Designing your Social Investments (I)

To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

  • Larry Fink, CEO, Black Rock

In today’s business environment, one growing sentiment among asset owners, young leaders, entrepreneurs, high net worth individuals and managers is the need to include ESG (Environmental, Social and Governance) and impact standards in their investment processes. Businesses that have enjoyed relative success while operating in a particular location for a while and even those that are just emerging have the responsibility of finding ways to deal with some of the social challenges in their respective locations or areas of influence.

With the emergence of new businesses springing up worldwide, there is also an accompanying rise in innovative approaches to investments that generate significant levels of social impact and aim at dealing with issues like hunger, healthcare, clean water, education, inequality, etc.

However, this does not move away from the importance of generating increasing market rate returns while at the same time creating positive social returns. Nevertheless, beyond the hype and following trends, what is the purpose of investing socially or for making an impact? What strategies should companies adopt that will actually create social value as well as financial value for the business?

Understanding Social Investments

To make successful social investments, businesses need to understand the rationale behind the idea. Social investment projects usually have people and the society as the integral focus. These projects are generally concerned with making social impact while at the same time acquiring significant financial proceeds.

According to Harvard Business School, 80% of the global wealth lies in the control of only one fifth of the world’s population leaving the less fortunate who are in the majority to grapple with issues like access to safe water, food and energy while living on less than $1.25 per day. In addition, close to 5.6 billion people in the world (about 80% of the world’s population) “have no safety nets, receive little or no aid and lack health care, education and access to capital. Many engage in meagre income-yielding economic activities, such as subsistence work as small-scale farmers.”

The onus lies on businesses to operate as social enterprises that will ultimately provide solutions to generate sustained opportunities for these groups of individuals, which would result in relative progresses in their earning capacity and lift them out of poverty.

The question for most organisations is can they become social enterprises without compromising on the expectations of shareholders and other financial stakeholders to the business?

Impact Investing

In the broad spectrum of social investing, impact investing takes the approach of making precise and quantifiable investments in projects and enterprises in a particular sector. The goal of these investments would be to deliver on social or environmental benefits.

For success to be achieved with these enterprises, the direction the projects will take should be clearly mapped out in their mission and vision statements. Projects should deliver on specific core values that are peculiar to the business or organisation. Leadership buy-in is a key success factor with these projects. It is the responsibility of the leadership to make the connection between making profits and drawing the line on the social impact of the enterprise, as well as aligning expectations of the different stakeholders involved in the projects. These projects should be able to manage issues like access to capital, as well as mitigating oppositions that may arise, and be able to measure impact.

 

There are different business models to consider in order to understand how social or impact investing works. Under listed are a few case studies to illustrate how it works.

 

 

A case of India’s Aravind Eye Care System.

Aravind Eye Care System is a non-profit Indian company founded in 1976. It was established to serve India’s less privileged population who had no access to eye care, while also offering their services to 40-45% of patients who can pay for eye care services. The company is known for its excellent eye care services catering to about 10,000 patients every day; performing an estimated number of 1,500 surgeries per day. Majority of their patients are those who receive free or subsidised eye care.

In spite of all of this, Aravind is still a financially successful company with profit margins of about 30%. The company uses the economies of scale from high volume of surgeries, efficient processes, high technology used in streamlining operations and low cost margins in their operations to achieve the impressive returns they have been enjoying.

They have been instrumental in creating an entire ecosystem for eye care in India using treatment procedures that has upgraded the quality of eye care across the country and even around the world. They have extended their good graces by sharing organisational best practices with 250 other hospitals all in a bid to extend the innovative technologies in eye care and ensure that more people can benefit.

Thulasiraj Ravilla, one of Aravind’s leadership has said that; “All of the segments have helped the business model. The 60% portion taken in the beginning as charity work brought in benefits of acceptance, economy of scale, and the frugality mindset that is part of our DNA. The 40% that are the ones that bring revenue… they drive quality because they want value for money”

From the foregoing, key factors to consider when planning projects for impact are:

  • Intentional: the need to generate social and/or environmental impact should be clearly spelt out.
  • Expected Returns: impact projects should have the ability to yield financial returns on capital.
  • Measurement: measuring and reporting of social and/or environmental performance and progress made by the investments is critical.
  • Range of returns: the returns generated from impact investments should range from below-market to risk-adjusted market rates.

Editor’s Note: This is the first article in the executive series on designing your social investments. In next week’s edition, we would explore some of the trends and market activities around social and impact investments. We would also review more case studies and business models from other sectors that have worked, and learn how they can be successfully applied for desired results.

 

*Article written by ThistlePraxis Consulting

 

*References are available on: www.sustainableconvos.com

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