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the views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make any representation concerning the same.
Draft 1: 22 April 2012
Inclusive Business ex-ante Impact Assessment
A Tool for Reporting on ADB’s Contribution to Poverty Reduction and Social Inclusiveness1
By: Alice Chapple, Impact Investment Consultant
This report was prepared by Alice Chapple, as staff consultant to ADB. Ms. Chapple is a specialist in impact investment and social development, who has spent much of her career working as a financial analyst and fund manager in development finance institutions. The report builds on an overview of impact assessment tools used for impact investors: (http://www.scribd.com/doc/80720133/Impact-Assessment-Tools-Review). The author would like to thank Armin Bauer (ADB), Robert de Jongh (ADB consultant),and Noah Beckwith (ADB consultant) for their valuable comments and guidance. This draft will be discussed further with other development partrners and revised to develop a shared impact assessment tool for Inclusive Business investments in Asia.
Table of Contents
Executive Summary 1 Background and Rationale 1.1 What is Inclusive Business? 1.2 Why Private Sector Solutions for Poverty Reduction in Asia? 1.3 ADB’s Inclusive Business Initiative The Social Impact of Impact Investments 2.1 Monitoring and reporting on social impact: rationale and difficulties 2.2 Overview on impact assessment systems 2.3 Inclusive Business Indicators 2.4 Inclusive Business Impact Rating systems 2.5 Why a new ex ante impact assessment tool? 2.6 How does the new ex ante impact assessment tool fit with other initiatives? 3 6 6 7 8 9 9 11 11 13 14 15
Key Features of the ADB’s Inclusive Business Impact Assessment Tool 16 3.1 The need to balance financial returns and social impact 16 3.2 The Five Impact Assessment Steps 17 3.2.1 Step 1 - Eligibility Gate 17 3.2.2 Step 2 - Routes to Social Impact (The Smell Test)20Error! Bookmark not defined. 3.2.3 Step 3 - Scoring 21 3.2.4 Step 4 - Setting Targets 22 3.2.5 Assessing the Fund Manager’s performance 23 3.3 Reporting 26 3.3.1 Fund manager reporting to its own Investment Committee 26 3.3.2 Fund manager reporting to ADB and other impact investors 27 Limitations of the Tool 27
Appendices A1 Summary of impact assessment tools used world wide [not included] A2 Summary Evaluation Sheets for Assessing the Social, Poverty and Inclusiveness Impact of IB ventures A3 Assessing the Impact of Inclusiveness: Examples [not included] A4 Bibliography and Links on impact assessment tools [not included]
(i) Inclusive business (IB) refers to commercially viable activities which explicitly seek to improve the lives of the poor.2 An inclusive business therefore combines the skills necessary for successful commercial company (financial discipline, viable business models, strategies for growth) with systems and processes for maximizing, monitoring and reporting on the impacts of that business on poor people. IB is a business that seeks to make profit, but has innovated in such a way that is also includes the poor to create shared value for them. The impact on the poor can arise in a variety of ways (impact channels): through including involving the poor and vulnerable in the provision of essential and affordable goods and services that they could not access before (poor as consumers), providing employment and income opportunities from them (poor as laborers and distributors), and through purchasing goods or services from low-income producers. (poor as suppliers). (ii) ADB’ s inclusive business initiative comprises the IB market scoping studies for 10 Asian countries, the development of an impact assessment tool, and due diligence and financing of possible IB investments.3 ADB is establishing a number of inclusive business funds, the first one for the Mekong region, covering Cambodia, Lao PDR, Thailand, and Viet Nam. ADB wants to ensure that the fund managers have appropriate tools in place so that they select investments that have robust and viable business strategies to deliver a positive impact on the poor, determine appropriate social impact targets for the companies before investment, and monitor performance against those targets during the life of the investment. (iii) Measuring and monitoring social impact for private sector driven projects is not straightforward for many reasons. It is difficult to decide on the appropriate scope of impact measurement; to gather meaningful data without incurring excessive cost; to decide on the relative importance of reach (the number of beneficiaries) and depth (how much life has changed for each beneficiary); to see the impact from the perspective of the relevant stakeholders; and to determine whether a particular impact can be attributed to a specific activity. But many organizations deal with these challenges to assess and report on their social impact. (iv) Charitable organizations, social enterprises and commercial companies tend to approach social impact assessment in different ways and use different techniques. Commercial businesses will often tend to apply safeguard policies to ensure there is no negative impact, and then report on the social impact created through creating jobs or buying from local suppliers. This has also tended to be the approach of development finance institutions. For inclusive business, the emphasis shifts to defining very clearly ex ante how its activities are expected to be profitable and have an impact on the poor and designing the business in a way that maximizes that impact for the long term. (v) The growth in impact investment over recent years has led to increased demand for effective tools for measurement, management and monitoring of the social impact of those investments. Investors want to see that their money is being used as effectively as possible at addressing social and environmental challenges. This has led to the growth of activities in this
ADB defines the poor as those under the $2 international poverty line, and the very poor as those under the $1.25 poverty line. In its Inclusive Business (IB) initiative companies that target the vulnerable poor (under the $3 poverty line) are included. In Asia and P22% of the population lived in 2008 (latest available comparable data) below the 1.25 threshold, 47% under the $2 poverty line, and 82% under the $4 vulnerability line. For more information on ADB’s Inclusive Business initiative, please see http://www2.adb.org/projects/BasePyramid/default.asp
area. The Global Impact Investors Network (GIIN), for example, has developed a library of indicators called the Impact Reporting and Investment Standards (IRIS). These are increasingly being used as a reference point in impact reporting, which helps to standardize the definitions of different types of impact. For example, the ‘number of customers’ might refer to the number of individuals to whom a company sells its product, or might simply count each customer, regardless of whether they have made a purchase before. To understand the impact, it is important for investors and other stakeholders to understand which definition is being used. (vi) At the same time the IRIS indicators do not address relevance of impact and context sufficiently. ADB’s impact assessment tool goes beyond counting whether a business intervention involves the poor by assessing what actual impact the intervention has on the poverty situation in a given area or sector. It aims at assessing the difference between the change that would have happened anyway, and the change catalyzed by the IB initiative, This is done – among others – by taking directives suggested by ADB’s market scoping studies in the various Asian countries. (vi) Some foundations and other impact investors are beginning to develop their own ways of reporting on impact. They are seeking to determine how their investments have impact, are selecting targets relevant to those ‘routes to impact’ and are selecting a set of IRIS indicators that are most appropriate to their activities. Over time, this will result in ‘metrics sets’ that are appropriate and relevant to each sector and geography, but these are not yet in place. (vii) The development finance institutions have reported on their development impact for some time and their approach continues to evolve. The Development Outcome Tracking System (DOTS) establishes targets for development impact before an investment is made, and monitors progress over the life of the investment, thus ensuring a focus on those impacts. But the primary focus of the businesses tends to be on profit maximization, so there is less opportunity to optimize outcomes for the poor than in businesses specifically designed to be inclusive. (viii) ADB found the tools developed by GIIN and IRIS, as well as the impact rating tool developed by KfW/DEG and its application for example in the Inter-American Development Bank very useful. However it wanted to go beyond those indicators, self-reporting mechanism and portfolio assessments by developing a decision and reporting tool specifically designed for practical purposes in making management decisions on its Inclusive Business funds. The ADB tool however uses major elements of its partners’ knowledge work (ix) The ADB Inclusive Business Ex Ante Impact Assessment Framework is a process to help fund managers and their investee companies articulate very clearly how they anticipate having a positive impact on the poor and to monitor their progress against appropriate targets. It also includes safeguards to ensure that the investee businesses are managing their environmental, social and governance issues. While the tool is focusing on social impact for the poor and vulnerable; and not assessing environmental, climate change or economic growth impact. it is developed under the framework of blending social and financial returns. It is designed to consider economic returns by placing a financial return hurdle in the gating stage of the assessment, although it places more emphasis on social returns for the reasons in the later stages of the assessment. (x) The tool was designed to provide information on the inclusiveness of the business case. It is not a rating tool to compare individual companies, nor is it a tool that assesses the financial viability of IB cases. It includes 5 steps – - Step 1 - Eligibility / screening - Step 2 - Routes to social impact
Step 3 - Scoring Step 4 - Setting targets Step 5 - Assessing the fund manager’s performance particular to help fund managers have a dialogue with the invest, so that the business delivers the best outcomes for excessively onerous, as this would be counter-productive. established at the outset through agreement between fund an important element of rigour to the impact assessment
(xi) The tool is designed in inclusive businesses in which they the poor. It is designed not to be However, the use of clear targets, manager and company, introduce process.
(xi) There is a limit to which commercially-run businesses (inclusive or not) can allocate resources to social impact assessment. They will be able to measure the outputs from their activities (number of hospital beds, purchases from low-income farmers) and to some extent the outcomes (number of patients successfully treated, increase in income for farmers). However, measurement of the ultimate impacts (mortality rates, macroeconomic indicators), understanding the real effect on individuals (through surveys and interviews) and attribution of impacts to specific investments will require additional work, with costs that the fund manager or individual companies cannot realistically be expected to bear. This needs to be recognized upfront in implementation of the tool, so that expectations are appropriately managed or additional funding made available. (xi) This report summarizes the suggestions for an impact assessment tool for ADB’s Inclusive Business initiative. Chapter 1 provides background and rational for inclusive business as well as a brief description of ADB’s IB initiative. Chapter 2 summarizes the state of the art thinking on social impact of impact investments. This should be read in conjunction with an earlier document on assessing similar tools available and used in the impact investment industry. Chapter 3 then discusses the key features of ADB’s IB impact assessment tool. And chapter 4 discusses limitations of the tool. Appendixes provide more detailed information on the tool and give examples on how it can be used at the project level.
BACKGROUND AND RATIONALE
1. This paper outlines the practical tool developed for ADB’s inclusive business funds. It builds on a separate paper which reviewed impact assessment tools used in the industry and by NGOs. 4
What is Inclusive Business?
