A framework to assess the impact potential of investments in social entrepreneurs

A framework to assess the impact potential of...

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.

Associate Professor of Entrepreneurship, Insead

KPMG contributor


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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.

Sustainable solutions to societal problems

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:

  1. The extent to which the problem is currently neglected by society. This can be measured in two ways:
    1. The extent to which the problem ignored by society (for example, the world was not aware of the severe negative impact on populations of buried land mines in war-torn regions until recent advocacy efforts from the United Nations).
    2. How bad is the current dominant solution (for example, until the wide availability of micro-finance in Bangladesh, poor people who needed capital had to borrow it from village money-lenders at a rate of more than 1000% per year).
  2. The importance of the problem for society. This can also be measured in two ways:
    1. The size of the problem, usually defined in terms of the number of people that it affects (for example, mental illnesses in the elderly population are increasing at an alarming rate).
    2. The criticality of the problem, usually expressed in terms of the impact in the target population (for example, cataracts in the eyes, if not treated through surgery, will cause blindness which has a very negative impact in the individual and its family, as well as society).

Social entrepreneurial initiatives

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:

  1. Focus on excluded populations: some segments of the population have been driven away from an active role in society. For example, long-term unemployed people, homeless people, criminals, people with disabilities. Any solution that manages to involve these populations into an active and positive role in society is likely to have a significant impact.
  2. The proposed solution benefits from spillovers that go beyond the direct effect of the interventions. For example, secondary school education in Africa benefits directly the students because they gain access to university educations and can become better workers, but it also has strong spillovers for society due to the higher employability and increased productivity, which will increase GDP of the country and generate more taxes.

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.

High potential impact investments

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.

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