This report intends to be the starting point for a broader regional conversation about investing for impact in Latin America. It will grow as new initiatives are developed, and their learnings are documented and shared.
For now, the following learnings from this report can serve as a reference for those that are interested in beginning or continuing on this journey.
A change of mentality that demands commitment and patience
When an organization decides to move towards an investing for impact approach, it has to consider that this new effort will bring about changes in processes and even in the organization's mentality. Understanding both, that investing does not necessarily mean forfeiting a philanthropic purpose and that providing grants is not being less disciplined, is key.
As already stated, investing for impact does not replace traditional philanthropy or impact investment. It is a model in which strategic philanthropists and social investors can play a more active and long-term role in their interventions. For traditional philanthropic organizations, it can be an opportunity to innovate by having a more sustainable impact. For impact investors, it is an opportunity to use impact first practices and mechanisms, or to find partners that can help build a future pipeline of deals that their investments can take to scale.
Achieving these changes in mentality, both on the side of philanthropists or investors, is not easy and can bring organizations challenges. This is why it is essential to maintain a firm conviction in the higher purpose of achieving a long-term impact.
Investing for impact initiatives require specific qualities like patience and commitment to impact, as these types of efforts take time. Commitment, in turn, is essential in order to offer support that goes beyond financial resources, and that is adjusted in order to best serve SPOs in achieving their objectives.
Taking risks to support the experimentation of new solutions
This implies participating in experimental solutions that have not necessarily been previously tested. This is the case of payment by results mechanisms and, above all, of Social Impact Bonds, where the risk is high, but also the potential for impact. Another example is Fundación Colunga in Chile, which supports initiatives with the potential to influence public policy.
To this end, it is essential to understand how financial instruments can be applied taking into account the level of maturity of each SPO as well as its needs. This study found a growing interest in hybrid financing mechanisms, which provide investors with different tools that adapt to their risk profiles and, above all, to the SPO's needs.
The current COVID-19 crisis has prompted more actors to engage in the ecosystem and has an optimistic attitude about this type of intervention. The value they can generate when closing the inequality gaps and economic recovery is essential. Ultimately, this has allowed some to take greater risks, which would have been unthinkable in other contexts.
Iterate based on lessons learned
This study shows that there are already lessons in the region that can help new actors to start their own journey.
Most of the investing for impact initiatives being executed emerged in the last ten years, and trial and error have been crucial. To this effect, it is important to learn from their success and failures, allowing others to adapt to existing ideas.
Beyond financial support
Non-financial support is one of the differentiating characteristics of investing for impact. Given that the focus lies on achieving impact, this type of support is critical for SPOs.
In order to reduce future challenges, the selection process of SPOs must aim to identify their readiness for receiving support. Errors in the selection process can be costly and de-motivate the development of subsequent initiatives.
In many cases, non-financial support is also about strengthening organizations so that they can receive financial support at a later stage. This can make the selection process longer but will help mitigate risks and ensure greater success in terms of the expected impact.
Also, the processes implemented for non-financial support allows to build trust and generate stronger relationships between capital providers, partners, and SPOs. All this to say, the human component is a critical success factor.
Managing and measuring impact: an essential need
Social initiatives often do not have rigorous practices to measure the impact of their interventions, which is another pillar of investing for impact.
A change of paradigm is fundamental so that the costs of measuring or evaluating are not weighed against allocating more funding to the project itself. Measurement is necessary to support the evidence of the impact being achieved.
Investors for impact usually define a set of impact management and measurement indicators alongside the SPO in order to increase their impact and reduce the risk of impact washing.
Measuring impact and measuring SPO satisfaction are aspects to be improved in the regional ecosystem. While the set of cases typically use follow-up and monitoring mechanisms, rigorous standardized measuring tools or impact evaluation tools are not common, as they are considered expensive. Changing this perception is essential in order to demonstrate more clearly the impact of the undertaken interventions. Similarly, measuring SPO satisfaction is an opportunity for investors for impact to learn in order to ensure success of their initiatives.
The value of partnerships
Impact is greater and sustainable over time if there are partners that co-invest or are willing to support - with patience and commitment - the same cause. In particular, partnerships allow joining forces in order to address issues in a more systemic way.
Defining an exit strategy from the beginning
It is ideal for an exit strategy to be set by the parties from the start. This helps to avoid any false expectations or dissatisfactions that might de-motivate future interventions.
Various exit strategies in the case studies were set based on achieving impact goals, or reaching a certain level of maturity by the SPO. These are interesting alternatives that go beyond exit strategies based on specific time frames.
Opportunities to collaborate with the public sector
The public sector has a crucial role in the investment for impact ecosystem as a policymaker, regulator, and investor.
Payment by results mechanisms or participation in blended finance projects can not only be the first step but can also prompt public institutions to overcome their own challenges, such as annual budget limitations, that make long-term planning difficult.
In this study, we try to underscore the public sector's unique contribution in the investing for impact ecosystem and explore opportunities for intersectoral collaboration to achieve large-scale impact.
Leadership that can engage other actors
To achieve institutional collaboration with common purposes, it is essential to count on leaders inside the organizations that can drive change and who are genuinely committed to bringing other relevant actors into the conversation.
With their presence on boards of directors or advisory councils, when these scenarios are of strategic relevance for organizations, these leaders can make a difference regarding how strategic philanthropy and social investment initiatives are approached. Strategic boards of directors can bring knowledge from other sectors, support difficult decision-making, and advocate effectively for collaboration to ensure their initiative's success.
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