2. The term ‘Inclusive business’ refers to profitable core business activity that also explicitly creates opportunities for people at the base of the economic pyramid (BOP): as producers, workers, distributors, and consumers. All kinds of companies – local and international, small and larger ones - can support development through providing employment, paying taxes or transferring new skills or technologies. And many companies go further by implementing clear policies to ensure that their activities follow high standards of social, environmental and governance practices. But the deliberate focus of inclusive business is on balancing financial returns with creating a positive impact on the poor at scale, thereby providing a systemic contribution to poverty reduction and more inclusive development in the specific region or country. 3. Therefore, the poor are not necessarily the primary focus of inclusive business, and this impact assessment tool tries to avoid overemphasizing the social impact vis-a-vis the financial impact of the business model. Inclusive business is often finding a solution to an existing business problem through inclusion of the low income segment. All inclusive businesses start and end with the business need and opportunities. However there are innovative and different to purely commercial ventures in that it makes the low-income segment critical to successfully implementing that business. 4. There are different reasons why companies want to develop inclusive business strategies. For some, the rationale lies in a desire to achieve social outcomes. For others, the drive comes from a desire to generate value for the company: for example, it might reduce costs; enable expansion into profitable new markets; or increase the quality or resilience of supply chains. Therefore, inclusive business strategies can be implemented by both small social enterprises and by large companies. 5. Inclusive business differs from corporate social responsibility activities and philanthropy because it is designed to be part of a company´s core business strategy. Although there is overlap between inclusive business and social enterprise, a distinction tends to be made along the lines of the potential for inclusive business to scale up and make a systemic contribution to poverty reduction, And the inclusive business approach differs from the original base of the pyramid approach that has tended to view the poor mainly as market and assumes automatic benefit for the poor through the provision of any consumption good. There is wider scope to expand private sector growth through inclusive business ventures to provide the poor with new jobs and access to quality and affordable goods and services, helping them improve their lives and reducing poverty. However, the private sector has barely explored its potential at the BoP. The two key dimensions of inclusive business – a focus on outcomes for the poor and profitability – are as important as each other. The business model for an inclusive business needs to be based on financial viability. Because many inclusive business models have not yet
For more information on other impact assessment tools, see: http://www.scribd.com/doc/80720133/ImpactAssessment-Tools-Review
been proven, and because it can take some time to find the right way to deliver products and services to the poor or develop appropriate structures for purchasing from low-income producers, it may take a while for an inclusive business to generate commercial returns. On the other side, there are many examples of profitable, scaled up, branding-improved, and social impact generating inclusive businesses, that generate value for the company in a relatively quick time frame. Many of those models have been proven successful, but for some there is still a question of scalability and additional mainstreaming in the respective market. 6. For a business to be sustainable, the social and financial objectives will need to be aligned. A business cannot continue into the long term if it buys raw materials from poor producers at such a high rate that it cannot achieve any margin on sales of its final product. Equally, it is not viable for a business to supply essential goods and services to the poor at such low prices that it cannot cover its costs. The long-term social impact is dependent on the business making adequate profits, because without that it cannot continue to operate. 5 7. But there is still scope for different approaches within the inclusive business spectrum. An inclusive business strategy pursued by a commercial company may seek to maximize profits while meeting the needs of the poor, while an inclusive business strategy implemented by a social enterprise may seek to maximize social impact while achieving profits that are sufficient to remain viable. 8. In some cases, social impact can be increased through increased profitability. For example, when the profits are being reinvested in the business, higher profits might enable the company to scale up further and faster to reach more poor people. Or higher profits might be shared with workers, suppliers or consumers in some way. However, higher profits are not always aligned with higher social impact if the extra profits are simply being distributed to shareholders. 9. Inclusive business strategies may also require companies to adopt a more patient approach to the generation of financial returns. They may therefore not fit easily within the normal payback periods expected by companies, and companies may need to be very clear about this upfront, to reduce the risk of funding being withdrawn during the development phase. Equally, companies also have to have a clear view of the milestones that need to be reached to indicate that progress for the inclusive business is on track: otherwise, there is a danger of throwing good money after bad in a business model that is not likely to succeed. These points are explored in more detail in section 3.1 below.
Why private sector solutions for poverty reduction in Asia?
10. The Asia Pacific region has been very successful in reducing income poverty. The percentage of the very poor (i.e. those living under the $1.25 per capita per day international poverty line adjusted for purchasing power parities) decreased in the region from 52.3% of population in 1990 to 21.9% in 2008 (for which the latest comparative data are available). Moderate poverty (those under the $2 poverty line) also declined from 79.4% in 1990 to 47.4% in 20086, albeit at a much lower rate. However, living standards for many poor people have not
But there is still scope for different approaches within the inclusive business spectrum. An inclusive business strategy pursued by a commercial company may seek to maximize profits while meeting the needs of the poor, while an inclusive business strategy implemented by a social enterprise may seek to maximize social impact while achieving profits that are sufficient to remain viable. ADB (Aug 2011): Poverty in Asia and the Pacific. An Update. Manila: Asian Development Bank. http://www.adb.org/Documents/Working-Papers/2011/Economics-WP267.pdf. Another publication also has projections through 2020 but does not yet recognize the impact of the global economic recession and the food and fuel price hikes in 2007-2009: ADB (Nov 2008): The World Bank’s New Poverty Data. Implications for the
meaningfully improved and as such it remains a major challenge. Insufficient investment in social and municipal services is often cited as one reason for the lack of sufficient inclusion in Asian economies. The face of poverty has also changed: While income poverty and some dimensions of social poverty have improved, environmental and other dimensions of poverty, as explained in the Millennium Development Goals 4 and 5 (on maternal and child health)7 and 7 (on the environments of the poor) have not progressed much. 11. The lack of public investment in addressing social poverty and the environments of the poor is often seen as a major drawback for poverty reduction in Asia. Private sector initiatives combining commercial interest with investments that work with and for the poor – if sufficiently up-scaled and systemically addressing poverty - could give a new push for poverty reduction in the ASEAN region. While the private sector has been a key contributor to the economic boom in Asia, it has yet to fully realize its potential in creating shared value, which is to promote business models that integrate the low-income segment in unique and innovative ways that generate company growth while creating value for the low-income segment and directly contributing to poverty reduction. As such, there is an increasing agreement that private sector growth can be a powerful tool in the global fight against poverty, if its business is more specifically targeted towards creating impact at the lower income groups. 12. The private sector is increasingly engaging in double or triple bottom line ventures that benefit business, the environment, and the poor. However such investments are still small in scale. This is partly because the framework conditions for deeper private sector involvement in poverty reduction are often restricted by government policies. The private sector alone is not the panacea for poverty reduction. Rather, governments and development partners need to leverage the private sector actions and provide good incentives so that the objectives of poverty alleviation, sustainable growth, and environmental sustainability – often joint objectives of value oriented business people and the public sector - can be achieved. Asia's private sector is increasingly realizing that the base of the income pyramid (BoP), i.e. those living below the $3$4 poverty line, represents an interesting business opportunity.
ADB’s Inclusive Business Initiative
13. ADB's corporate Strategy 2020 foresees that 50% of ADB's investments by 2020 will come from either non-sovereign activities or supporting private sector development objectives. ADB’s strategy is to ensure that its private sector operations find ways to more directly support the poverty reduction and inclusive growth agenda. At the same time, Strategy 2020 mandates the institution to contribute to its overarching goal of poverty reduction and improvements of the living conditions of all Asian people, which it specifically contributes to by supporting the growth and development process in the region to become more inclusive. 14. ADB’s initiative to stimulate inclusive business in Asia and the Pacific was first approved in 2008, and refined in 2010. An initial technical assistance (TA) project aimed to study the market readiness for inclusive business ventures in six (later broadened to 10) target Asian countries (Bangladesh, India, Indonesia, Pakistan, the Philippines and Viet Nam; as well as Cambodia, Lao PDR, Sri Lanka, and Thailand). It also financed initial due diligence for setting up subregional IB funds as private equity funds. The initiative also facilitates cooperation and knowledge sharing with other partners, and develops an impact assessment tool. The project is co-implemented, and leveraged where appropriate, with the Netherlands' Development
Asian Development Bank. Manila: ADB. http://beta.adb.org/publications/world-banks-new-poverty-dataimplications-asian-development-bank ADB/ESCAP/UNDP (Feb 2012): Accelerating Equitable Achievements of tjhe MDGs. Closing Gaps in Health and Nutrition Outcomes. Bangkok. http://beta.adb.org/sites/default/files/equitable-achievement-mdgs.pdf
Organization SNV and the networks and assets of the World Business Council for Sustainable Development (WBCSD). The Ford Foundation is supporting the work in Indonesia. 15. The initiative is a joint effort of ADB's Private Sector Operational Department and the poverty and inclusive growth team in the Regional and Sustainable Development Department.
THE SOCIAL IMPACT OF IMPACT INVESTMENTS
Monitoring and reporting on social impact: rationale and difficulties
16. The existence of financial accounting standards makes it relatively straightforward for a company to report on its financial performance. The standardization of reporting procedures and the common language applied to specific indicators makes it possible to analyze and compare various dimensions of financial performance such as the financial rate of return on investment and annual profitability. It is much more difficult to do the same for reporting on social impact. Yet clearly if companies are pursuing an inclusive business strategy they need to be able to monitor and report on the impact that their activities are having on low-income producers, consumers, distributors and workers. 17. Effectively, the social impact reporting process is designed to show how a company - applies various inputs (money, skills etc), - turns them into outputs (number of people employed, number of immunizations provided, number of teachers funded, number of producers brought into the supply chain) - through this, achieves various social outcomes (increased income for x people, protected x children from y diseases, provided education for x children, increased amount or predictability of revenue for x producers) - and can attribute various poverty reduction and inclusiveness impacts (reduced child mortality among the poor by x, improved literacy rates by x, improved wellbeing or livelihoods of x people) 18. The difficulties of reporting effectively on social impact fall into 5 broad categories - Range of impacts (direct, indirect and systemic) - Gathering adequate data - Reach and depth of impact - Stakeholder perception of impact - Attribution of impact 19. Range and relevance of impacts – There are many areas where an activity could have an impact, positive and negative. These range from environmental issues (such as climate change, biodiversity, waste, water availability, soil quality), social issues (such as community engagement, workers’ rights, health and safety, resettlement) and governance (independence of the Board, remuneration practices, management systems). A business may have a highly positive impact on one of these areas while falling short of good practice in another. In addition, some impacts may be limited to their direct effects, while others have a more systemic impact and therefore are better able to reduce poverty and promote inclusiveness. Effective reporting on social impact needs to cover this range of issues without making the process excessively onerous for the business.
