#12 December 2023
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IMPACT ECONOMY HOW TO MAKE A POSITIVE DIFFERENCE
BLENDED FINANCE DRIVES PROGRESS BIODIVERSITY AND eDNA
EMPOWERING NEURODIVERSE TALENT
LESSONS IN LAUGHTER REBUILDING COMMUNITIES THE RISE OF STEWARD-OWNERSHIP ibyimd.org
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[ Foreword ]
The impact economy offers a positively different approach
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e are inundated with signals indicating that our business practices are unsustainable. Investor activists, as reported by Kristin Hull in this edition of I by IMD, are actively urging companies to address issues that are often ignored. How can we transition to a business model that aims to produce positive social and environmental outcomes alongside financial returns? As you will discover in our in-depth coverage, the impact economy could be the answer. Several factors are converging to position impact investing as an appealing alternative to conventional business practices. These include a clearer understanding of impact business models, innovative financing schemes, supportive governance structures, enhanced impact assessment methodologies, and the emergence of successful case studies. Participants in the impact economy are becoming more explicit about their intentionality, defined as their “Theory of Change,” as highlighted by Vanina Farber and Patrick Reichert. Frameworks like “civic wealth creation,” proposed by Sophie Bacq and Tom Lumpkin, are paving the way toward inclusive business models established through collaborative efforts between corporations and communities.
Illustration: Jörn Kaspuhl
Financing models for the impact economy are falling into place, as noted by Maximillian Martin, enabling private investors to make a positive impact without taking on undue risks. Maryanne Ochola advocates for increased inclusion of Africans in the impact ecosystem, emphasizing the significant value-creating opportunities that persist in doing business in Africa. Innovative governance structures that challenge traditional concepts are being pioneered by companies such as Patagonia. In an interview with Bryony Jansen-van Tuyll, Adrian Hensen illustrates how steward-ownership, a governance model that separates control and voting rights, can empower the impact imperative.
Impact measurement, as argued by Sonja Haut, enables companies to grasp opportunities for maximizing value, not only financially but also in market and talent management. Adrian Dellecker further explains that technology is playing an increasing role in facilitating access to novel forms of data, allowing us to measure aspects that were once considered unmeasurable such as biodiversity impact. Impact investing acts as a catalyst for fostering a more inclusive, sustainable, and socially responsible global economy. Funds with a focus on impact are starting to demonstrate the viability of this new model. In his article, Adrian Ackeret, the Chief Investment Officer of elea, an early-stage philanthropic investor, shares success stories that suggest a potential shift in the ecosystem. Another focal point in this issue addresses a dimension of diversity and inclusion often overlooked by many companies – harnessing the talents of people with disability and neurodiversity. Nancy Doyle and Heather Cairns-Lee illustrate that organizations can learn to accommodate and enable neurodiverse talent. Additionally, Tania Lennon shares a framework for leveraging the contributions of people with disability, who arguably make up the world's largest minority group. As in every issue, you'll discover compelling insights in our regular columns by Shelley Zalis (focusing on intentional investment in women), Jerry Davis (questioning the value of venture capital), George Kohlrieser (discussing authenticity), and Howard Yu (exploring future readiness). And don't miss Jessica Sibley's “CEO Dialogue” with IMD President Jean-François Manzoni as they discuss the reboot of TIME magazine. ■ Treat yourself to this high-impact issue!
Anand Narasimhan, Dean of Research December 2023 • I by IMD 1
[ CONTENTS ] 36
04 [ In good company ]
The venture capital model has failed far too many smaller firms seeking the funds to grow. A fresh approach is needed, argues Jerry Davis.
20 CHF
[ IMPACT ECONOMY ] What is the impact economy and why should it matter? And how do you know if your actions are making a positive difference? Our 40-page report provides the answers.
