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Impact Investing in Emerging Markets: What have we learned? Lessons Learned from Results Measurement
16 June, 2015 TBLI Conference Nordic 2015 Copenhagen, Denmark Maria Kronsteiner, Senior Development Effectiveness Specialist, [email protected]
www.iic.org
IDB Group Impact Investing Tagging Approach
2
DEVELOPMENT
IMPACT FILTER • Generates social and environmental externalities • Contributes to economic growth and/or private sector development • Complies with ESG criteria
• Follows a specific Impact Investing approach: • Deliberately aims at generating social/environmental impact in
addition to a financial return • Is accountable for both financial and social outcomes
Generates direct/visible social impact by: • Creating income and employment opportunities for BOP/
disadvantaged populations; and/or • Delivering essential products and services to BOP/disadvantaged
populations
SOCIAL IMPACT FILTER
IMPACT INTENTION
FILTER
FINANCIAL VIABILITY
FILTER
• Project involves a financial instrument (private debt, guarantees or equity investment)
• Investment is expected to return at least nominal principal
Yes
Yes
Yes
Yes
= DEVELOPMENT FINANCE
= HIGH IMPACT SECTORS
= IMPACT INVESTING
!
"
#
$
www.iic.org
Development Finance $7.2 bn, 517 projects
Generate positive social/environmental externalities
High Impact Sectors $3.8 bn, 311 projects Generate tangible social/
environmental impact
Impact Investments
1.1 bn, 131 projects
Explicit intention to generate and measure social/environm ental
impact
Preliminary Results: Impact Investment within a Development Focused Portfolio
+ ~ 200 projects ~ $39M
The IDB also has a portfolio of more than 200 small impact investing projects ($39M in value) corresponding to the first phase of the Social
Entrepreneurship Program (approved prior to 2006). This program is administered by the MIF
and provides small long-term concessional loans to high-impact social enterprises.
www.iic.org
Inter-American Investment Corporation (IIC): Private Sector Window Dedicated to SMEs % Member of the Inter-American
Development Bank Group % Non-sovereign private sector lending % Mission: promote economic
development by financing small and medium-size enterprises (SMEs)
% 45 member countries are shareholders from the Americas, Europe, Asia/26 borrowing members
% Based in Washington DC, established in 1984
% Long-standing partner for impact investments in Latin America and the Caribbean Region
IIC’s PORTFOLIO (2014)
Development-related Assets Portfolio US$ 1.1 billion
Portfolio profile
229 projects in 20 countries + regional
48% of portfolio in smaller countries
68% of total portfolio involves financial services for on-lending to SMEs; 32% is in direct SME lending for agriculture, infrastructure, investment funds etc.
Private Sector Resource mobilization US$ 274 million
SMEs financed 27,000
SMEs benefitted from technical assistance and knowledge transfer (e.g. Sustainability Week training) www.iicsustainabilityweek.org.
8,000
www.iic.org
Development Results Framework: Focus on Measurements and Results
5
How
When
Why % ‘What gets measured gets done’ % Accountability and Learning % Strategy
% Throughout project cycle
% Development Impact and Additionality Scoring System (DIAS); Result Matrix (sector and cross-cutting indicators)
% Evaluation: Expanded Supervision Reports (XSR)
Systematic Approach to Selecting Relevant and Sustainable Projects
Criteria Questions Tools Objectives
% Relevance % Does the project meet country development priorities?
% Does it address market failure?
% DIAS % Provide access to Finance for SMEs
% Provide financing otherwise unavailable
% Effectiveness % What are the project’s development objectives?
% What are expected results including baselines and targets?
% Results Matrix % Focus on key development indicators (i.e. jobs created, # of SMEs reached; GHG reduced etc.)
% Efficiency % Do expected financial and economic benefits justify project costs?
% Financial and Economic Analysis
% Portfolio Approach
• Achieve attractive financial and economic returns
% Sustainability % What are prospects for project sustainability?
% What can be done to mitigate Environmental and Social Risk?
% DIAS % Financial sustainability % Environmental and Social
sustainability assured
% Additionality % How can we add value (Financial and Non-financial)?
