Impact Investing as an engine for Social Innovation

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1 Impact Investing as an engine for Social Innovation Luciano Balbo, Milano 15 marzo 2016

2 What is Social Innovation Social innovation can be defined as the development and implementation of new ideas (products, services and models) to meet social needs and create new social relationships or collaborations. It represents new responses to pressing social demands, which affect the process of social interactions. It is aimed at improving human well-being. Social innovations are innovations that are social in both their ends and their means. They are innovations that are not only good for society but also enhance individuals capacity to act.* * Source: European Commission, Guide to Social Innovation,

3 Why social innovation is so important and needed The demand of social needs has changed deeply (inequality, immigration, wealth divide, ageing, digital divide, globalization impact) while the offer is stuck in the past. The offer of social services is mainly financed by the public sector and by the out of pocket of the citizens. The lack of innovation is an issue as relevant as the scarcity of financial resources. A correct analysis of the total social spending (public plus private) shows that it is very similar in all the developed world.* The quality of the solutions is what makes the difference. This is the reason why we need social innovation. Our society has been deeply changed by new technologies, but the real disruptive innovations are those that make our society more inclusive for all. *Source: OECD, Social expenditure database. 3

4 Why social innovation is much more complex than technology/commercial innovation It involves some universal services as education, health care, where the proposed solutions can not select the customers as in the commercial markets. Universal services are complex systems which involve many stakeholders (public sector, unions, private providers customers); it is extremely difficult to modify them. The impact of the innovations can only be measured on the long term basis; at the same time there always are good reasons for keeping the status quo. Some improvements of the social system (better wellbeing and/or lower costs) require the changes in the citizens behaviors (smoking, obesity): these changes can not be reached only through laws but vocational campaigns and incentives are needed. The public sector is a major player in the social scenario so the social innovation can not be limited only in the out of pocket area. 4

5 Impact Investing Impact investments are investments in companies, organisations and funds with the intention of generating measurable social and environmental impacts alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below-market to market rate, depending on the circumstances.* The interpretation of the sector is still wide and uncertain: from a simple measured intention to produce social impact to a more restrict one to produce new disruptive model in the social area. Personally I agree with the second view: the Venture Capital approach applied to the social sectors to develop new solutions. Impact investing is still a very small market, but it looks the most appropriate tool to promote social innovation. Impact investing wants to break the duality profit/non profit and promote the use of all the financial product to tackle social needs. Different social needs require different financial tool; philanthropy is able to attract very limited amounts of money. * Source: GIIN. 5

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7 Which investors for Impact Investing The answers lie in the sector's structure. The companies do not have a static position in the following diagram. They operate in the initial phase based on risk/return related to the mission and can grow only if they subsequently attract commercial capital: if this does not happen then the companies will be unable to grow and open up new markets. 7

8 How to build the sector The sector is in the early stages of development: there are few projects which deserve investments today. The first objective is to attract new talent from all sectors of society by tearing down existing barriers. Offer creates demand (Venture Capital history teaches this). The first entrepreneurs in the sector are the management team of the Social Venture Capital players. Impact Investing requires pioneer investors: foundations could play a key role. It is not just a matter of financial resources, but of giving useful insight of the social needs and learning new ways to work. Foundations can keep Impact Investing on the right path avoiding a pure commercial drive. What is needed is impatience to resolve unsolved social needs and patience to create new solutions. 8

9 A new vision of the Public Sector It is nearly impossible to modify - with a top down approach - the social sectors financed by the public sector. Whereas a bottom up approach could be more able to overcome the resistance to change. Impact Investing should act as a promoter of pioneering experience, to be adopted by the public sector, if they are successful. Public sector should allocate part of its budget to finance innovation through partnership with the private sector. Impact investing could act as the R&D engine of the public sector. No long term improvement of our societies can be achieved without the involvement and the improvement of the public sector. 9

10 Some areas of activity for Impact Investing: New ways to deliver education and healthcare services; it is not just technology, but also the involvement of teachers/doctors and citizens. Unlock unused assets: both public and private (default real estate assets of the banks). Promote investments in "poor" areas of our "rich" countries. 10