Cover picture: Created using Microsoft Image Creator
IMPACT ECONOMY HOW TO MAKE A POSITIVE DIFFERENCE
BLENDED FINANCE DRIVES PROGRESS BIODIVERSITY AND eDNA
EMPOWERING NEURODIVERSE TALENT
LESSONS IN LAUGHTER REBUILDING COMMUNITIES THE RISE OF STEWARD-OWNERSHIP ibyimd.org 11_IMD_2023_Edition_12_Dezember_2023_COVER_Final.indd 29
05.12.23 11:20
07 Vanina Farber and Patrick Reichert
propose using the ‘Theory of Change’ as a model to measure if your actions are achieving the results you seek.
10 Economies across Africa are being
transformed by targeted investment, but more needs to be done. Maryanne Ochola offers six ways to accelerate the pace of change.
12 ‘Civic wealth creation’ is strengthening local communities through commerce and collaboration. Sophie Bacq and Tom Lumpkin explain how such initiatives can help to solve complex local problems. 17 By taking a lead in the impact
economy, women can transform the way business operates and change lives, writes Shelley Zalis.
18 Impact metrics are about more than just
keeping regulators and investors happy, argues Sonja Haut, they can also help to unearth new pockets of value for companies. 2 I by IMD • December 2023
22 Blended finance has the power to unleash the capital needed to drive progress toward the UN Sustainable Development Goals. Maximilian Martin explores the options. 26 The responsibility to maximize
profits guides how institutional investors invest on behalf of others. But that does not mean investing in climate change is off the table, explain Emil Moldovan, Todd Cort, Matthew Goldberg, Jennifer Marlon, and Anthony Leiserowitz.
18 39 Be inspired by some wise words on making an impact from a book of quotations compiled by IMD’s Dominique Turpin.
40 Ventures that change ecosystems will help to develop the impact economy, writes Adrian Ackeret. He offers three ‘levers’ to add value and support innovation.
30 Adrian Hensen, Co-founder of the Purpose Foundation, explains to
Bryony Jansen-van Tuyll how the model
of steward-ownership equips businesses to deliver positive change.
34 Activist investors have the power
to direct the corporate world to embrace positive change. Kristin Hull offers a four-step guide to effective engagement.
36 With over two-thirds of species lost in the past 60 years, regulators want businesses to be accountable for their biodiversity impact. Adrian Dellecker explores the rise of biodiversity data startups seeking to help companies to adjust.
22 43 Impact venture capital in Europe is generating lower financial returns than its traditional counterpart. Valentina Masseretti, Anita Quas, Stefano Romito, and Clodia Vurro offer possible reasons why.
Photos: UNICEF/Mojtba Moawia Mahmoud, David Clode via Unsplash, © Volvo Bus Corporation
#12 December 2023
46 [ The human factor ]
Learning how to effectively accommodate and enable neurodiverse talent unlocks benefits for business and the wider workforce, explain Nancy Doyle and Heather Cairns-Lee.
51 Executives are often oblivious to the seven
psychological factors that shape human behavior. Understanding and recognizing these needs opens the door to better leadership, writes Michael Yaziji.
55 A multi-step approach can help to attract and
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develop the largely untapped talents of people with disability, suggests Tania Lennon.
58 [ In the mind’s eye ]
Striking a balance between being approachable and authoritative can be difficult. George Kohlrieser explains in seven steps how to become an authentic and effective leader.
60 [ Leadership skills ]
Humor makes for better leadership, but not everyone is a natural comedian. However, through training and practice, executives can acquire the essential skills they need, writes Emilia Bunea.
63 [ I reader ]
Photos: Michael Steele/Getty Images, BBC, Purpose, Courtesy of TIME, Beyond Good
IMD professors recommend books that will make ideal gifts for the festive season.
64 [ Technology ]
From drug development to finance, the potential of AI for business is huge, but effective safeguards are needed, write Sarah Toms and Amit Joshi.
55 70 [ Sustainability ]
The telecoms group Telenor worked with UNICEF to increase digital birth registrations in Pakistan. It’s a powerful example of how firms can experiment with sustainable business models to empower societies, writes Zainab Hussain Siddiqui.
74 [ Finance ]
Companies responding to the shock of higher borrowing costs must beware of three common misconceptions, argue Salvatore Cantale and Marc Woodfield.
