Financing global development: Is impact investing an investment model with potential or just blowing smoke?

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Lindenberg, Nannette / Caroline Pöll
Briefing Paper 20/2015

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

The Briefing Paper series “Financing Global Development” analyses key financial and non-financial means of implementation for the new Sustainable Development Goals (SDGs) and discusses the building blocks of a new framework for development finance.

Financing social service delivery is becoming more and more challenging. At the same time, private assets are increasingly seeking out investment opportunities. Some high-net-worth individuals and foundations are accepting lower returns as long as pressing societal objectives can be achieved. This presents an opportunity to mobilise more private capital for social investments. The so-called impact investors can play a promising role in financing social and environmental service delivery in G7 countries as well as in the developing world. Impact investing is intended to finance projects, organisations and social enterprises to intentionally create a measurable social or environmental impact alongside financial returns. One innovative instrument is the so-called social impact bond (SIB) – or, in the case of development cooperation, development impact bond (DIB) – through which private investors pre-finance the intervention, and governments or donors provide funding solely when the intended outcome goes beyond what would have occurred otherwise.
Advocates of impact investing see SIBs and DIBs as useful instruments for the financing of the 2030 agenda. However, they are still largely unproven; even though some promising interim evaluations exist, this innovative
financing approach faces a number of challenges. Besides questionable or outstanding evaluations, the most important challenges are: limited transferability, the nascent development of the market, high transaction costs and the hurdles for investors. Nevertheless, given the urgency to mobilise finance for sustainable development in developed and developing countries, it is worth considering and prudently developing impact bonds further, and more generally impact investing. Supporting them would entail:

Data- and information-sharing have to be furthered by the impact investing community in order to critically evaluate first experiences of pilot SIBs and DIBs, provide recommendations and enable basic education for entrepreneurs and investors.
Further research should be encouraged to get a better understanding of how to create additional impact and to deploy different instruments in the development context as well as to offer exit opportunities for private investors.
Policy-makers should support the development of clearer definitions and a common impact-measurement system as well as standardised and mandatory reporting requirements to ensure effectiveness and quality.
Development finance institutions should become more active in the market by providing resources to encourage the implementation of SIBs and DIBs. Governments and/or donors need experienced partners who provide catalytic capital for first initiatives and serve as intermediaries.

About the author

Lindenberg, Nannette

Economist