20. Gathering data – Even assuming that a manageable range / scope of impacts can be identified, one of the most difficult aspects of reporting on social impact is gathering reliable data. For example, it may be possible for a company to know how many products it has sold, but it is much more difficult for it to establish the number of beneficiaries (so not double counting for repeat purchases) or the income level of those customers. For some businesses (health, education) this may be easier than others but it still may be costly and / or intrusive for a business to acquire that information. The relationship between a business and its customers is very different from the relationship between a donor and the people benefitting from that donation: a business has no right to expect that information to be made available. 21. Reach and depth of impact – A business may measure its outputs and outcomes through the number of people affected by the activity but this does not provide the full story. A particular activity might reach 5,000 farmers and increases their income by 20%, while another reaches 1,000 farmers but increases their income by 100%. One of these businesses may engage farmers whose incomes start at a much lower level than the other. It may be difficult to assess which of these activities delivers the most valuable combination of reach and depth. Another example: a hospital may provide health services with the potential to reach 1 million poor people, although only 5,000 will use it. In comparison, an investment in value chain agriculture may generate 5,000 sustainable jobs and increase income of the poor by 50%. It is difficult for a multi-sector fund, such as ADB is proposing, to compare these two investments on its social impact. The actual change the investment brings in the lives of poor people very much depends on the country and regional as well as sector specific conditions. 22. Stakeholder perception of impact – It may be difficult for a business, or even an independent third party, to assess the quality of the social impact and how much difference it makes to the lives of those affected. Proxies exist – for example, analyzing the basic goods that a household owns before and after the activity – but they can only give a partial picture. Firstly, they require a baseline study to be undertaken. And, secondly, obtaining detailed feedback from individuals (for example, involving interviews with those affected to give a detailed sense of the impact of the activities on their quality of life and future opportunities) is very resource-intensive and often not possible. 23. Attribution of impact – To get to the heart of the impact achieved, a business has to assess what changes would have taken place in the absence of the activity (in other words, using randomization and control groups). There are always other changes going on within an economy that will have an influence on the individuals affected by the inclusive business. Unless a business accounts for those in some way, it may overstate the impacts of its own interventions. 24. A fund manager uses an impact assessment tool to enable him to assess, manage, monitor and report on social impact in his portfolio companies. As stated in the earlier background paper prepared for ADB8, the tool needs to enable the fund manager to - ensure that all investments in the Funds meet basic eligibility criteria - ensure that each investee company in the Fund portfolio has articulated how its business achieves impact - use a framework to assess the development impact of each proposed investee company ex ante (but not necessarily to rank or rate different investments)
ADB / Alice Chapple (Jan 2012): “A Review of Impact Assessment Tools used for BoP and other types of triple bottom line investing – and relevance for ADB’s Inclusive Business Impact Assessment Tool” .http://www.scribd.com/doc/80720133/Impact-Assessment-Tools-Review
generate enough impact data for effective ex ante decision-making, and ex post monitoring and evaluation, through selection of a few appropriate indicators not data overload. help the company generate transparent and measurable targets for development impact which are useful to the business in achieving its own strategic goals and which can then be monitored by the Fund.
25. Because ADB is deliberately focusing on inclusive business, the fund manager must gather data that will enable him or her to assess impact, so the businesses in the portfolio must be committed to reporting data which will go beyond standard reporting requirements in equity funds which tend to be limited to financial sustainability, employment generated and taxes paid. Great care is required to ensure that, as far as possible, the data requirements are seen as providing useful support for achievement of the company’s objectives, rather than a distraction from core business. 26. It is important to note that a Fund manager would be unlikely to be in a position where he or she is directly comparing a range of different potential investments and scoring them to decide which investment would be preferable. However, he or she would be using criteria to decide whether an investment can be expected to deliver impacts of sufficient quantity and quality to merit selection for the Fund.
Following a systems approach
27. The earlier background paper by ADB/Chapple outlined the range of impact assessment systems that exist for different organisations, showing that there is a distinction between the approach adopted by, and the types of impact assessed by 28. (a) commercial businesses in their core business activities, where financial performance is the key driver; social and environmental safeguards are important to protect reputation; and positive impact may also be used as a measure of success; 29. (b) organisations such as social enterprise and venture philanthropy, that primarily seek positive impact but are also driven by financial returns because these underpin sustainable enterprise; 30. (c) activities by not-for-profits or corporate philanthropy whose primary purpose is to have a positive social impact in a particular area but who may need to demonstrate value-for-money. 31. An ex ante impact assessment framework for an inclusive business fund needs to combine elements of all of these approaches, while avoiding an excessively onerous process.
Inclusive Business Indicators
32. The Global Impact Investors’ Network (GIIN) has produced a library of indicators that can be used for impact assessment. These are called the Impact Reporting and Investment Standards (IRIS). The value of the indicators lies in the fact that they create a common language for reporting social and environmental impact. So, for example, when two different impact funds provide data on the ‘number of clients served’ or ‘default rate on loans’ both are using the same definition of ‘clients’ and ‘default rate’. This introduces more rigour to the impact reporting process because an individual fund cannot simply select a definition that positions the fund in the most favourable light. It also enables some comparisons to be made between data from companies or funds in similar sectors and geographies. Currently, IRIS is not prescriptive about the indicators that any particular fund should use: a fund can simply select from the library the ones that they feel are most appropriate. But IRIS is working with members of the network
to develop sets of indicators that can be applied to specific sectors and business types. In this way, they will move towards common groupings of indicators that are applied by similar businesses, ultimately enabling benchmarking and comparability. 33. IRIS indicators are also not adjusted to the specific context in which the goods or services are provided and matter for the poor. IT may be that in a specific context a default rate is the most important proxy indicator of impact. In another context, perhaps the proposed solution may target the poor well, but is not addressing the more systemic problem the poor have. The ADBN tool therefore takes into consideration those context b y building on market scoping studies or inclusive business that assessed – among others – specific sector contribution to poverty reduction in a given geographical and socio-cultural context. 34. Any business reporting on social impact, and any ‘standard’ developed for doing so, has to achieve an appropriate balance between being too prescriptive and lacking rigor. A process that is too prescriptive risks a ‘tick-box’ mentality and may fail to capture the particular ‘route to impact’ of an activity. On the other hand, a set of standard indicators is a valuable way to ensure that businesses cannot simply select the indicators that make them look best, and they can be useful for benchmarking. 35. Some foundations have been using a combination of GIIN and other metrics to provide stakeholders with a complete picture of their activities. KL Felicitas Foundation, for example, produced a report in 20119 outlining how it has selected its key performance indicators: these have three elements. Firstly, each company in their portfolio has to report against a core set of metrics; secondly, each company uses specific indicators relevant to its own activity and route to impact; and thirdly, KL Felicitas has a set of qualitative indicators to describe the extent to which the foundation has catalyzed new investment, supported business model innovation or connected individuals with capacity-building tools. 36. KL Felicitas was keen to have a core set of indicators because they wanted to be able to benchmark their performance. The core set of indicators they use (combined with additional sector-specific and qualitative indicators) is - Number of clients - Jobs created in financial enterprises - Number of direct investments - New investment capital - Contributed revenue (grants and donations) - Earned revenue - Net income 37. The Aspen Network of Development Entrepreneurs (ANDE) has also decided on a core set of metrics which all of its members (which are small and growing businesses in developing countries) will report against. The core metrics are – - Revenue - Employees - Wages - Additional finance mobilized - Greenhouse gas emissions
KL Felicitas Case Study, accessible at http://iris.thegiin.org/files/iris/KLF_IRIS_Case_Study.pdf
38. In addition, each ANDE organization has to decide whether its impact is through its clients, its products or its suppliers, and then select an indicator that is relevant to that route to impact – for example, number of customers, number of goods or services sold, number of people from whom products were purchased. It is interesting to note that ANDE members are all committed to reporting on greenhouse gas emissions. This metric is not necessarily core to their strategy but is important to a range of stakeholders. 39. The ADB framework requests that fund managers select indicators from the IRIS library. Currently, this is what ‘application of IRIS’ means. As IRIS develops more ‘metrics sets’ for specific sectors, then alignment with IRIS may mean something more, because funds in a certain sector may be expected to report against a particular set. ADB can play an active role in helping IRIS to evolve in this way, by providing data from its own funds. ADB can also keep a watching brief and encourage fund managers to adopt appropriate metrics sets as they emerge.
Inclusive Business Impact Rating systems
40. In principle, rating systems should enable investors and others to compare funds and companies to ascertain which is the most attractive for investment. One rating system being used by a number of small companies, particularly social enterprises, is the Global Impact Investing Rating System (GIIRS). GIIRS provides an independent judgment of social and environmental impact for companies and investment funds using a rating scale of 1 to 5 stars. The rating system poses a wide range of questions on business model, policies, practices and achievements, to establish where the business has had a positive impact. 41. The GIIRS rating system is rigorous and transparent. It is also inevitably subjective because the selection of appropriate indicators is itself a subjective process. It is, however, objective in its application of the selected indicators to all funds and companies. It is a relatively young system and the latest analysis showed 136 companies reporting against it, 76 from developed countries and 64 from emerging markets. This means that the number of reference companies within each sector or geography is currently small and meaningful comparisons are not possible within that small sample. So, while a GIIRS rating would provide useful information alongside other indicators, ADB cannot rely on it as a primary source of due diligence. And application of the ADB framework - rather than GIIRS – should enable a fund to define the impact channels and to weight the impacts according to ADB’s own priorities for the funds. 42. However, ADB supports the GIIRS principles of weighting and rating in order to gain a clearer picture of the general trend on how inclusive the business case is vis a vis other business cases. It is therefore suggested that the fund manager (or portfolio company) considers using the GIIRS rating, alongside application of the ADB framework, because that could provide useful information for ADB. However, the cost of acquiring a GIIRS rating needs to be taken into account. 43. The Inter-American Development Bank (IADB) has developed a ‘balanced scorecard’ scoring system for use in its Opportunities for the Majority (OMJ) Fund. The indicators are taken from the IRIS databank and the rating has some similarities to the GIIRS system. More detail is included in the earlier background paper. IADB’s scores for impact (which comprise 50% of the total score that any project can achieve) are made up of scores for the following 6 areas – - Number of direct beneficiaries - Cost per beneficiary - Innovation factor (for example, whether disruptive or incremental)
Role of the Bottom of the Pyramid (BOP), whether as owners, producers, suppliers, employees or consumers (with the impact score being highest for BOP as owners and lowest for BOP as consumers) Scalability Replicability
44. Rating systems can introduce a rigor to the process of selection. They require companies and fund managers to focus on specific areas that can drive development impact and to consider how their scores in certain areas can be improved. They can help to sharpen up the dialogue between fund manager and company by requiring scores to be given which then elicit a response. However, with a very wide range of sectors and new markets, it is difficult to rely wholly on a scoring system when making investment decisions. 45. A scoring system is attractive and useful in principle. However a fund manager will not seek to compare one investment in one sector with another investment in another sector for its investment decisions in the 3-5 years investment period. However towards the end of the fund when all investments are placed, the investors and the fund manager may wish to know which type of investments and which companies brought bigger social and financial returns. To report at a corporate level on its success in financing inclusiveness through private sector operations, one could then use a scoring system that combines elements of IADB’s tool with the GIIRS and perhaps also KfW/DEG’s impact rating. Given that for IB financial and social return should be balanced it is proposed that such system looks into the totality of the impoacts and not only the social impacts. Table 1_below shows a possible broad rating categories of such a system, and this is further elaborated in step 5 of the impact assessment tool.10 The broad categories in the table below needs to be further detailed with criteria and sub-weights which may be different depending on the sector investment and business case.
