'? Not at all. There will always be a need for donations to support social and environmental causes that do not have a business model. However, these newer tools offer a way for grant capital to be where there is the potential to attract additional resources to maximize impact (Box1).

No matter what tool we use, ultimately, transparency of impact will be paramount to building trust with investors, communities, and the stakeholders who generate impact. To paraphrase Ann Mei Chang, ‘Fall in love with the problem, not the solution, and make sure to measure your impact’.

Box1: Grantmaking still plays an important and strategic role

Grantmaking remains a significant bedrock to address social and environmental challenges. There are many instances where the nature of the problem at hand makes financial sustainability elusive, such as in advocacy campaigns or capacity building in areas like impact evaluation.

Philanthropic capital has the potential to crowd in other sources of funding—private and commercial. However, to realize this, we need a healthy pipeline of investments with real evidence of social and environmental impact and the ability to model financial returns.

This is more difficult than it sounds, particularly when targeting vulnerable and marginalized communities. Additional challenges arise when some sectors like health and education have better evidence of impact while others like environment need better data, and investments often need more evidence of meeting impact and financial thresholds when targeting low-income groups.

Grantmaking should be used strategically to build the pipeline of investable opportunities. Consider Access Afya,6 a health-tech platform that uses a custom analytics tool to identify communities in Kenya without access to healthcare. It received a grant that can be converted into equity, provided it meets financial and impact targets over the next 2 years.

In other instances, grants can support innovation in impact measurement. For example, Blue Finance, a social enterprise, received an impact loan and a grant to support collecting baseline and endline data in key metrics that were tied to the investment.

In sum, grants play a critical role in the ecosystem—both for issues that don’t lend themselves to market-based solutions and for gearing up those that do for further capital.

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