The so­cial in­vest­ment rev­o­lu­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

In 1972, dur­ing Richard Nixon’s visit to Bei­jing, Zhou En­lai, the first Premier of the Peo­ple’s Re­pub­lic of China, was asked for his view of the im­pact of the 1789 French Rev­o­lu­tion. “It is too soon to say,” he is said to have replied.

Zhou prob­a­bly mis­un­der­stood the ques­tion (think­ing it re­ferred to the May 1968 French re­volt). But his an­swer could just as eas­ily be ap­plied to the rev­o­lu­tion that has re­cently shaken the world of phi­lan­thropy. The im­pli­ca­tions could be far­reach­ing – but it will take some time be­fore they are fully un­der­stood.

Phi­lan­thropy’s Storm­ing of the Bastille be­gan in Novem­ber, when a group of nearly 30 bil­lion­aires, in­clud­ing Ama­zon’s Jeff Be­zos, Vir­gin’s Richard Branson, and Alibaba’s Jack Ma, an­nounced the for­ma­tion of the Break­through En­ergy Coali­tion. The BEC promised a “new model” that would lev­er­age pub­lic-pri­vate part­ner­ships to mo­bilise in­vest­ment “in truly trans­for­ma­tive en­ergy so­lu­tions for the fu­ture.”

The an­nounce­ment was closely fol­lowed by Mark Zucker­berg and Priscilla Chan’s com­mit­ment to give 99% of their Face­book shares (cur­rently val­ued at some $45 bil­lion) to im­prov­ing the lives of new­borns across the world. They, too, stressed the im­por­tance of “part­ner­ing with gov­ern­ments, non­prof­its, and com­pa­nies.”

The game-chang­ing de­vel­op­ment is the recog­ni­tion of a fund­ing gap – a “col­lec­tive fail­ure” of govern­ment, tra­di­tional phi­lan­thropy, and com­mer­cial in­vestors, in the words of the BEC – that creates “a nearly im­pass­able val­ley of death be­tween promis­ing con­cept and vi­able prod­uct.”

No sin­gle ac­tor – be it a govern­ment, a univer­sity re­search lab­o­ra­tory, an NGO, an en­tre­pre­neur, or a group of in­vestors – can solve to­day’s re­ally big prob­lems alone.

It is a gap seen in ar­eas as di­verse as health care, education, and the fight against cli­mate change.

That is why the Chan Zucker­berg Ini­tia­tive was de­signed for max­i­mum flex­i­bil­ity, al­low­ing funds to be chan­neled into non-prof­its, di­rected into pri­vate in­vest­ments, or used to help in­flu­ence pol­icy de­bates. Sim­i­larly, the BEC has pledged to boost the work of oth­ers by tak­ing “a flex­i­ble ap­proach to early stage, pro­vid­ing seed, an­gel and Se­ries A in­vest­ments, with the ex­pec­ta­tion that once th­ese in­vest­ments are de-risked, tra­di­tional com­mer­cial cap­i­tal will in­vest in the later stages.”

Of course, not even bil­lion­aires can solve the world’s prob­lems on their own. Other stake­hold­ers will need to play a part in the rev­o­lu­tion as well. Tra­di­tional phi­lan­thropies should re­visit their man­dates. And gov­ern­ments must do more to fa­cil­i­tate a greater flow of pri­vate funds into more sus­tain­able in­fra­struc­ture Pol­i­cy­mak­ers could look at tax in­clud­ing cred­its in key ar­eas.

There is an op­por­tu­nity for the fi­nance in­dus­try to par­tic­i­pate, too, through so­called i mpact in­vest­ing, which aims to achieve both so­cial progress and fi­nan­cial re­turns high enough to at­tract main­stream pri­vate in­vestors.

This, of course, is more eas­ily said than done. As Bill Gates, who has given away more money than any­one in the his­tory of the world, put it: “So many things have a so­cial re­turn, but not a fi­nan­cial re­turn. You re­ally have to be care­ful think­ing you can have your cake and eat it.”

That is es­pe­cially true for those who de­sign fi­nan­cial in­stru­ments for i mpact in­vest­ing. Among the most in­no­va­tive are de­vel­op­ment im­pact bonds, in which in­vestors pro­vide fi­nanc­ing for de­vel­op­ment projects, in ex­change for re­turns pro­vided by donors, NGOs, or govern­ment agen­cies if, and only if, the agreed-upon out­comes are achieved.

For ex­am­ple, one such bond is fund­ing an ef­fort to en­roll and keep girls in school in Ra­jasthan, In­dia. De­pend­ing on the pro­gramme’s at­ten­dance rates and suc­cess at im­part­ing nu­mer­acy and lan­guage skills, the Chil­dren’s In­vest­ment Fund Foun­da­tion will pay a re­turn to bond­hold­ers. Pro­grammes like this, it is hoped, will pro­vide a model that can be repli­cated and scaled up else­where.

An­other promis­ing

as­sets. in­cen­tives,


are in­vest­ments in the riski­est stage of the de­vel­op­ment process for new drugs: the phase be­tween ba­sic re­search and hu­man clin­i­cal tri­als, which has tra­di­tion­ally strug­gled to at­tract fund­ing. In­deed, for ev­ery $1 mil­lion dol­lars spent on this part of the process, some $8 mil­lion is spent on ba­sic re­search and an­other $20 mil­lion on clin­i­cal tri­als.

Quar­terly earn­ings cy­cles, real-time pric­ing, and con­stant scru­tiny by share­hold­ers have pushed phar­ma­ceu­ti­cal com­pa­nies to­ward projects with clear, im­me­di­ate pay­offs – at the ex­pense of more spec­u­la­tive, but po­ten­tially trans­for­ma­tional re­search. With in­ter­est rates at record lows in much of the de­vel­oped world, ma­jor play­ers in the fi­nan­cial sys­tem have an op­por­tu­nity – and, I would add, a re­spon­si­bil­ity – to help bridge this gap. In ad­di­tion to pro­vid­ing a ro­bust so­cial im­pact, a pa­tient in­vest­ment strat­egy in this area would also of­fer high long-term fi­nan­cial re­turns.

There is a strong de­sire on the part of many in the fi­nance in­dus­try to make in­vest­ments that im­prove the world. The rev­o­lu­tion in phi­lan­thropy will be truly suc­cess­ful only when we re­al­ize that we do not have to be bil­lion­aires to make a dif­fer­ence.

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