Table 1: Possible Rating System for Broader Impact Reporting
Why a new ex ante impact assessment tool?
46. The earlier background paper gave an overview of the many approaches in place to assess social impact. These tools are useful, but are not fully appropriate for ADB’s fund assessment as they tend to be either designed for commercial businesses where the impact is not central to the strategy, or designed for charitable activities where the exclusive focus is on impact so
` A similar system was used in the evaluation of the 2012 G20-Challenge on Inclusive Business Innovations implemented by the World Bank’s International Finance Cooperation(IFC) of which ADB was a member in the judging panel. For more information, see (http://www.g20challenge.com/)
specific detailed techniques such as social return on investment are used. The tool outlined in this paper is designed to combine the tools used by commercial businesses with a ‘route to impact’ or ‘theory of change’ methodology that describes more explicitly the process by which the investee company’s activities are expected to have an impact on the poor. 47. We consider that ADB will benefit from applying an ex ante impact assessment tool of this kind in its inclusive business funds so that fund managers can apply criteria for selection of the businesses that are most likely to deliver a combination of robust financial returns and basic social, environmental, social and governance standards on the one hand; and meaningful and lasting impact on the poor on the other. The ADB tool considers the importance of other development goals such as environmental sustainability or good governance, but the tool is specifically designed for assessing the poverty and social impact of the investments, and therefore does not focus on developing indicators and impact channels for strategic development objectives other than poverty reduction and social inclusiveness.
How does the new ex ante impact assessment tool fit with other initiatives?
48. The new ex ante impact assessment tool will make use of the IRIS library of indicators, to ensure that it is reporting on selected indicators in a standardized form. As the GIIN develops suggested suites of indicators for specific sectors, these will be useful reference points for the funds, and fund managers can compare the indicators developed by their own portfolio businesses to these indicator sets. 49. The tool has elements of an impact rating as proposed by GIIRS. In addition, fund managers within the ADB Inclusive Business Funds program may elect to report in line with GIIRS.. However, this will not be a requirement for the funds or the underlying companies. 50. The proposed ex ante impact assessment tool has similar features to the framework designed for the Inter-American Development Bank’s Opportunities for the Majority (OMJ) funds for establishing indicators and reporting on development impact. The principal differences are that, in the balanced scorecard, the ADB ex-ante impact assessment tool applies some clear ‘yes/no’ decisions to its selection criteria (ie gating rather than rating in some areas). This is because ADB has some clear direction for the types of companies it will want funds to seek for their portfolios. Other differences are that the ADB framework as a whole does not focus as heavily as the OMJ framework on calculations of the economic return (largely because of the practical difficulties that are involved in gathering sufficient data for this calculation); and the ADB framework requires a greater focus on basic environmental social and governance standards than OMJ. 51. The Development Outcome Tracking System (DOTS) used by IFC, has been developed to measure and report on the development impact of commercial businesses where the primary focus is on growth and jobs, and there is less emphasis than in the proposed ADB framework on a business being able to define its ‘route to impact’. It has four components for measurement – financial performance; economic performance; environmental, social and governance (ESG) standards; and private sector development. The review of economic performance includes collection of data of particular relevance to poor people – for example, on connections to basic services and loans to small enterprises. IFC is developing an evaluation strategy that will enable it to focus more closely on the poverty impact of its projects, and ADB will want to continue a dialogue with IFC on this. 52. As with the ADB framework, and as implied by its name, the DOTS system seeks to identify the expected impacts before the investment is made and to track performance against them. It is therefore not simply used as a tool for reporting development impact ex post. The DOTS
system works best for large companies which are able to report on their performance in a wide range of areas and arguably less well for smaller companies which lack the resources to report across the board and need to home in on fewer areas. But IFC has also stated its intention to “offer interested clients support to enhance their results measurement systems so they can use their development results in their own competitive strategies”.11 53. It is conceivable that an ADB Inclusive Business Fund may invest alongside another development finance institution (DFI). Many of these DFIs use DOTS or the Corporate Policy Project Rating Tool (GPR) developed by DEG. There is no inherent contradiction between ADB’s tool and these other approaches, although the emphasis is different. The most important additional element that the ADB tool brings is the articulation of the route to impact and the accompanying requirement for a business to be very explicit about the alignment of social and financial objectives to achieve that impact over the long term.
KEY FEATURES OF THE ADB’S INCLUSIVE BUSINESS IMPACT ASSESSMENT TOOL
The need to balance financial returns and social impact
54. It is common to hear the argument that to achieve social impact a business must be financially viable. This is broadly true but needs some clarification if fund managers are to be able to achieve the right blend of financial and social objectives. It is of course true that, if a business cannot generate financial returns to pay back its capital providers, then it (and/or its capital providers) will ultimately become insolvent. If a company goes out of business, then it can no longer continue to have positive social impact, and the disruption caused by the collapse of a business on its employees, suppliers and customers can be worse than if it had never started. It is also true, at the other end of the spectrum, that a business which achieves high commercial success can use its profits to grow and extend its reach to more employees, suppliers and customers. It is therefore clear that, for a business to have a positive social impact, it must be financially viable in the long run. 55. However, there are reasons why the relationship between financial returns and social impact might not always be straightforward, and a proposed business strategy may not contribute to social impact. The proposed impact assessment tool addresses these issues adequately. (a) Time-frame - Just because a business takes a long time to become financially viable, it does not mean that it is a bad investment, if the providers of capital are willing and able to make that commitment. Patient investors may be prepared to wait for quite some time for a company to achieve profitability, and may be prepared to accept lower-than-market rates of return during that period. This means that a fund manager looking to invest in inclusive business may need to consider relatively long gestation periods before a business becomes profitable. During that period, the fund manager must apply very clear performance targets to indicate whether the business is making timely progress towards financial viability. Otherwise, there is a danger of persisting too long with business models that prove to be unworkable. (b) Externalities - Just because a business is financially viable, employing many people and paying taxes, it does not mean that it is necessarily having a positive social impact. This
See http://www1.ifc.org/wps/wcm/connect/5fd0a7004a57bb0bb346bf8969adcc27/DOTS+Handout+2011.pdf?M OD=AJPERES
is because there are often social and environmental externalities – costs to society and the environment that are not borne by the business. A company may be treating its workers poorly, polluting the river, destroying biodiversity or disrupting communities. It can also be that it makes no contribution at a systemic level to reducing poverty or making the markets and society more inclusive. Over the long term, it is likely that governments will take action to regulate for the worst externalities, and over time consumers may also prefer companies that have better records on social and environmental issues. In addition, many companies recognize that good social and environmental practice can have clear benefit (on motivation of staff, marketing, government support), even in the short term. However, many businesses do still benefit from externalizing social and environmental costs. The Safeguard Policies that ADB and other organizations have in place assess social and environmental risks of an investment, and are designed to ensure that a business cannot make profits at the expense of society and the environment. A fund manager has to ensure that he understands all of the relevant externalities before investment. (c) Distribution of profits - Just because a business is making profits, that does not mean that it will reinvest the profits in expanding the business, extending its reach to new poor and socially excluded customers; , employing more people from the lower income strata, and buying more from local suppliers. The business may choose simply to distribute the profits to its shareholders (often outside the local area). The fund manager has to consider the expectations of co-investors in deciding whether increased profitability will lead to higher impact or simply higher dividends. (d) Strategy for expansion – Just because a business expands on the back of financial success, this may not result in improved social impact. Scaling up a business could result in social (and environmental) impacts that did not occur at its previous size. Also, the business could shift from having a local perspective to having a regional, national or international perspective on suppliers and employees so that the impacts on the poor may actually be reduced. The fund manager may also need to consider the motivations of other investors in that respect – for example, a social entrepreneur is likely to retain the focus on the poor whereas a profit-seeking entrepreneur may simply look for the most profitable solution. 56. The ADB tool therefore requires that fund managers undertake an analysis of how social and financial returns are currently aligned in each proposed investment, and how they will continue to be aligned in the future.
The Five Impact Assessment Steps
57. ADB’s inclusive business ex ante impact assessment tool involves five steps. These five steps will be done after an initial separate financial and institutional due diligence of the investment case shows sufficient profitability and good governance of the possible investment based on the financial hurdle rate of 15% rate of return net. 3.2.1 Step 1 - Eligibility Gate 58. The first step is screening the proposal on its eligibility. This step is to determine whether a project meets the broad social eligibility criteria by answering Yes/No to the questions on the eligibility tab. Table 2 below gives the initial screening stage for the project. 59. The criteria for determining eligibility / screening are as follows
60. The Fund Manager will not have complete answers to all of the questions at this stage. Where there is a clear 'No', and little reason to expect that this will change, the project should be rejected. Where there are areas of uncertainty, these are flagged for discussion with the project sponsor. Where more analysis is required to establish the answer, this is included in the detailed due diligence if the project meets the other basic eligibility criteria. Table 2: Social Eligibility Criteria (when applied to the Mekong Fund for example)
Questions to determine eligibility12 [* A ‘No’ in the in columns 1 to 5 and 13 to 16 disqualifies the company from investment] 1 Eligible Are the proposed investee company’s activities in Vietnam, Laos, geography * Cambodia or in Thailand outside the Bangkok area? Does the project focus on geographies that have been specifically identified as priorities in the market scoping study? 2 Eligible sector Is the project in an eligible sector (ineligible are tobacco, armaments, * pornography)? Does the proposed project focus on the priority sectors that have been identified in the market scoping study? If not in a previously identified area of focus, is there a clear reason why this sector will deliver pro-poor growth? Financial soundness and good business case 3 Robust Do the company’s financial projections show a financial rate of return financial that clears the hurdle rate of [x%], based on conservative assumptions returns * about future growth? 4 Country, Does the project mitigate or consider sector or country risks identified in sector and the market scoping study? Does the inclusive business model market risks considered for the project maximize market opportunities and mitigate are identified key inherent market risks? and managed 5 Clear, wellDoes the proposed investee company have a clear strategy for defined route delivering development impact? to impact 6 Clear and Does the proposed investee company have (or is the company willing to ambitious develop) clear targets for its proposed impacts? targets 7 Scalability Is the business case in realistic terms sufficiently replicable and scalable over 5-10 years. Criteria 8 9 Credible sponsor High-quality strategy Is the sponsor credible? For example, does the sponsor have a solid track record and knowledge of the sector concerned? Does the sponsor have a high-quality strategy for delivery of the project outputs, including the right people, adequate financial resources, appropriate management systems? Where the project is part of a larger company, will it receive adequate focus? Does the proposed investee company combine commercial and development objectives in a way that is aligned with the objectives of the Fund? For example, is inclusive business a fundamental part of the growth strategy? Does the company have processes in place for understanding, managing and monitoring the impacts of its activities on wider society and the environment (beyond its targeted development impact)? Is the proposed project compatible with long-term environmental sustainability - ie does it maintain or enhance (rather than deplete) the local environment and ecosystems at each stage in the production and consumption process?
