ImpactAlpha, September 4 – The risks, real and perceived, and high-costs of investing in early-stage businesses in emerging markets have starved many enterprises of capital to grow. The capital gap is even wider when those businesses are tackling climate change and resource constraints with innovative green business models and are explicitly targeted at climate action and resource constraints with innovative business models and technologies.
A unit of the World Bank that has designed a fund to address this “missing middle” financing gap in South Africa reports, “By monetizing impact, the Green Outcomes Fund is able to mitigate the disproportionately high costs and risks associated with these investments, thereby developing the green finance sector.”
The Green Outcomes Fund is part of a new category of financial instruments that directly reward social impact in order to draw commercial capital to impact investments. The World Bank Group’s Climate Technology program led the design of the Green Outcomes Fund to pay local fund managers for delivering impacts such as green sector jobs created, tons of carbon sequestered, access to renewable energy for people without electricity and improved water and waste management.
The bank, along with the University of Cape Town’s Bertha Centre, GreenCape and WWF-South Africa, is seeking to raise up to 50 million rand ($3.4 million) to incentivize fund managers to make such investments by reducing risks and raising returns. A half-dozen fund managers that have agreed to make investments into green enterprises will receive payments from the Green Outcomes when the enterprises achieve the agreed-upon outcomes.
Others efforts to monetize impact include:
- Social Impact Incentives. An early test of at a string of diabetes clinics in Mexico suggests that direct payments to ventures with verifiable impact may help nudge companies towards greater impact and help them attract the financing they need to scale.
- Social Success Note. Interest payments on the UBS Optimus Foundation’s loan to Impact Water will be reduced if the organization hits targets for installation of water purification systems in Ugandan schools.
- Payment waivers. Beneficial Returns has agreed to waive the final payments on loans to Sistema Biobolsa and Iluméxico in Mexico if the firms achieve their stated impact goals.
- Impact carry. Bamboo Capital’s Arun Asok (in ImpactAlpha) proposed an “impact carry” as a way to incentivize fund managers for generating social returns.