Financial innovation and philanthropy: The latest cocktail to build assets

This week’s Economist has an interesting article on the recent trend of mixing philanthropy with innovative “impact investing”.

The Clinton Global Initiative launched the Global Impact Investing Network (GIIN), comprising of twenty members representing big banks (including Citigroup and Deutsche Bank), donors (Gates, Rockefeller), the Acumen Fund and Generation Investment Management (which is Al Gore’s green company). If this group succeeds in agreeing on a common language for social investing and lobbying for helpful laws and regulations, impact investing could grow to $500 billion, which accounts for around 1% of the world’s total assets under management in 2008.

Social investment is not new in itself. But the success of ideas like microfinance, which combines do-good with profit, has inspired mainstream financial institutions and investors to become interested.

For example, Social Finance, a social investment firm in Britain, has introduced the “social impact bond,” where funds raised by bond purchases contribute toward organizations with social missions. Social Finance plans to try out this bond for several public services like rehabilitating released prisoners and improving community health services.

The Gates Foundation has set aside $400 million to see if various fledgling innovations can attract larger amounts from government and private investors. For example, Gates guarantees charter schools that are issuing bonds so that other investors can feel less worried about risk.

There is a need to evaluate the impact of these ideas, specifically on how they can effectively be used to create assets. But since neither Government spending nor grants are enough to meet the needs of the bottom billion, its time to marry them with private capital and skills.

There are many opportunities created by this marriage. For example, can a cluster of village banks in Tanzania, where the poor deposit their money be guaranteed by a social investment firm?

The Global Assets Project in collaboration with the World Council for Credit Unions (WOCCU) will be hosting an event to talk about another innovation. Using its network of credit unions, WOCCU’s new program matchsavings.org provides much needed savings-led financial services to the poorest in remote regions of Mexico.

Mark your calendars for October 15 at 12.15 pm, for lunch and some fresh discussion on the details of this new model and its relevance outside mexico in other countries around the world.

Shweta Banerjee is a consultant with the Global Assets Project at the New America Foundation.

Banerjee@newamerica.net