Alignment of interests between company and Fund Compliance with basic standards on ESG issues Compatibility with long-term sustainability life cycle analysis
More detailed explanation of these questions is in the spreadsheet at Appendix A2.
Criteria Social inclusiveness 13 Inclusive business is at the heart of the proposition * 14 Poor as beneficiaries 15 Properly managed impact on wider stakeholders 16 Systemic solution to poverty
Questions to determine eligibility12 Does the project include the poor as a primary focus?
Does the project include the poor as a primary focus and are the poor (<$3) the majority of project beneficiaries? Is the proposed project compatible with long-term social sustainability ie does it support or enhance relevant local community networks and institutions?
Does the project address key issues of poverty in the region and sector? And does the business concept provide a systemic solution to poverty and better social and economic inclusivenesss of the vulnerable?
3.2.2 Step 2 - Routes to Social Impact (The Smell Test) 61. The second step is a ‘smell test’ to determine the Route to impact and to understand how a company’s strategy achieves a combination of social and financial objectives. Since this Fund is focused on inclusive business and explicitly seeks pro-poor impacts and the creation of company value, a Fund manager must understand, as a priority, the 'Route to impact'. That means the way that the business intends to have an impact on the poor, whether as producers, consumers, employees or distributors. And this route to impact must be reconcilable with financial viability. 62. The Fund manager must therefore identify, in consultation with the project sponsor, the 3-4 primary and secondary ways that the project will achieve impact.. In order to do this, the Fund manager will complete the ‘Route to impact' spreadsheet (see Appendix A2) and identify the route through which the investment will have an impact. This may be a direct impact through providing a product or service, through its supply chain, through job-related opportunities or through improving the quality of the environment, or a combination of these things. There may also be indirect or systemic impacts. 63. the route to social impact must be reconcilable with financial viability Reconciliation of social and financial viability Section 3.2.2. Refers to the notion that but a little more explanation as to how these trade-offs are considered in the evaluation. It is suggested, though not always true, that inclusion comes at the expense of profitability. This may not be the case in some instances — we constantly look for companies where the opposite is true — where inclusion is the pathway to greater profitability. It is important to be cautious here. 64. The fund manager then identifies - the unmet development need that this project is designed to address - the proposed inputs of capital and expertise - the anticipated outputs from the project (for example, how many hospital beds provided, how many new schools built, value of goods purchased from farmers)
the anticipated outcomes arising from those outputs (for example, how many patients treated, how many children literate, how many farmers raised above the poverty line); and the anticipated impacts arising from those outcomes – ie the company’s contribution to meeting the unmet need identified (for example, mortality rates before and after the company started activities but taking account of the impacts of other programs). It may not be possible for the fund manager to quantify this and it may simply be provided as an aspiration.
65. The Fund manager must also articulate on the spreadsheet how a company’s business model aligns social and financial objectives. Ideally, the growth potential of the business should be based on the way it engages with the poor - in other words the business is attractive in commercial terms because it is inclusive. However, the evidence suggests that for the reasons outlined in section 3.1 above there may be - in the short term at least – some conflict between generating positive social impact from reaching the poor and making financial returns. . 66. The tool emphasizes that the social and financial viabilities need to be reconciled. This needs to be considered when analyzing the rite to impact. In a normal case inclusive business are characterized by the fact that inclusion of the poor does not come at the expense of profitability13. The tool - in step 1 – mandates a financial hurdle rate of minimum 15% net for each investment decision. Once this is achieved the fund manager may place in its discussion with the investor higher focus on the social return than on the financial return, and this is then not perceived as trading off financial with social returns. 3.2.3 Step 3 - Scoring 67. Scoring systems are attractive because they can help to determine whether a project delivers enough impact to merit investment and to identify weak areas that need attention. It could be used in other ways - for example to compare one project with another and to compare ex-ante expectations on a specific project with ex-post actuals. Caution is required if the scoring is to be used in this way as there are many ways that the scoring could throw up anomalies. 68. The scoring system developed for the ADB ex ante impact assessment tool therefore has to be applied with care, and it is proposed that the scoring system be used alongside other, more qualitative assessments of the attractiveness of any particular project. Fund managers should treat the scoring as indicative of a company’s strengths and weaknesses and a helpful guide to the attractiveness of each potential investment. 69. Bearing in mind these words of caution, step three involves scoring projects on their anticipated impact. In this step, the project is assessed against some key elements of pro-poor impact to establish whether its impact in that area is expected to be high, medium or low. These elements are – Social impact and inclusiveness - Expected number of direct poor beneficiaries (less than $3/day) - Percentage very poor (<$1.25 / day), poor ($2) and vulnerable ($3) (you may not be able to segment your beneficiaries in this way when applying the business model) - Expected distribution of benefits (to consumers, distributors, producers, employees) - Percentage women
This typically distinguishes IB from other forms of social entrepreneurs, venture philanthropy, and from corporate social responsibility activities.
How each beneficiary will be affected (for example, the expected % change in a producer’s revenue, or the change in price of the basic good provided (and as a % of the average income in the target group), or the % change in a worker’s income - Systemic impact - innovation - Systemic impact – scalability - Distribution and use of profits (this implies a direct correlation between reinvestment in the inclusive business and more impact – this may not be true, a company could invest more in marketing or R&D that could contribute to IB benenefits upstream or downstream in their value chain) - Relevance and critical need for the low income segment the investment addresses in a specific geographical and sector context - Internalization of inclusiveness in the company’s wider business culture - Others Good business case conditions - Alignment of financial and social objectives - Value for money (cost per beneficiary) (not sure this is a relevant indicator) - Management of negative social, environmental or governance impacts - Proven quality of financial performance - Quality of strategy for delivering proposed outcomes - Other 70. These indicators comprise a challenging mix of traditional development indicators, business benefits, distribution aspects, and qualitative criteria. The indicators need to be further prioritized into core and variable indicators. However such prioritization is sector specific and needs to be done by ADB in con junction with the fund manager. In this process a more specific description of the indicators would also be added. 71. The scoring is flexibly based on high-medium-low ranges, and its further applications in numeric assessments. Benchmarks for high, medium and low have been developed by reference to other organisations, but they will need to be refined over time. Also, a brief guide with criteria on how to qualify the indicators and their respective high-medium-low weighting will need to be prepared. For example, for systemic impact, scalability, high might be qualified to mean "the initiative is currently being replicated in multiple geographies and business lines and additional investments are being made to rapidly expand on a national scale." While low might mean, "the initiative is currently in the pilot phase and is only being tested in one business line in a specific geographical context." 72. Depending on ADB's specific strategic priorities, ADB will give each of the impact areas a weighting. The weights will be further discussed with the investment partners and the fund manager. For example, if ADB particularly wants Fund managers to select investments that can be scaled up, or are innovative, or benefit women, then the weighting for a Fund can be designed to take account of those preferences. The spreadsheet at Appendix A2 provides one possible allocation of weightings. 3.2.4 Step 4 - Setting Targets for Systemic Change on Poverty Reduction and Inclusiveness 73. The fourth step involves setting targets. For each project, the Fund manager will need to establish appropriate targets in consultation with the project company, based on its anticipated
route to impact. In part, this will be determined in consultation with the project company, based on their ambitions for their project. However, there will also be an element of benchmarking against similar projects where possible. For each of the 3-4 routes to impact described as primary and secondary in the 'routes to impact' spreadsheet, the company must develop measurable, realistic and time-bound targets with indicators and means of verification. The targets must relate to the key route to impact but it must not be excessively onerous for the business to collect the relevant data. Some of the targets will relate to outputs while others will relate to outcomes where it is possible to determine them. Each investee company should have at least one outcome-related target. All targets needs to be set on a progressive scale by year. 74. For each target, the data-point should be referenced to the IRIS library of indicators. This will ensure that the target definition is in line with industry and will enable benchmarking at a later date. 75. Furthermore, internal company target setting around inclusion will be prioritized in order to promote the internalization of inclusiveness within a company’s DNA.. For example, if a company wants to focus its performance based compensation schemes in part based on performance around inclusion, such company would score higher than another company which doesn’t do so. should we also consider that? This add to the sustainable internalization of inclusion within the company´s DNA 76. Appendix A3 provides an example of target-setting in two companies. 3.2.5 Step 5: Assessing the Fund Manager’s performance 77. Many organisations are trying to address the challenge of tying remuneration in to achievement of social impact rather than on financial performance. There are several issues to be managed, including the following - Sufficiently quantitative data on impact. If the data is subjective, it can be manipulated. The data need to be unambiguous and, if possible, independently verified. - Selecting the right metrics. The success of the scheme obviously depends on ensuring that the performance metrics are focused on the elements that will deliver the most effective outcomes. But this is not easy to determine. - Range of different motivations. For some fund managers driven by a desire to see social impact, remuneration based on social impact may not be necessary and could be unhelpful. - Short-term and longer-term performance. Inclusive business funds may take a longer time to show results than traditional funds. - Combining rewards for financial and social performance. In a performance-related pay structure that is based on the financial profits generated by the fund, it may be in a fund manager’s best financial interest to maximize financial returns at the expense of social returns. That way, the total pay-out is higher and even if the fund manager has no reward for social impact, his total remuneration may be higher. 78. In 2011, the Global Impact Investors Network produced a report giving some examples of social returns being incorporated in manager’s performance-related pay14. These came from Aureos Capital’s Africa Health Fund, Core Innovation Capital and UBS.
