Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 6 - June 12, 2016.

 

Impact Exchange, the world’s first social stock exchange, launched by Impact Investment Exchange Asia (IIX), is poised to introduce its first instrument — the Women’s Livelihood Bond — which is set to raise US$20 million from a pool of underlying issuers. IIX founder and chairman Durreen Shahnaz talks about this instrument and the other investment platforms the company has come up with for the social good.

 

Marrying capitalism with philanthropy

Impact Partners is a private marketplace that connects accredited investors with social enterprises making US$5 million or less in revenue that are looking to raise between US$1 million and US$7 million. The average amount raised is US$2 million. 

The inspiration to democratise capital markets came from a deeper personal experience, Durreen tells Personal Wealth. “Growing up in Bangladesh, which was devastated in the 1971 war, was really where it all started. It was a country that relied on foreign aid as we didn’t have much natural resources. 

“It was very interesting as a child. The parallel for me, at least, was that the country was being told what to do by the donors and I — as a girl growing up in a Muslim country and a restrictive society — was being told what to do.

“I felt that we were falling short in terms of being at the main table, being a part of the conversation where we are all participants in the global economic growth. We were pigeonholed in a way that some people decided that they were going to give us some money and the country [Bangladesh] then figured out what it needed to do to feed its people. 

“So, I figured, there must be a way to break this, as a woman coming out of that [environment] and the country as it was. I think Bangladesh, for one, has been a Petri dish for fantastic development initiatives such as the Grameen Bank.”

Seeking to create a link between capitalism and social enterprise, Durreen joined Morgan Stanley in New York as an investment banker at the age of 22. Two years later, she traded in her power suit to work for microcredit financier Grameen Bank in her native Bangladesh.

Yet, she did not find what she was looking for. So, she returned to the US to work for media conglomerate Hearst Magazines. She left a year later, in 1999, to found global e-commerce marketplace OneNest as a way to empower local craftmakers, many of whom were women — an idea that came from her brief spell at Grameen Bank. She sold OneNest in 2004 and joined Reader’s Digest to run its Asian operations, which were based in Singapore. Occasionally, she wrote articles on creating capital market infrastructure around social businesses. 

In 2008, the Lee Kuan Yew School of Public Policy offered Durreen the opportunity to teach a class on social innovation. This allowed her to work on her idea of an exchange for social enterprises. With the support of the Rockefeller Foundation, she initiated the setting up of IIX in 2008. She roped in Kraybill, whom she had met at Morgan Stanley.

“That year, 2008, was really bad for the financial markets and the world. But the silver lining was that it made a lot of people wake up and consider something in between extremely high financial returns and charity,” says Durreen. 

This was a way to end the world’s most pressing woes — by harnessing the power of capitalism and philanthropy. “You don’t have to think of everything as philanthropy or as profit maximisation. Many countries had been considering this for a while, but IIX was looking to bring together the two concepts with a new lens. For us, the big thing was bringing in people, such as social enterprises, investors and other stakeholders that make up the ecosystem, such as donor agencies, foundations, non-governmental organisations, governments, private banks, law firms and academic institutions, which had never even thought they could be part of the equation,” Durreen explains. 

She had told the 2013 Technology, Entertainment, Design (TED) Conference in Singapore that Asia was home to 3.4 million high-net-worth individuals (HNWIs), who collectively owned more than US$100 million in assets. But it was also home to 1.2 billion people who suffered from multi-dimensional poverty, 70% of the world’s hungry, 65% of the world’s malnourished children and more than a billion people without access to clean water and still lived on less than US$1 a day. 

She also highlighted the fact that there wasn’t enough philanthropy to address this gap, that there “wasn’t enough heart in the traditional capital markets to use the system to change things”. 

With Kraybill — who has two decades of experience in investment banking — at her side, they managed to approach even the most scrupulous of investors. “It was very important for me to have the voice of someone like Rob. People would listen to him because he had been doing this for 20 years and asked him if he really thought it was a good asset class. This made a difference, especially to Asian investors,” says Durreen.

But even with the creation of the exchange, Asian HNWIs have been the hardest to convince. In this region, philanthropy is approached very differently, as most of the grant makers tend to want to go back to their villages or hometowns to make an impact. “It is deeply linked to their social ties and it hasn’t changed much in the last decade,” Durreen says. 

“In the West, when people made money, they gave it away. In Asia, the money is fairly new. For them, the philanthropy didn’t happen straightaway. So, in some ways, they look at anything with an impact angle with scepticism. But I have a feeling that we can get more traction out of it because they are looking at the financial side, and as people see this more as an investment, they will be willing to explore,” she adds.

“Typically, Asian investors who are interested in impact investing are interested in making a difference. But they tend to look at it very closely as an investment and want to ensure that these investments stack up purely on a financial basis. Then, they will use [the latter factor] as a tiebreaker, that it also has positive social impact,” says Kraybill.

“For social finance and social capital markets to go mainstream, we do need to appeal to people on both levels and clearly demonstrate the social impact and that there can be financial returns,” he adds. 

Durreen says there are parties promoting the impact investment space as a profitable and socially gratifying one at all turns, but this is not always the case. “There is a cost and the investors have to be able to embrace that it is okay not to make 30% returns, that it is fine making only 7% or 8%. 

“It goes back to the question of need and want — you can keep on wanting more, but do you really need it? At the end of the day, it is about being practical about the fact that a part of the returns you are getting is actually very good. But on top of that, you are getting social gratification.”

 

In the pipeline

Despite creating a myriad instruments to prepare the social enterprises, Durreen says there remain gaps to fill. “The other thing we see in the ecosystem is the need for working capital. These organisations may not need to raise equity money but only US$25,000 to US$150,000,” she adds. 

“Interestingly, these enterprises are mostly led by women. Across the globe, many SMEs are led by women, and it is harder for them to access capital to grow their operations because of parochial conditions, gender stereotypes, patriarchal societies or a lack of education and access. So, we are now creating a debt platform that will be able to supply US$25,000 to US$100,000 for working capital.”

This debt platform, which has been dubbed “Impact Credit”, is positioned as a peer-to-SME lending platform. It is expected to be rolled out by the first quarter of next year. “We are still putting the pieces together. The UN is a big part of it, so is Dun and Bradstreet [a New Jersey-based company that provides business data and analytics],” says Durreen.

Having followed its progress, Agensi Inovasi Malaysia, which had been created to promote innovation in the country, approached Durreen earlier this year to help draw up its Social Finance Roadmap 2016-2020 for the 11th Malaysia Plan (see next page). She says it was the first time a government had approached social finance in a systematic way, and this gained the attention of the United Nations Economic and Social Commission for Asia and the Pacific (Unescap).

“Unescap is a big voice in creating resolutions that go into the general assembly. The resolutions they are coming up with are expected to be announced in September, encouraging all the member states to think about creating social finance initiatives and to look at innovative financial structures,” says Durreen.

With these structures in place, there will be more blended capital, combining philanthropy and investments, she says. “We started this mission to boil the ocean, and now it is lukewarm after all these years. I did not expect to see this in my lifetime, but in the next five or six years, this will be a robust impact investing space where every stakeholder, such as organisations, entities and institutions, in the public and private sectors will be a part of the conversation.

“You do need that crazy thought of doing the impossible. With the exchange, what it does is irrelevant, what is relevant is that it really becomes the beacon for social enterprise and the impact investing ecosystem players who want to bridge the gap between development and finance.”

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