66 [ Coaching corner ]
Understanding what motivates you can help to build habits to sustain yourself when faced with uncertainty, explains Francesca Giulia Mereu.
68 [ CEO dialogue ]
Jessica Sibley, CEO of TIME, tells Jean-François Manzoni how she is transforming the 100-year-
old media brand.
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78 [ The forecaster ]
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In the tech, pharma, and fashion sectors, Microsoft, Pfizer, and Nike have the knowhow and agility to make the most of the fast-shifting business landscape. Howard Yu has the details.
80 [ Preview ]
Join us in March when I by IMD will cast light on the opportunities and dangers for business in a world increasingly dominated by artificial intelligence. December 2023 • I by IMD 3
[ In good company ]
A fresh start is needed after the misadventures of venture capital The venture capital model has failed far too many smaller firms seeking the funds to grow but, argues Jerry Davis, there is a better way
It’s not just WeWork that has disappointed retail investors. The American stock market is home to hundreds of tiny money-losing companies whose valuations drop after they go public. What gives? Now is a good time to re-evaluate the role of venture capital in the economy. VCs have fundamentally distorted our capital markets and our system of business creation, sanctifying “going public” as the crowning achievement for young companies. But a public listing is only suited to a tiny minority of businesses. If our goal is to create sustainable companies, generate jobs, and provide investment opportunities for families outside the top 1%, perhaps we should re-think how we fund our enterprises, and what role the stock market plays in this system. Taking stock of the market
American capital markets are vast and deep. A recent report notes that “with a combined market value of nearly $50tn, the US stock market is nearly five times larger than the second biggest“ in China. And yet almost all the real action is concentrated in a small number of companies. Stock markets in the US list roughly 4,000 domestic companies, but 80% of the market’s value resides in firms that make up the S&P 500 index. 4 I by IMD • December 2023
And one-quarter to one-third of the value of the S&P 500 at any given time is made up of just seven tech companies: Google, Apple, Facebook, Amazon, Microsoft, Tesla, and Nvidia – “The Magnificent Seven”. Moreover, 10 stocks accounted for 89% of the index’s gain in 2023. It has always been true that a small number of companies account for most of the market’s gains, but this level of concentration is something new. A tiny group of tech conglomerates is uniquely responsible for how the world’s largest stock market performs (See table). Like other S&P 500 companies, the tech conglomerates are devoted to shareholder value. Among the S&P 500, there is a rigorously enforced set of rules around corporate governance: no “poison pills”, no classified boards, and no dual-class voting shares for new admissions. Activists enforcing conformity to their codes of conduct almost inevitably target members of the S&P 500 and not the smaller companies outside the index. Thus, with few exceptions, companies in this index follow a rigid set of standards aimed at ensuring their commitment to creating shareholder value. The ownership of companies in this index is also highly concentrated: nearly 25% of the average S&P 500 company’s share is held by just three giant fund families, invested on behalf of the 58% of American families who own shares. Outside the S&P 500, things are very different. Far more companies have poison pills (a defensive strategy whereby directors buy up large chunks of shares) and classified boards, aimed at thwarting activist shareholders. They may also have dual-class shares that give the founders absolute voting control. And index funds mostly ignore them. In short, the US stock market today consists of a handful of giant tech conglomerates with vast valuations, the rest of the S&P 500, which are
Illustration: Jörn Kaspuhl
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eWork’s declaration of bankruptcy in November closed a revealing chapter in Wall Street history. The company’s failed IPO in 2019 became a cautionary tale of the wild excesses enabled by the venture capital (VC) funding model – in particular, VC’s ability to fund audacious bets, turn visionary founders into overnight billionaires, and burn investor cash by the barrel-load. A chastened WeWork ended up listed through a different, less demanding route, but its sketchy business model – taking out long-term leases on acres of office space and retailing access by the month – ran headlong into the COVID-19 pandemic, leading to a disastrous collapse in its share price.