Impact-Based Incentive Structures – Aligning fund manager compensation with social and environmental performance, Global Impact Investors Network, December 2011
79. Aureos Capital’s Health Fund has targets for the number of low-income people served by the fund. An annual impact assessment is carried out to assess the incomes of the people served by the fund and therefore performance of the fund against the targets. A base carry rate of 15% is based on financial returns and this can be increased to 30% depending on whether the targets for low-income beneficiaries have been achieved. 80. In Core Innovation Capital, an incentive payment is paid on the basis of an Impact Score. This Impact Score is derived from a combination of an industry score and a portfolio score. The industry score (10% of the Impact Score) is awarded by reference to Core Innovation Capital’s leadership within the industry as a whole (speaking engagements, research papers and so on). The portfolio score (90% of the Impact Score) weighs qualitative factors such as the ability of investments to meet impact objectives, the quality of the systems used to evaluate impact, and compliance with performance reporting requirements. The Impact Score determines the payout on 10% of the carry, while financial performance determines pay-out on the remaining 90% of the carry. The maximum carry is 20% of profits. 81. The UBS performance metrics for social impact are constructed around targets in 5 areas – country and sector (higher scores for a greater proportion of low-income countries and nascent sectors); ESG (higher scores for ESG staff, training and processes); employment (performance against benchmarks of historical data in the relevant countries); sector-specific indicators; and quality of reporting. The scores on these areas are compiled into an Impact Coefficient which can be between 0 and 1. The total bonus available is 10% of profits if a financial hurdle is met. In order to determine the total carry paid to the fund manager, the total bonus is multiplied by the Impact Coefficient. So if the fund manager achieves an Impact Coefficient of 0.8, then the fund manager will be eligible to receive 8% of the available bonus. 82. The following principles should be applied to ADB’s approach - There must be incentives to (a) select investments that have significant pro-poor and inclusiveness impact and (b) seek to maximise that impact post-investment where possible - The incentives to invest in projects with a pro-poor impact must be strong enough to influence a fund manager's decisions. This could be achieved by setting a minimum target social return, and enforcing a reduction in the financial return (say 5%) to the fund manager if this minimum target is not met. - The extent to which ADB wants to incentivise fund managers to achieve pro-poor impact will depend to some extent on the level of risk they are prepared to take in the funds. - Incentivising fund managers to invest in projects with a pro-poor impact will be counterproductive if there is a significant risk that they will not become commercially viable businesses. 83. However, ADB may want to incentivise fund managers to explore pro-poor options that may not - always or immediately - maximise only commercial returns (for the reasons outlined in section 3.1 above). In some cases, failure to achieve an impact may result from factors that are outside the influence of the company concerned. Where possible, these factors should be identified and the fund manager should not be penalised in relation to them.. In terms of its practical application, ADB’s approach could therefore be based on the following84. Nothing without social impact. Ignoring social impact should not under any circumstances be more attractive financially than taking it into account. Therefore achievement of social impact has to be a material factor in the carry paid. It would also be desirable to have a system where no incentive can be paid without a positive social impact. This can be achieved through an Impact Coefficient (as with the example of UBS above), where achievement of social
impact determines the proportion of carry payable. For example, the fund manager could get 10% carry based on its financial performance, and anything between 5 and 15% in addition based on its social performance. Table 3 provides a model how such performance rating of the fund manager could work Table 3:
85. Quantitative metrics where possible. Although qualitative metrics are notoriously challenging to gather, there are enormous advantages of qualitative data in terms of clarity and rigour. The proposed framework is designed to result in a manageable set of metrics. Fund managers will be expected to have a common set of core metrics for all their investee companies and to work with each on selecting 3-4 measurable output or outcome indicators relevant to their own route to impact. This set of generic and tailored indicators can be used to assess performance. 86. Some qualitative metrics are needed, because quantitative metrics cannot tell the whole story. There is some danger that quantitative targets are pursued simply because they are the ones being measured, to the detriment of other aspects that could enhance development impact. In order to avoid this, the performance metrics will need include some qualitative assessment of fund manager performance on social impact. This could perhaps be a description of how the company has worked to organise producers into co-operatives, a description of educational activities undertaken to give people a better understanding of specific health issues, or an account of partnerships forged with NGOs or public sector bodies to enhance the effectiveness of reach of the company’s activities. 87. It is recommended that ADB (in consultation with an independent expert) should assess performance in a number of areas to determine the Impact Coefficient. The Impact Coefficient should then be applied to the maximum compensation, to determine the actual level of
compensation payable. The Impact Coefficient will be made up of 4 components. Each can score up to 0.25. - (1) Investment policy targets – the extent to which the fund manager has met specific objectives set out in the Investment Policy - for example, geographies and sectors - (2) Cross-fund targets on pro-poor reach – the extent to which the Fund has achieved cross-fund impact targets – for example, the % of people served who have an average annual household income less than $x - (3) Achievement of specific targets in individual investments – the extent to which the fund's investee companies have achieved the specific targets identified in step 4 (see section 3.2.4 above). - (4) Quality of reporting and social impact assessment – the extent to which the fund makes an effort to continually improve the quality of its impact reporting and encourages its portfolio companies to do so.
3.3.1 Fund manager reporting to its own Investment Committee 88. Each Fund manager will need to decide how best to incorporate this ex ante impact assessment tool into its own internal reporting processes. Based on common practice within funds, it is anticipated that reporting on the outputs from the tool will be incorporated in the investment and monitoring processes as outlined in the following paragraphs. 89. Initial screening. On initial screening of potential investments by the fund manager’s Investment Committee, the fund manager will use the matrix in section 3.2.1 above to report to the Investment Committee on how the proposed investment meets basic eligibility criteria. The fund manager will also highlight the key areas that have been flagged for more detailed assessment at due diligence. In this report to its Investment Committee, the fund manager may therefore use the matrix to determine the specialist inputs that are required at due diligence. In addition, at this stage the fund manager will provide the Investment Committee with an initial high-level description of the anticipated route to impact. 90. Investment approval. When a fund manager is seeking approval from its own Investment Committee for investment in a particular company after financial and governance due diligence on the one side, and the initial social impact assessment on the other is complete, it is anticipated that the report to the Investment Committee will highlight how the key issues raised by the eligibility matrix have been addressed and resolved. The report to the Investment Committee will also identify areas that will need to be monitored carefully over the life of the investment. And it will also include a section providing detail on the route to impact and the proposed performance targets for the social impact of the investment. 91. Portfolio management and monitoring The Investment Committee will receive regular monitoring updates on the activities of the portfolio companies, including an annual report on each company’s performance against the social impact targets. Whether this should be done on a quarterly or annual basis will depend on the nature of the companies concerned and the challenges involved in gathering data. In any case, the fund manager will require all investee companies to provide immediate information on any incidents of particular concern from a social, environmental or governance perspective, including any incidents that affect the company’s ability to meet its impact targets.
3.3.2 Fund manager reporting to ADB and other impact investors 92. The fund manager should provide an annual report to ADB and other impact investors providing information on the performance of each company in the portfolio against the core metrics, which are likely to be - number of direct beneficiaries, - way of engaging the poor (as consumers, producers, employees) - number of people and poor people benefitting by income group and gender (where feasible) - route to impact systemically on poverty reduction and social inclusion over years - total revenue generated by the business and expected profit - additional capital mobilized the company-specific metrics that each company generated as part of the process of identifying the route to impact (step 2) – for example - number of hospital beds provided - number of children immunised - number of farmers purchased from qualitative indicators, particularly on innovative work done at a systemic or structural level to reach the poor such as - organising producers into co-operatives - health education and awareness programmes - engaging NGOs or relevant public sector bodies as partners in delivery 93. It may also be valuable for the fund manager to report on the overall quality of the systems in place in each investee company to monitor, manage and report on social impact. This will highlight good practice and also any areas of concern where the reporting may be less reliable. It will be a useful source of information on how individual companies are approaching the impact assessment process, who is responsible for this part of the fund manager’s activities and the internal processes (training, Board level scrutiny and so on) that have been put in place. 94. In addition, the fund manager should report immediately to ADB on any incidents of particular concern from a social, environmental or governance perspective, including any incidents that affect the company’s ability to meet its impact targets.
LIMITATIONS OF THE TOOL
95. The tool is limited by the inherent difficulties of measuring social impact outlined in section 2.1 above. In particular, an individual fund manager or investee company will be able to measure its outputs and in many cases will have a metric for its outcomes. But it will probably not be able to undertake a complete assessment of impact from within its own resources because it can be extremely costly to gather all of the relevant data. For example, - baseline studies are needed to understand the starting point in order to assess the impact that a particular company has made; - macroeconomic studies may be needed alongside the microeconomic assessments of individual companies, because many of the impacts can only be established through an assessment of changes that have taken place in the wider economy;
resource-intensive processes such as surveys and one-to-one interviews are needed to gather meaningful data on how companies have actually affected people’s quality of life or livelihoods.
96. If ADB wants to be able to determine the impact of its inclusive business funds in depth, rather than using the data on outcomes to provide an indication of the impact, then it may have to consider allocating resource to these types of evaluation activities. Unless an appropriately high management fee is agreed, it will not be feasible to expect fund managers to pick up all of the associated costs. However it is understood that ADB is setting up a technical assistance facility in parallel to the fund, which could then provide the funding and independent expertise to do more rigorous poverty and social impact assessment.
Inclusive business ex ante impact assessment tool Step 1 - Eligibility This first step is to ensure that a project meets basic eligibility criteria. Fund managers should therefore check that they can answer 'Yes' to the following questions The fund manager comments can be used as narrative for early presentations to the Investment Committee and will need to be analysed in more detail during due diligence Requiring focus at due Fund manager comment diligence?
Info on geographies
Are the proposed investee company’s activities in Vietnam, Laos, Cambodia or in Thailand outside the Bangkok area? Does the project focus on geographies that have been specifically identified as priorities in the market scoping study? Is the project in an eligible sector (ineligible are tobacco, armaments, pornography)? Does the proposed project focus on the priority sectors that have been identified in the market scoping study? If not in a previously identified area of focus, is there a clear reason why this sector will deliver pro-poor growth? Does the project include the poor as a primary focus?
