In Lugano – Switzerland, I spoke at the first-ever conference on Partnering for Global Impact. This is an annual platform, organized in collaboration with INSEAD, for the meeting of impact investors and social entrepreneurs, so that both sides can make deals that support the scaling up of social enterprises.
During the conference, I met several heads of European family offices that were making impact investments as part of their investment portfolio. They were seeking advice on where and how to invest in order to achieve a strong societal impact with their portfolio. In particular, they asked for frameworks that could help them in the selection criteria for impact investments.
From my experience, this is a frequent request from family offices. While the selection criteria for traditional financial or business investments is well understood (Risk-adjusted return on investment) and there are strategy frameworks to analyze industry attractiveness (such as Porter’s Five Forces framework), there is no practical framework to assess the likelihood that an investment will have a strong positive impact in society.
Drawing from my experience with hundreds of social entrepreneurs, I presented at the conference a framework for assessing the potential for societal impact.
The essence of social entrepreneurship is to develop, validate and scale a sustainable solution to a societal problem. Thus, it is critical for an investor in social entrepreneurs to analyze both the societal problem being addressed and the nature of the proposed solution.
There are two key drivers of impact for a societal problem:
Important problems that are neglected by society represent a fertile domain of work for social entrepreneurs and deserve to be supported by impact investors because solving these problems is likely to have significant impact in society.
But investors also need to consider the nature of the proposed solution. In particular, they should be looking for solutions with two key characteristics:
In summary, the most compelling social entrepreneurial initiatives are the ones that deal with important and neglected problems and propose solutions that target excluded populations and explore spillovers.
A good example is Sameer Hajee who became a social entrepreneur in 2009, a few years after graduating from INSEAD with an MBA. He focused his social enterprise – Nuru Energy – on the problem of access to energy in rural areas of Africa and India, a problem affecting 500 million people in those continents who are neglected by governments and not well served by markets.
The current dominant solution is the use of Kerosene lamps for lighting. But a Kerosene lamp is a very bad solution since it is expensive, provides poor light, can cause illnesses and burns, as well as environmental pollution. Nuru’s proposed solution involves replacing these lamps with a renewable energy lantern, targeting the poorest villages in East Africa and India. The lantern is charged once a month through only 20 minutes of pedaling in a fixed bicycle owned by a micro-entrepreneur.
This solution is five times less costly for the clients, and has significant spillovers, leading to fewer accidents, improved health conditions, and reduced carbon emission in addition to the lower costs to the client and better light for reading or socializing at home. Nuru Energy thus fulfills all the criteria that make it a high potential impact investment.
Social entrepreneurship and impact investing are exciting growth areas that demonstrate the best facet of capitalism. We need clear frameworks and business tools that allow family offices to make the most of their resources for the benefit of society.