% DIAS % Provide better terms % Mobilize resource % Improve ESG standards
6
www.iic.org
The DIAS Result Framework
Based on 340 projects approved between 2008-2013 High outcomes are measured as high and medium ratings, or any score from 70% of the maximum performance score.
IIC Strategic Objectives
Project or Company Business
Performance 84%
Contribution to Economic
Development
Environmental & Social Performance
66%* *excludes FIs
Private Sector Development
99%
82%
87%
DEVELOPMENT OUTCOME
ADDITIONALITY 100%
38%
Financial Additionality
Non-Financial Additionality
Percentage of projects with high
outcomes (projected)
DIA
S
Granularity: Indicators by
sector
Emphasis on final
beneficiaries
Gender Strengthen
non-financial additionality
Intrinsic part of the project
cycle
Data collection throughout
project cycle
Project logic improves
Evaluability
Result focus: Baseline and
Targets
Approach Elements
www.iic.org
Balancing Financial Viability and Development Impact
8
What have we Learned from Results Measurement?
“What gets measured gets done” Results measurement is a critical vehicle for continuously improving project design and optimizing development impact
% Strengthens accountability to stakeholders % Results indicators must focus on key development objectives with few meaningful indicators % Overall standardized results measurement system must permit performance comparison by sectors and
aggregation % Set realistic targets against which performance will be measured % Quality of data is important % Agree on reporting requirements with client and preferably in loan agreement % Offer TA support for improving client capacity to measure results % Adopt common standards to facilitate comparison with other DFI institutions % Consider offering incentives for investment officers to develop pipelines of projects and for development
results achieved Financial viability and development impact are strongly correlated: “Doing well by doing good”
% Financially successful projects allow for higher demonstration effects and provide a basis for replicability
Cooperation between private investors and MDB’s leads to higher development impacts
% IIC resources are insufficient to meet market needs which places a premium on syndications, privatizations, PPPs, co-investments etc. to generate additional resources
Improving ESG standards leads to long-term sustainability % Financial performance and ESG performance are correlated % Makes companies sustainable and more attractive to investors % Enhances public opinion regarding investments
SMEs can be reached successfully with resulting positive impacts on employment, productivity and ESG standards.
www.iic.org
“IIF” Fund $18M Calvert Foundation
IDB Group
Borrowers
$2M
Equ
ity
% Innovative facility supported by all private sector windows of the IDBG
% Calvert pools capital raised from individual investors for impact investment projects
% BUT, need help developing pipeline
% Creating a vehicle where the IDB is contributing US$2 million in equity and Calvert is providing US$18million in debt
% Calvert will co-invest in current and future deals with a weighted average duration of five years
• Facility is in signing stage
Example: IDB Group-Calvert Fund
Inter-American Investment Corporation • www.iic.org
ANNEX
www.iic.org
The IIC invests in healthy foods in Mexico
13
KUA: A Food and Beverage Producer and Distributor in Mexico % KUA seeks to invest in healthy
products for Mexican population
Solution: % US$ 9 million equity investment by
IIC to support company’s growth strategy, which consists in acquisitions and investments to incorporate and consolidate healthy food products
% The equity investment will support KUA’s portfolio diversification, innovation and healthy promotion
www.iic.org 14
Rural Costa Rica: SME Forestry Project Led to Improved ESG Standards
Expected Results Actual Results Development
Outcome 5.96 (out of 6.5) Highly Successful
Additionality 3.05 (out of 3.50) Excellent
Improvements in Environmental
Standards
• IIC required company to obtain Forest Stewardship Council (FSC) certification in Nicaragua and maintain it in Costa Rica ensuring sustainable forestry practices
• Obtained FSC for the sustainable reforestation model in Nicaragua
• Maintained FSC in Costa Rican operations • Implemented Environmental and Social Action
Plan (ESAP)
Improvements in Corporate
Governance
• IIC required consolidated financial statements for project appraisal
• IIC engaged with company in the implementation of their Strategic Business Plan
• Provided consolidated financial statements • Implemented Strategic Business Plan
Use of Technical Assistance
• IIC identified need for TA to address succession plans • IIC provided TA and SME hired consultant to
carry out study on corporate governance
• Company identified through FINPYME Diagnostics • US$ 1.5m loan to expand operations in Costa Rica and initiate operations in Nicaragua • Financial Additionality: Long-term financing (6 years) is rarely available for plantation
activities. Loan allowed SME to make long-term investments sooner and on a larger scale.