largely owned by three index funds, and 3,500 or so firms that are often small, loss-prone, and invisible to most activist investors. This last territory is where most IPOs dwell. The world made by venture capital
Venture capital plays an exalted role in American capitalism. Most prominently, Silicon Valley was built on venture capital. Its high-growth model is widely emulated: during the 1990s and 2000s, economic developers around the world sought to launch some variant of the Silicon Valley model in “Silicon Prairie” or “Silicon Glen” or “Silicon Gulch,” in the hope of germinating world-beating businesses that bring jobs and prosperity to the local economy. The leading VC practitioners are regarded as intellectuals whose wealth certifies their genius. Sometimes they even pen lengthy manifestos to guide lesser mortals. But there is a bug built into the venture capital model. VCs are oriented toward maximizing financial returns for their partners, who typically get their payday when portfolio companies exit, either through an IPO or acquisition. Their ideal outcome is going public at the highest valuation possible and cashing in for the next round. On the other hand, retail investors who buy shares in a public company aim to realize returns over time – and yet for many venture-backed enterprises, the IPO is the peak of the bubble in terms of valuation. (A skeptic might even compare this model to infamous pump-and-dump operations, as in The Wolf of Wall Street film based on the memoirs of a convicted trader.) As my analysis of recent data on IPO firms demonstrates, this may not be a situation conducive to jobs and prosperity. Let’s start with jobs. Among the roughly 1,800 American companies that have gone public since the 2008 crisis, the median company created just 32 jobs per year – about the size of a typical McDonald’s outlet. That’s hardly a jobs boom. And 57% of these companies were concentrated in just four states: California, Massachusetts, Texas, and New York. A glance at the industries of IPO companies helps to explain why they are not major job creators. About one-third are in biotech (broadly), where the median company employs just 39 people at IPO. These firms grew by 10 employees per year on average. And the biggest employers among IPO companies tend to be seasoned enterprises that had previously gone private, such as grocery giant Albertsons.
Evidently venture capital is not the most reliable pathway to creating jobs. But are VC-backed firms at least creating wealth for their shareholders? Here too the story is not encouraging. The Wall Street Journal reported that 87% of companies that went public in 2021 were trading below their IPO price by the fall of the following year, and Crunchbase found that the biggest IPOs of 2021 had lost 60% of their value by October 2023. Of the 26 companies that debuted with a $10bn or higher valuation, only one was not trading well below its IPO price. Retail investors who jumped on these new IPOs on the day they listed would have learned a hard lesson in American capitalism.
‘Among the roughly 1,800 American companies that have gone public since the 2008 crisis, the median company created just 32 jobs per year – about the size of a typical McDonald’s outlet’ This should not be too surprising. Four in five companies that have gone public since 2019 reported a loss last year. Even among seasoned firms, losses are common: half of all listed firms in the US had negative net income in 2022, continuing a trend that dates back two decades. To be clear, there were some notable exceptions to this grim picture – two, to be precise. Tesla grew from roughly 250 employees in 2008 to 130,000 today, and Facebook grew from 2,000 to 86,000. Both have made their early investors rich. But should we premise our system of funding enterprises on a tiny handful of extreme cases? Judging by the numbers, WeWork is more representative of the market than Facebook or Tesla. There is some evidence that retail investors are catching on. Professor Jay Ritter reports that there were only 38 IPOs in 2022. This is the smallest number since the financial crisis of 2008, and the second-smallest number in over four decades – at a time when, by many indicators, the economy is booming. Perhaps it’s now twilight for the VC model. There is an alternative, maybe more than one
If the stock market is broken as a method of funding enterprise, then »
TOP S&P 500 COMPANIES BY MARKET CAP 1998
2003
2008
2013
2018
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COCA-COLA MICROSOFT EXXONMOBIL MERCK INTEL
MICROSOFT GENERAL ELECTRIC EXXONMOBIL WALMART CITIGROUP
EXXONMOBIL GENERAL ELECTRIC MICROSOFT AT&T PROCTER & GAMBLE
APPLE EXXONMOBIL ALPHABET WALMART MICROSOFT
APPLE ALPHABET MICROSOFT AMAZON FACEBOOK
APPLE MICROSOFT ALPHABET AMAZON BERKSHIRE HATHAWAY
December 2023 • I by IMD 5
[ In good company ]
how can we foster new businesses that create jobs and benefit local economies? Fortunately, two major trends are enabling growing enterprises that need never set foot near the stock market. First, the costs of launching a startup have never been lower. It is now possible to “rent” all the inputs to an enterprise, from turnkey manufacturing services and distribution channels to a work-from-home labor force. The capital needs today can be much lighter than in the past, bypassing the need to go public.