Yes / No
A 'No' response disqualifies the project. The Fund can only invest in the defined regions, should actively seek investments in the geographies identified in the scoping study, and should aim for a balance of geographies. A 'No' response disqualifies the project. The Fund should only invest in projects in eligible sectors, should actively seek investments in the sectors identified in the scoping study and should aim for a balance of different sectors. A 'No' response disqualifies the project. The Fund should invest in projects where the focus is on inclusive business models. A 'No' response disqualifies the project. Businesses need to be commercially viable to achieve continuing impact. So anticipated financial returns must at least be solid. However, the Fund could decide to take a greater financial risk to support an innovative business model. The project proposals should explicitly state how the project will manage any relevant country, sector or market risks that were identified in the market scoping study. The Fund needs to ensure that each investee company clearly defines its anticipated route to impact (see Routes to impact) The Fund needs to ensure that each investee company sets clear and ambitious targets based on its Routes to impact (see Target setting) The Fund needs to be comfortable that the sponsoring individual or company is credible and reputable. The Fund needs to have a sense of whether the sponsor has the resources in place to make the project work in practice
Info on sector(s)
Inclusive business is at the heart of the proposition Robust financial returns
Do the company’s financial projections show a financial rate of return that clears the hurdle rate of [x%], based on conservative assumptions about future growth?
Info on whether the business e greater risk and why this is appropriate for this project
Country, sector and market risks are identified and managed Clear and well-defined route to impact Clear and ambitious targets
Does the project mitigate or consider sector or country risks identified in the market scoping study? Does the inclusive business model considered for the project maximize market opportunities and mitigate key inherent market risks? Does the proposed investee company have a clear strategy for delivering development impact? Does the proposed investee company have (or is the company willing to develop) clear targets for its proposed impacts? Is the sponsor credible? For example, does the sponsor have a solid track record and knowledge of the sector concerned? Does the sponsor have a high-quality strategy for delivery of the project outputs, including the right people, adequate financial resources, appropriate management systems? Where the project is part of a larger company, will it receive adequate focus?
Info on how specific risk s are managed
Info on Route to impact (see s Info on targets (see step 3)
Info on the type of sponsor (multinational company, social enterprise etc), track record et
Alignment of interests between Does the proposed investee company combine commercial and company and Fund development objectives in a way that is aligned with the objectives of the Fund? For example, is inclusive business a fundamental part of the growth strategy? Compliance with basic standards on environmental. social and governance issues Compatibility with long-term sustainability - life cycle analysis Does the company have processes in place for understanding, managing and monitoring the impacts of its activities on wider society and the environment (beyond its targeted development impact)? Is the proposed project compatible with long-term environmental sustainability - ie does it maintain or enhance (rather than deplete) the local environment and ecosystems at each stage in the production and consumption process?
The Fund should seek business models where the two objectives - positive pro-poor impact and commercial success - reinforce each other. Where there is a conflict between the two objectives, these should be explicitly identified. The Fund needs to check compliance with basic ESG to ensure that a company with a positive development impact also has detailed plans in place to manage any potentially negative impacts. The Fund should consider whether the proposed project is compatible with long-term sustainability. For example, it should not depend on the short-term depletion of soils to generate high but unsustainable yields, it should not rely on unsustainable levels of water consumption, carbon emissions should be carefully managed. The Fund should consider the risk that the project will achieve development impact for one group at the expense of another group or create risks to important community structures, including family and other relationships.
Info on how financial and socia objectives complement each o or conflict
Info on any potential negative impacts and how they are to b managed
Info on any areas of the life cy that may cause concern from sustainability perspective
Properly managed impact on wider stakeholders
Is the proposed project compatible with long-term social sustainability - ie does it support or enhance (rather than damage) relevant local community networks and institutions?
Info on the impact that the pro lik ely to have on community structures and family relations and how this will be managed
Inclusive Business ex-ante impact assessment tool Step 2 - Defining the route to impact This second step is to articulate clearly how the proposed project expects to achieve impact. (a) Identify up to 2 primary and 3 secondary routes for direct impact. (b) Describe current unmet need, proposed inputs, anticipated outputs, anticipated outcome and anticipated impact in these areas (c) Identify areas of potential for indirect or systemic impacts. (d) Describe how the project achieves a balance between financial and social objectives.
Poor as Poor as consumer producer Select principal routes to impact on the poor Direct impacts Product or service access to new pro-poor product or service meeting basic needs more affordable existing product or service meeting basic needs product or service reducing vulnerability Supply chain improved access to markets for goods and services produced by the poor access to finance to improve production capability more reliable market for goods and services produced by the poor technical support for low-income producers Job-related opportunities increased employment opportunities improved labor conditions opportunities for skill development, training Gender improved opportunities for women as laborer/producer products have a particularly positive impact on women Quality of environment reduction in pollution improvement in water supply improved soil fertility Indirect / wider systemic impacts potential for scaling up replicability of business model promoting equity support for informal pro-poor networks increased ownership by poor support for enterprise development H/M/L Description of wider systemic impacts. Also a description of how the project achieves an appropriate balance of financial and social impact and achieves sustainability over time. Poor as Poor as laborer distributor Description of current unmet need Inputs Description of outputs of the project Description of anticipated outcomes
Description of anticipated impacts
Inclusive Business ex-ante impact assessment tool Step 2 - Defining the route to impact - Example 1 This is an example of the route to impact for a project designed to provide low-cost maternal healthcare from pregnancy to delivery and beyond. It is taken from the real-life example of LifeSpring Hospitals
Select principal routes to impact on the poor Direct impacts Product access to new pro-poor product or service Primary $X of capital India has one of the highest rates of maternal mortality in the world. With 100,000 pregnancy-related deaths each year and an equal number of women funding suffering from moderate to severe complications due to childbirth, India’s maternal mortality rate is 6 times worse than China’s, 8 times worse than Cuba’s, and 14 times worse than Chile’s. The cost of traditional private hospitals is out of reach of many Indians. Yet, public hospitals’ free services often compromise quality, transparency, efficiency, and attitude towards the customers. Women are increasingly choosing to give birth at a private hospital, but often have to take out loans or sell assets to finance their choice of receiving adequate care. LifeSpring Hospitals offer opportunities for lowerincome women to access affordable, high quality maternal care. LifeSpring’s model uses a market-based approach to achieve sustainability and scale. It utilizes a cross-subsidy model of tiered pricing that enables LifeSpring to charge low prices for the general ward, which makes up 70% of each hospital. LifeSpring’s prices are between 30-50% of prevailing market rates. Knowledge of inclusive business models 200 hospitals by 2015. Provide maternity services to 82,000 women Poor as Poor as consumer producer Poor as Poor as laborer distributor Description of current unmet need Input Description of anticipated project outputs Description of anticipated outcomes
Description of anticipated impa
Reduced maternal an child mortality Women can make a c and are empowered
more affordable existing product or service
Sustainable business model that enables the project to combine financial viability with affordability for the poor
Maternity services offered at a cost lower than alternatives. Financially viable cost structure
Reduced maternal an child mortality Women can make a c and are empowered
product or service reducing vulnerability Income from production improved access to markets for goods and services access to finance to improve production capability more reliable market for goods and services technical support for producers Job-related opportunities increased employment opportunities improved labor conditions opportunities for skill development, training Gender improved opportunities for women as laborer or producer products have a particularly positive impact on women
This project is targeted specifically at maternal care
200 hospitals with affordable maternity care
Provide maternity services to 82,000 women
Reduced maternal an child mortality Women can make a c and are empowered
Quality of environment reduction in pollution improvement in water supply improved soil fertility Indirect / wider systemic impacts potential for scaling up
replicability of business model promoting equity support for informal pro-poor networks increased ownership by poor support for enterprise development
H M L L L
Through its process-driven model, each LifeSpring Hospital is easily replicable in other locations, ensuring scaleability and supporting rapid expansion. The sustainability of the business model emerges from 4 aspects - HIGH THROUGHPUT LifeSpring operates at a much higher volume (outpatient and deliveries) than traditional players, which spreads its fixed costs over a larger number of customers (LifeSpring hospitals complete 100-120 deliveries per month compared to 30-40 in similarly sized hospitals) NO FRILLS MODEL LifeSpring provides services that are required by most of its customers while refraining from making investments in infrastructure required by very few of its customers (for eg. LifeSpring partners with pediatric hospitals for treating neonate requiring intensive care (2-3% of all deliveries) instead of building this infrastructure in-house). This helps LifeSpring in not only keeping its initial capital cost low, but also in reducing operating expenses related wit hiring full time pediatricians and pediatric nurses. LifeSpring hospitals operate in leased premises to keep project costs lower than traditional hospital models. SERVICE SPECIALIZATION LifeSpring’s specialization in core maternal healthcare allows its processes to become standardized and repeatedly performed by its clinical staff. These processes are replicated across all hospitals, facilitating LifeSpring’s expansion. MAXIMISING ASSET UTILISATION LifeSpring hospitals operate in clusters. By setting multiple hospitals in a city, some of the expensive resources (ambulances, back-end operations) may be shared across hospitals
Inclusive Business ex-ante impact assessment tool Step 2 - Defining the route to impact - Example 2 This is an example of the route to impact for a finance project providing working capital loans to small-scale, low-income farmers. It is taken from the real-life example of Root Capital
Select principal routes to impact on the poor Direct impacts Poor as Poor as consumer producer Poor as laborer Poor as distributor Description of current unmet need Inputs Description of outputs Description of anticipated outcome
Product access to new pro-poor product or service more affordable existing product or service product or service reducing vulnerability Income from production improved access to markets for goods and services access to finance to enhance production capability
Most of the rural poor depend on agriculture as their primary $ X m of source of income. According to the World Bank’s 2008 World capital Development Report, economic growth in the agricultural sector funding is twice as effective in reducing poverty as growth in other economic sectors. Access to stable export markets can put farmers and their communities on a path to long-term economic prosperity and environmental sustainability. In turn, access to working capital is critical for small and growing agricultural businesses to fill the gap between planting, harvesting and processing a crop, and receiving payment from buyers. Unfortunately, small rural businesses often lack access to financing. Commercial banks typically do not lend in rural areas, or they demand payment schedules and hard collateral that cash-poor rural businesses are unable to provide. While microfinance addresses the financing needs of individuals and very small businesses, it has less reach in remote farming regions and tends not to serve agricultural businesses that need loans in excess of $25,000. Financial training and support on sustainable practices such as Training minimising water and pesticide use expertise and technical assistance
(1) $320 million in credit to 350 businesses in 30 countries. These businesses represent more than 500,000 small-scale farm households—families that benefit from higher and more stable incomes and improved livelihoods. (2) Maintain a 99 percent repayment rate from borrowers and a 100 percent repayment rate to investors.
