What Is “Innovative Finance”?
By Will Hackman (MPP’18)
What Is “Innovative Finance”? As a Global Social Enterprise Initiative student leader and public policy graduate student this was my question going into a breakfast panel discussion October 11 hosted by the Beeck Center for Social Impact and Innovation. The “Designing Innovative Finance Mechanisms for Scaling Impact” panel convened CEOs, entrepreneurs, leaders in fund management, and international development experts who discussed how to invest with “impact” in order to meet global challenges like climate change, energy, poverty, and social inequality. Here’s some of what I learned.
Accelerating solutions for international development challenges requires innovative thinking and new forms of finance. The old models of foreign assistance aren’t cutting it. There are large funding gaps in meeting sustainable development goals that the public sector doesn’t have the capacity to fill. We need to look to the private sector to facilitate the new forms of investment needed.
The possibilities for innovation in finance are endless. New financial technologies (FinTech) like mobile payment applications, cryptocurrencies like Bitcoin, and Blockchain technology are revolutionizing how goods and services trade hands around the world. They can help provide a “pay-as-you-go” program to a household in Sub-Saharan Africa that can’t afford the entire up-front payment of a new home-solar system that replaces their dangerous cookstoves and kerosene lamps (which kill thousands every day). They can provide identification services via a mobile thumbprint or retina scanner that replaces burdensome paperwork (ID requirements are a huge impediment to financial inclusion in developing countries). They can facilitate humanitarian assistance in times of emergency. These innovative new financial products are helping to address many traditional investment concerns that banks and other institutional investors faced when responding to development needs.
The tides are turning and “Impact Investing” is playing a key role. Institutional investors are more and more interested in investing in the developing world. The field of impact investing, a relatively new spin on leveraging investment toward making a measurable impact against social or environmental challenges, has helped catalyze momentum. Large funds now offer impact investment opportunities. Pooled investors in the United States are making direct loans to small and mid-size ventures in emerging markets, supporting their impact. Mitigating risk for these investments has always been a major challenge. But FinTech is providing new opportunities and linking to the market a previously excluded consumer base of hundreds of millions of people in rural communities. Renewable energy is now more profitable in some places than traditional fossil fuels. Investment strategies large and small have changed.
The right kind of public policy is critical. There is a critical role that governments can play in either creating new policies that incentivize the market or reducing existing burdensome regulations that stifle growth. How can public institutions mitigate investment risk through guaranteed loan programs, grants, incentives, and by providing technical expertise, for instance? How can governments support mobile money infrastructure through reducing tax burdens? There is an important conversation about the role of the public sector in supporting entrepreneurs who come up with innovative new ideas but have trouble accessing debt financing from banks. Public policy can also help to educate investors and consumers alike by providing data that ventures need. In order to be profitable, businesses need to start with a clearly defined understanding of the problem they are trying to address as well as the circumstances behind why the market hasn’t met this need already. Governments can help provide the facts that investors take to create good opportunities and help ensure that the right financial tools are available. Not everything is an investment possibility for the market, to be fair. But this type of public-private cooperation can help to create blended financial solutions that unlock capital where it makes sense. This cooperation is also needed to address the problem of scaling investments up in order to fully bridge the gap between where we are now and where we need to be in solving many global challenges.
As a policy student, this panel discussion was fascinating and illuminating for me. The main take-aways that I was left with were that public dollars won’t go far enough in addressing global social and environmental problems at scale; that new financial tools and technologies are being employed to take the market where it hasn't gone before; and that innovative financial mechanisms are subverting the institutional reluctance of some governments and banks that still have a “we've never done this before” mentality. The unknown means risk. But that should never ever end the conversation.