‘Four in five companies that have gone public since 2019 reported a loss last year’ Second, there are now emerging alternative methods of funding more congruent with creating enterprises built to last. In particular, the Jumpstart Our Business Startups Act (JOBS Act) of 2012 included provisions to enable online crowdfunding for enterprises of all sizes, from barber shops to tech startups. It took several years to work out the details, but founders today can raise capital from investors around the world – including their own customers, who no longer have to document their wealth to put a few dollars into local businesses. Platforms like StartEngine, WeFunder, Mainvest, Small Change, Honeycomb Credit, and dozens of others have expanded not just the kind of companies that can raise funding but also the format of investing – beyond plain-vanilla debt and equity, including revenue-share loan agreements that enable founders to own a greater share of the businesses they create while enabling retail investors options beyond the S&P 500 for their savings. There are also innovative firms like Builders + Backers and its philanthropy-supported “Pebble Fund” that offer an alternative to the traditional incubator/VC model and fill critical funding gaps across the country. Others provide matching funds for crowdfunded capital raises. And there are alternatives to traditional equity such as “redeemable equity” that lowers the need for founders to head toward an IPO or other exit. The stock market had a good run. Perhaps now we are ready for something different. ■
Jerry Davis is the Gilbert and Ruth Whitaker Professor of Business Administration and Professor of Sociology at the University of Michigan’s Ross School of Business. He has published widely on management, sociology, and finance. His latest book is Taming Corporate Power in the 21st Century (Cambridge University Press, 2022), part of the Cambridge Elements Series on Reinventing Capitalism.
6 I by IMD • December 2023
[ Impact economy ]
The theory of change: intentionality and how to measure impact What is the impact economy and why should it matter? And how do you know if your actions are making a positive difference? To kick off our 40-page exploration of the subject, Vanina Farber and Patrick Reichert propose using the ‘Theory of Change’ as a model to embrace an impact-oriented mindset
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mpact is a term that has rapidly gained prominence in the business world in recent years. It is typically used to describe the positive social or environmental effects of an organization’s activities, products, or services. Impact is also associated with new forms of investing and venture creation, such as impact investing or social entrepreneurship that aim to generate social or environmental benefits alongside financial returns. But what does impact really mean? And why should it matter to corporate managers, boards of directors, and business leaders? Here we explore these questions and argue that impact considerations deserve to be on an equal footing with financial and strategic decision-making. We start with a simple observation: all organizations have economic, social, and environmental impacts. However, this alone is not enough to justify the creation of new categories such as impact investing or social entrepreneurship. The central question facing the impact economy is one of intentionality: that is, how do we know how much of the future impact is attributable to their investments or market solutions? How can we know whether the impacts are due to their actions or whether it is attributable to other factors? These difficult questions arise because we lack the counterfactual – that is, what would have happened without the funding of an impact investor or the social innovation of an entrepreneur? This question has perplexed some of the best minds across economics and management for decades. One potential solution to measure impact proposed by development economists Esther Duflo, Abhijit Banerjee, and Michael Kremer involves the use of randomized controlled trials (RCTs) to study the effects of various interventions on poverty alleviation in developing countries. Their groundbreaking work, for which they were awarded the 2019 Nobel » December 2023 • I by IMD 7
[ Impact economy ]
Prize in Economics, used hundreds of RCT experiments across areas such as education, health, microfinance, agriculture, and governance to test the impact of different policies and programs on the well-being of the poor. Impact in this context is a technical term that requires comparison with a counterfactual: that is, what would have happened in the absence of the intervention? Despite being hailed as the gold standard for impact evaluation, RCTs require time and money to demonstrate the impact of a particular intervention – a luxury that most of the business world does not have. An additional and more accessible model to help managers and investors effectively use an impact-oriented mindset is the Theory of Change. Put simply, the theory is a methodology that explains how and why a desired change is expected to happen in a particular context. It requires impact to be (1) intentional, (2) additional, and (3) measurable and encourages actors in the impact economy to focus on mapping the causal linkages and preconditions between what an intervention does and how it leads to the desired long-term goals. Intentionality requires actors in the impact economy to not only explain the “what, how, and why” but also to go one step further by addressing “to whom” and “how many”. What is impact?