15
Small Family-Owned Business: A Successful Transition % US$ 1.2m loan to finance expansion of a manufacturing company in Costa Rica and Panama % Excellent terms for small company: 9.5 years was not available in the market
Expected Results Actual Results Development
Outcome 4.86 (out of 6.5) Mostly Successful
Additionality 2.85 (out of 3.5) Satisfactory
Improvements in Environmental
and Social Standards
• Contributes to social integration of former female inmates thereby enhancing the SME’s corporate social responsibility program
• IIC requires Environmental & Social Action Plan (ESAP), including annual environmental monitoring reports
• Hired 50 former female inmates at one of their small plants
• Implemented ESAP and submitted yearly environmental monitoring reports
Improvements in Corporate
Governance
• IIC requires audited consolidated financial reports
• In addition, TA was requested for improving corporate governance of family owned business
• Audited consolidated financial reports improved creditworthiness
• Company established family protocol and succession plan
Technical Assistance
• In 2011, during implementation, IO identified need for TA due to operational and financial issues
• IIC provided technical assistance from the Korean Trust Fund (US$38,500). Deloitte & Touche prepared business plan proposal, including an action plan
“We have greatly benefitted from the assistance we received from
the IIC family governance program, which has resulted in
better communication and understanding between first- and
second-generation family members (…) helping to ensure
its survival.” President of Company
16
A Valid Choice for Reaching SMEs: SME bank in Brazil
• Financial Additionality: A/B Loans (US$200m+) • IIC helped transform a relatively unknown SME bank to an established player
attracting international funding. Expected Results Actual Results
Development Outcome 3.89 (out of 5) Successful
Additionality 2.2 (out of 3.5) Excellent Number of SMEs financed *(A-loan)
310-350 1,207
SME Loan Amounts US$175,000 US$107,000
Terms to SMEs 18 months 24 months Increase in SME
Portfolio US$630 million (Baseline 2009) US$2.7 billion
Improvements in Environmental
Standards
• IIC requires that the bank develop an environmental management system
• IIC requires that subprojects comply with environmental and labor laws and IIC’s E & S standards and exclusion list
• Implemented environmental management system • IIC provided bank with environmental training in
2009 • Several bank officers have been trained BID/
Febraban in 2010 • Submitted annual environmental reports to IIC
confirming compliance with IIC’s requirements • Appointed environmental coordinator • Contracted data collection services to gather
environmental information from clients
www.iic.org
Unlocking the Potential of a Small Port Operator in Argentina % US$7m to finance expansion of port infrastructure % Took advantage of favorable market trends and dynamic trade within Mercosur % Targets largely exceeded in terms of production, sales, employment, foreign-exchange % Financial Additionality: Due to the worldwide liquidity crisis, IIC’s terms (7 year + 18 months grace period) was not
available in the market. Mobilized additional US$7m from private sources.
17
Expected Results Actual Results Development
Outcome 5.45 (out of 6.5) Highly Successful
Additionality 2.6 (out of 3.5) Satisfactory
Employment 776 (Baseline) 1,001
Sales US$51 million (2012 projections) US$100 million (2012)
Improvements in Environmental and Social Standards
Requires Environmental & Social Action Plan
• Implemented ESAP • Submitted Annual Environmental Reports
Improvements in Corporate
Governance
• Recommends international external auditor
• Recommends improving corporate governance practices, in particular need for written agreement between shareholders
• Company hires external auditor • Participated in the IIC Corporate
Governance Seminar (3 people) which resulted in a revision of family constitution.
“Learning about the experiences of other Latin American companies in family governance led me to reflect
on what we could do differently.”
Chairman of the Board