Originally published on Greater Good on August 15, 2016, Cynthia Muller and Rachel Reichenbach of Arabella Advisors argue that human rights funders should consider impact investing as a powerful complement to grant making and other forms of philanthropic support.
“How can funders support the sustainability of human rights?” This question was the topic of last month’s International Human Rights Funders Group’s 2016 New York Conference. We proposed this answer: human rights funders can boost both funder and investee sustainability by using impact investments to complement grant making and other forms of philanthropic support.
We recognize that grant making and advocacy will always be critical in the fight to ensure the basic rights of all people, and that impact investing isn’t suited to every situation. But impact investing is building a track record of helping to address certain types of challenges that can make it a valuable addition to a funder’s broader human rights efforts.
Crucially, making investments into for-profit and nonprofit entities that have an explicit social or environmental impact goal can enable funders to pursue their missions while recycling their capital—since impact investments often yield at- or below-market financial returns. By making investments alongside grants, human rights funders can retain and even grow a portion of their resources, which they can then channel into additional impact. At the same time, impact investments can supplement the funds available to sustain human rights organizations. We have already seen this happening in multiple ways, including the following four.
1) Impact investing to seed programs and services that have significant potential to advance human rights
When an organization with a revenue-generating model demonstrates potential for human rights impact, a seed investment can often increase the organization’s capacity to innovate. Seed investments from impact investors are particularly useful when an organization needs to test a product, concept, or service that is perceived as too risky to attract traditional capital—as is often the case in human rights work, which deals with the world’s most underserved populations. Seed funding can also be catalytic in attracting additional capital, as it lowers the risk for other investors—and having multiple funding sources boosts an investee’s sustainability.
The North Star Alliance provides a case in point. The Alliance is a social enterprise that delivers critical medical care via mobile health clinics to people largely ignored by formal health care and social programs—including long-distance truck drivers and sex workers—in border posts, transit towns, and ports across sub-Saharan Africa. It receives both grant and investment capital, and each supports different aspects of the organization’s work.
Investment capital often goes toward scaling mobile health clinics in its various geographies, enabling the Alliance to provide critical health care in those areas. Its ability to attract and successfully use such investments also signals the organization’s financial health and market success, reducing perceived risk among other funders and investors. The organization has leveraged investments in its core work to attract grant and investment capital for innovation, such as testing its model in new geographies—a risk a traditional funder might not be willing to take with grant capital to an unproven organization.
2) Impact investing to help scale organizations that are successfully advancing human rights
Investing in an organization with a proven human rights-advancing concept, adequate revenue sources, and a demonstrated financial track record can help that organization scale to serve significantly larger numbers of people and achieve increased impact and sustainability. While grants can also help human rights organizations scale, grant dollars are limited and funders tend to prefer to channel them to programs and direct services rather than operations. Investments can help fill the gap that often results.
The Wallace Global Fund invests in clean energy access via a fund, SJF Ventures. One of the fund’s portfolio companies is NEXTracker, which designs and manufactures tracking systems for the global utility-scale solar market. The company’s product supports significant increases in solar energy production, and is helping solar become cost-competitive with fossil fuels. As such, it is advancing the rights to an ecologically sound environment, health, and an adequate living standard for the 1.2 billion people who currently must rely on harmful fuel sources like coal and firewood. The Wallace Global Fund’s investment is helping the company scale swiftly: NEXTracker recently doubled its manufacturing capacity and expanded its team across five continents.
3) Impact investing in the form of bridge financing to fill short-term funding gaps for human rights
Using grants to meet urgent needs can be difficult, as many foundations’ grant cycles are fairly rigid. Bridge financing, often in the form of loans, can provide a flexible way for funders to support organizations that urgently need capital to seize time-sensitive opportunities to promote human rights. For example, in 2011 the UN Foundation launched the Pledge Guarantee for Health, a $100 million bridge financing facility that structured financing to organizations that were awaiting grants. This financing enabled them to accelerate the delivery of life-saving health supplies in the developing world.
4) Impact investing to provide underserved populations with access to finance to purchase products or services that enable them to exercise their rights
Impact investing has long been a tool to increase access to finance—through microfinance, community development loans, and more—for individuals who are denied traditional financial services because of their income level. Funders can invest in organizations that provide financing for underserved populations to purchase products or services that empower them to exercise their rights.
The Rockefeller Foundation provided a $2 million loan as a program-related investment to Resident Owned Communities USA (ROC USA), a social enterprise offering financing, training, and networking opportunities to help mobile homeowners gain security through community ownership. Lack of affordable housing and home financing are barriers for many low-income people to an adequate living standard and to the security that comes with a stable home. ROC USA is using the Rockefeller Foundation’s debt investment to provide acquisition financing to resident corporations in manufactured housing communities to purchase the land on which their mobile homes sit. This provides a pathway to full homeownership for residents, who otherwise would not be able to afford the cost of the land in addition to the cost of the home.
In sum: Impact investing can increase the range of solutions available to funders, enabling them to better respond to the complex problems facing the world’s most vulnerable populations. We are excited to be working with a range of funders who are incorporating impact investing into their strategies, and we believe human rights funders have the potential to increase their impact even more by doing so.
Cynthia Muller leads Arabella Advisor’s impact investing practice. Rachel Reichenbach is a director in Arabella’s San Francisco office, where she manages projects and advises clients on strategy development, evaluation, and project implementation.