Impact can be defined as the difference an organization makes in the world compared with what would have happened otherwise. It is important to distinguish impact from related concepts like output or outcome. Output refers to the quantity or quality of what an organization produces or delivers, such as the number of products sold or the number of people served. Outcome refers to the immediate or short-term effects of
Free bed nets to fight malaria The problem: Despite a large reduction in the global malaria burden over the past two decades, malaria still claims hundreds of thousands of lives a year. The intervention: Public health experts and officials have long agreed that prevention through widespread use of insecticide-treated nets (ITNs or bed nets) is a highly effective method of preventing malaria transmission. The RCT research: J-PAL-affiliated researchers conducted more than a dozen randomized evaluations in eight countries to evaluate how pricing affected the take-up and use of various preventive health products. In 16 randomly selected health clinics, ITNs were offered at a subsidized rate with the discount varying between 90% and 100% of the market price. The 90% discount formed the control group while the 100% discount served as the treatment group. The results: Researchers found that ITN take-up was 60 percentage points lower when the price was $0.60 than when it was $0 (i.e., at a subsidy of 90% instead of 100%). By demonstrating that providing preventive health products for free increased take-up, this research helped organizations rethink their approach to user fees to increase their reach.
8 I by IMD • December 2023
an organization’s output on its beneficiaries or stakeholders, such as the satisfaction, income, or health of its customers or employees. Impact, on the other hand, refers to the long-term and lasting effects of an organization’s output and outcome on its beneficiaries or stakeholders, as well as on society and the environment at large. Impact also takes into account the counterfactual scenario – that is, what would have happened if the organization did not exist or did something differently. For example, an impact investor may ask: How much did my investment in a clean energy company reduce greenhouse gas emissions compared to what would have happened if I’d invested in a fossil fuel company instead? In this context, outputs may refer to the number of solar panels installed, the total megawatts of solar energy produced, or the number of green jobs created. Outcomes are linked to the reduction in use (dependence) on fossil fuels or the corresponding decrease in electricity costs. Impact, meanwhile, could be captured by the ultimate reduction in greenhouse emissions that contribute to efforts against climate change or the associated boost to energy security independence. Another example from the social arena may focus on gender equity. Here, outputs might refer to the number of gender sensitivity training sessions conducted within the workplace, the development and distribution of educational materials on gender equality, or the implementation of new workplace policies that promote gender equality, such as equal pay for equal work. Outcomes in the context of this gender equality program might include items such as increased awareness and understanding of gender issues among employees and management, measurable improvements in hiring and promotion rates of women and other gender minorities, and positive changes in workplace culture, as indicated by employee surveys and greater compliance with gender equality policies. Long-term impact will materialize through the achievement of a more balanced gender representation at various levels of management and senior roles, an improvement in workplace productivity and innovation contributing to societal change by challenging and reducing gender stereotypes and biases, and the economic empowerment of women and gender minorities. How can we use the Theory of Change to achieve impact?
