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Putting the “Impact” in Investing

The recent Global Philanthropy Forum in Washington D.C. drew hundreds of participants from the worlds of finance and philanthropy, underscoring the growing interest in focusing private investments on projects that will advance a social good.

The forum, which featured a special address from OPIC President and CEO Elizabeth Littlefield, generated considerable discussion about the roles of the private and public sectors in achieving positive social change and financial return.

While Littlefield stressed that OPIC was “living proof that private investment for the public good can work and does work,” she also conceded that the public and private sectors often approach what is commonly known as “impact investing” with a poor understanding of the best ways they can interact.

In advancing the notion of public-private partnerships from a “feel good” concept earning limited market respect, to a solid investment tool, Littlefield and other speakers identified a few key  themes:

Private sector money is essential in addressing the world’s biggest problems. “Every dollar that we catalyze from the private sector to invest in development is one more dollar that does not need to be spent by the public sector or philanthropists and can be shifted to other priorities or back to the taxpayer,” said Littlefield. In a world of daunting and mounting social challenges – for example, the need to double world agriculture production over the next 18 years – public sector funds alone are grossly insufficient.

The investment opportunity is significant. A key lesson of the global financial crisis, said Littlefield, is that “fundamentals were a hell of a lot worse in the developed world than we thought and a hell of a lot better in the developing world.” Today, she said, investments in emerging markets are no longer exotic investment tools, but rather, “a core part of asset allocations.” OPIC, whose investments address social challenges in the developing world such as climate change, access to electricity, housing and healthcare, earned net income of $269 million in fiscal year 2011, and has a long track record of successfully catalyzing private sector dollars for key development challenges.

A longer, broader perspective is needed. Investors’ common preference for short-term returns and a quick payback is often at odds with both the significant challenges and the significant opportunities of investing for the public good, said Littlefield. Too many firms, she said, will embark on sustainability initiatives “only if they can immediately cut costs, limit risk or gain market share.” Such a view, she said, often blinded businesses to the full impact and costs of their activities. Littlefield said that while industry “is thankfully well past the notion of a tradeoff between sustainability and commercial success,” their efforts in sustainability need to be viewed as an essential component of their operations.”

In recent decades, there has already been a dramatic reversal to the point that foreign direct investment now accounts for the majority of funds flowing to the developing world and aid dollars make up a much smaller share. Despite that progress, Littlefield said there is room to do much more with private-sector investments, and even small changes could have a big impact.  A 1% shift in global asset allocation from the developing world to the developed world, would equate to an additional $2 trillion for development, an amount that is ten times the total assistance currently flowing to the developing world, she said.

On Thursday April 26, Elizabeth Littlefield will moderate the panel, From Aid to Investment, at the Global Impact Economy Forum, sponsored by the U.S. State Department.

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