Increase in annual household income by an average of $1,290 for 194,000 suppliers
Improved health, e quality of life
more reliable market for goods and services technical support for producers
Financial training for 100 farmer Viable businesses and groups access to further commercial finance results in sustainable economic growth in the local area / region and increased incomes
Improved health, e quality of life Protection of ecos and biodiversity
Job-related opportunities increased employment opportunities improved labor conditions opportunities for skill development, training Gender improved opportunities for women as laborer or producer
Women have limited sources of income but evidence shows that Capital and increasing women's incomes can have a significant impact on the training health and education of their famililies support
Loans to 125,000 women
Increase in annual household income in households where women have power to decide how the income is spent
Improved health an education for famil leading to greater l chances
products have a particularly positive impact on women Quality of environment reduction in pollution improvement in water supply improved soil fertility Indirect / wider systemic impacts potential for scaling up replicability of business model promoting equity support for informal pro-poor networks increased ownership by poor support for enterprise development Negative impacts x
At the close of 2010, Root Capital’s lending program was 80 percent of the way toward operational self-sufficiency. In less than five years, Root Capital will cover the full costs of its core lending program through revenue from loan interest and fees. In the meantime, philanthropic contributions fill the revenue gap. Philanthropy also plays a role in underwriting Root Capital’s financial management training program for rural business leaders. Its strong repayment experience is based on the fact that Root Capital’s investment officers spend a third to half their time visiting clients and talking to them. Their intimate knowledge of their clients allows them to approve new loan applications in four to six weeks and renewals often in days. Another key element is the transfer of risk. Typically, in agricultural trade, small producers bear most of the risk while export companies and retailers reap most of the profits. What is most innovative about Root Capital is the way it has “derisked” an inherently risky business while shifting some of the profits from the big guys in the supply chain to the little guys. In addition to helping small producers add value, which boosts their revenues, the organization secures its loans by arranging fixed-price forward contracts from buyers. This insulates small farmers from the risk of price drops. Root Capital also gets paid back directly from importers and retailers, rather than from its borrowers.
Increased economic activity as small farms grow big enough to access commercial capital and new small-scale farmers access working capital loans
Inclusive business ex ante impact assessment tool Step 3 - Scoring projects A fund manager will generally not make direct comparisons between projects when deciding on which investments to select. If an investment meets the eligibility criteria (step 1) and has a clear route to impact that is relevant in meeting a need (step 2), then it is likely to be a strong candidate for selection. This step 3 is to guide the fund manager in deciding whether the proposed project is likely to achieve sufficient impact to merit investment. This requires the fund manager to review all of the key elements of the project to assess where the project is likely to have high, medium or low impact Where a project has a low rating in all areas, it is unlikely to be attractive proposition The scoring system may be used to decide whether a project is impactful enough for investment, where a project needs to increase its focus, and / or which elements require monitoring The scoring system could be used to compare projects or compre ex ante with ex post scores on any specific project, but some caution will be required if using the scores in this way. Rating L=0, M=1, H=3 Weighting 0 20
Number Rating Expected number of direct beneficiaries Expected distribution of benefits (to consumers, producers, employees) Percentage very poor (<$1.25 / day) Percentage poor and very poor (<$3 per day) Percentage women Value for money (cost per beneficiary) Expected depth of intervention per beneficiary Alignment of financial and social objectives Management of negative social, environmental or governance impacts Proven quality of financial performance Quality of strategy for delivering proposed outcomes Systemic impact - innovation Systemic impact - scalability Other
Low / Medium / High - select from drop-down menus
Rating x weighting = score 0
0 0 0 0 0 0 0 0 0 0 0
15 10 5 5 5 5 5 5 5 10 10
0 0 0 0 0 0 0 0
100 Benchmarks Number of direct beneficiaries Low - fewer than 5,000 Medium - 5,000 - 30,000 High - More than 30,000 Percentage very poor Low - less than 20% Medium - 20% - 60% High - over 60% Percentage poo and very poor Low - less than 20% Medium - 20% - 60% High - over 60% Percentage women Low - less than 20% Medium - 20% - 60% High - over 60% Value for money Alignment of financial and social objectives Low - conflicting objectives, unclear strategy Medium - objectives can be reconciled High - business model explicitly designed to align objectives Management of negative social, environmental or governance impacts Low - weakness in managing ESG risks Medium - some flaws in approach to ESG risks High - ESG risks managed effectively Proven quality of financial performance Low - unproven business model Medium - some concerns about financial projections High - consistent profitability already achieved or guaranteed Quality of strategy for achieving proposed outcomes Low - financial resources, people and systems cause concern Medium - financial resources, people and systems are adequate High - financial resources, people and systems inspire confidence impact - innovation Low - limited innovation Medium - incremental innovation High - disruptive innovation
Systemic Low - cost more than $10,000 per beneficiary Medium - cost between $1,000 and $10,000 per beneficiary High - cost less than $1,000 per beneficiary
Systemic impact - scalability Low - project is specific to local context, limited reach, limited resources Medium - potential for scaling up eg because of universal product, backed by large business High - scaling-up opportunities identified and achievable Expected depth of intervention per beneficiary Low - expected change in income of less than 20% / new products marginally affect well-being Medium - expected change in income of 20-50% per beneficiary / new products have a material impact on well-being High - expected change in income of more than 50% per beneficiary / new products expected to transform life chances
Inclusive Business ex-ante impact assessment tool Step 4 - Setting targets * For each project, the Fund will need to establish appropriate targets in consultation with the project company, based on its anticipated route to impact. In part, this will be determined by the project company itself, based on its ambitions for the project. However, there will also be an element of benchmarking against similar projects where possible. * For each of the 3-4 routes to impact described as primary and seconday in the 'routes to impact' spreadsheet, the company must develop a measurable, realistic and time-bound target * The target must relate to the key route to impact but it must not be excessvely onerous for the business to collect the relevant data * For each target, the data-point can be referenced to the IRIS library of indicators * It may be difficult for a company to collect data on the impacts because of the need for benchmark data and for resource-intensive processes (eg interviews) to obtain qualitative data. The cost of this evaluation of impact may therefore have to be picked up separately and not borne by the business * In most cases, there would not be targets set for the indirect / systemic impacts because of the difficulties of developing ex ante targets and the difficuties of attribution. For example 1 - LifeSpring Hospitals - the targets would be set as follows OUTPUTS Anticipated output Access to new pro-poor product or service Targets Data reference from IRIS library Anticipated outcome
Number of square feet installed - PI 9601 Provide maternity services to 82,000 women Maternity services offered at a cost lower than alternatives. Financially viable cost structure
ROUTE TO IMPACT (from Step 2)
2012 - 10,000 women; 2013 - 20,000 women; 2014 - 40,000 women; 2015 - 82,000 women (1) Cost of product lower than alternatives. [Note benchmark required.] (2) Business profitable by 2015
Data reference from IRIS library
IMPACTS (these will not be used to assess the performance of business but can be tracked as they are the ultimate objective Data reference Anticipated impact Targets from IRIS librar
By 2015 - maternal mortality in the region reduced from x to x; child mortality reduced from x to x. [Note benchmark required.] By 2015 - evidence from interviews with  women in the region on changes to the quality of life resulting from the hospitals
More affordable existing product or service
200 hospitals financed by 2015. 2012 - 10 hospitals; 2013 - 100 hospitals; 2014 - 150 hospitals; 2015 - 200 hospitals Sustainable business model X number of people that enables the project to with access to combine financial viability with affordable quality affordability for the poor maternal healthcare who had no access before
Client individuals provided new access PI 2822. Can be split down into number of Very poor (PI 9835), Low income (PI 7098), Poor (PI 3193), Female (PI 8330)
Number of client visits PI 8783 Number of women client visits - PI 8330 (2) Income before Reduced maternal and donations - FP 3274 child mortaility EBITDA - FP 1657 Women can make a choice and are empowered
Products have a particularly positive impact on women
as for access above
as for access above
For example 2 - Root Capital - the target-setting would be as follows OUTPUTS Anticipated output Access to finance to enhance production capability
(1) $320 million in credit to 350 businesses in 30 countries. These businesses represent more than 500,000 small-scale farm households—families that benefit from higher and more stable incomes and improved livelihoods. (2) Maintain a 99 percent repayment rate from borrowers and a 100 percent repayment rate to investors. Financial training for 100 farmer groups
ROUTE TO IMPACT (from Step 2)
OUTCOMES Data reference from IRIS library Anticipated outcome
(1) Number of debt investments closed PI 8381 Value of loan investments closed PI 5476 (2) Non-performing loans - FP 6373 Increase in annual household income by an average of $1,290 for 194,000 suppliers
(1) Credit advanced 2012 - $x m; 2013 - $ x m etc (2) Repayment rate of 99%
(1) Number of households reached 2012 - x households; 2013 - x households etc (2) Average increase in income per household [Note - benchmark required.]
Data reference from IRIS library
(1) Number of households reached PI 4060 Can be split down into number of Very poor (PI 9835), Low income (PI 7098), Poor (PI 3193), Female (PI 8330) (2) n/a
IMPACTS (these will not be used to assess the performance of business but can be tracked as they are the ultimate objective Data reference Anticipated impact Targets from IRIS librar
Technical support for producers
(1) Training provided for Number of groups farmer groups provided with training 2012 - x groups; PI 7997 2013 - x groups etc
Improved opportunities for women as laborers or producers Loans to 125,000 women
Loans to women 2012 - x women; 2013 - x women etc
Loans as above To Females - PI 8330
Viable businesses and access to further commercial finance results in sustainable economic growth in the local area / region and increased incomes Increase in annual household income in households where women have power to decide how the income is spent
(1) Access to further commercial loans of $ x m (2) X number of farmers running viable agricultural operations
(1) By 2020 - evidence from interviews with  farmers Improved health, in the region on changes to education, quality of life the quality of life resulting Protection of from the agricultural loans ecosystems and (2) Evidence of maintained or biodiversity improved ecosystems and biodiversity
(1) Number of women(1) Number of womanrun households reached - led households reached 2012 - x households; - PI 4060 and Female 2013 - x households etc (PI 8330) (2) Average increase in (2) n/a income per woman-run household [Note benchmark required.]
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