The Theory of Change is a logical framework that describes how an organization intends to achieve its desired impact by linking its inputs, activities, outputs, outcomes, and impact in a causal chain. It identifies the assumptions and risks that underlie each link in the chain, as well as the indicators and methods that can be used to measure and verify each link. Actors in the impact economy start with a requirement to be intentional about the change they want to create, encouraging them to use evidence and data to design, manage, and evaluate their impact performance. As a result, the Theory of Change also facilitates collaboration and coordination among actors in the impact economy and other stakeholders, such as investees, intermediaries, beneficiaries, and policymakers. By sharing and comparing their Theories of Change, organizations can identify common goals, outcomes, and indicators, and align their efforts
THE THEORY OF CHANGE INPUTS
What resources are required to make your activities possible? People, tools, funding,etc.
ACTIVITIES
What are the key actions required to create your offering or sell your product/ service?
OUTPUTS
How will you measure the tangible success of your project/initiative? Number of people reached or products sold.
and resources to achieve greater impact. They can also learn from each other's experiences and best practices. How is impact changing the risk-return frontier for investors?
The risk-return frontier is a concept that depicts the trade-off between risk and return for different investment options. Traditionally, investors are assumed to seek higher returns by taking higher risks. However, this paradigm is rapidly starting to introduce a third dimension: impact. Impact risk is an additional concept that refers to the uncertainty or variability of achieving the desired impact. Impact return is the value or benefit of achieving the desired impact. As a result, some investors may look to achieve impact by assuming a higher risk profile, while others may focus more explicitly on the impact accruing to society or the environment. We believe that the impact-risk-return frontier creates a more diverse investing landscape. Investors can now choose from a range of investment options that offer different combinations of risk-return-impact profiles. Adding impact to the investment equation can even allow some actors to assume higher risk with the expectation of lower returns to crowd-in market-rate funders or investors that are indifferent to impact considerations. In this vein, blended finance is a promising financial innovation that can help companies to de-risk their transitions towards sustainability or increase the availability (and duration) of funding for humanitarian organizations. By collaborating across different profiles, blended finance transactions help align incentives in a way that reduces risk or enhances returns to make viable social innovations that otherwise wouldn’t have happened. Effective stakeholder engagement is key to aligning the interests of those with shared impact goals but different risk-return profiles. Clear communication is essential but also challenging. For investors focused on returns, it’s important to highlight how impact strategies can lead to long-term financial benefits and reduce risks. For those more interested in social or environmental impacts, the emphasis should be on the real-world positive outcomes at scale. Understanding what drives each stakeholder and maintaining open, ongoing dialogue helps ensure that everyone's interests are considered and valued. This approach builds trust, which is crucial for the success of any impact collaborative initiative.
OUTCOMES
How will you see signs that the project/ initiative has been effective? Survey of customers, beneficiaries, etc.
IMPACT
What is the ultimate impact achieved? Adjusting for the results that would likely have happened without your activities.
In short, blended finance plays to the strengths of each type of actor: private companies realize entrepreneurial opportunities for impact value creation and civil society organizations monitor the social and/ or environmental impact while public actors step in to offer financial guarantees. Such ecosystems can lead to effective impact creation while enjoying high levels of trust from society and stakeholders. Impact matters: a call for action
No significant social innovation will happen without the courage to do things differently and the pursuit of intentional positive impact. No significant social innovation will happen without dedicated resources. To this end, the Theory of Change can help guide organizations toward these objectives. This includes setting transparent financial and impact goals and implementing strategies to achieve both while at the same time managing risk. The theory also obliges organizations to dedicate sufficient attention to understanding the impact they generate. This may include value-chain tracing to assess labor practices and conditions in product sourcing or the environmental impact of raw material production. Measuring impact often requires substantial resources since organizations may need to leverage the expertise of other stakeholders to demonstrate credibility on their stated social and environmental objectives. Despite these challenges, we still need to measure and manage it to move beyond intention to tangible impact. ■
Vanina Farber is elea Professor of Social Innovation and Dean of the IMD EMBA program. She is an award-winning economist and political scientist who specializes in social innovation and the mobilization of private capital for impact investing. Patrick Reichert is a Term Research Professor at the IMD elea Center for Social Innovation. His research primarily focuses on how financial innovation can accelerate the speed, scale, and effectiveness of promising social innovations.
December 2023 • I by IMD 9
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