Impact investing is gaining momentum worldwide. Seen as the future of double bottom-line investing – which seeks to measure investment performance in term of positive social impact, as well as fiscal performance, many believe this approach has the potential to leverage trillions in private capital to address social causes. Wealth holders are increasingly looking for ways to direct their resources and business acumen toward initiatives that generate financial returns and a positive impact at the same time, what we call “doing well by doing good.”
And while impact investing is still an evolving field, social entrepreneurial organizations such as Root Capital and Acumen Fund are paving the way with innovative finance models to accelerate progress toward alleviating poverty. We know there will never be enough philanthropy to tackle pervasive challenges such as the global water crisis that continue to cripple poor communities economically. The World Health Organization estimates that it will cost $200 billion in capital annually to solve the global water crisis over five years, and maintain the infrastructure. Currently, annual investments combined amount to roughly $9 billion, far short of what is needed to solve this crisis. Combining innovative financing, such as impact investing, with smart philanthropy presents one of the greatest opportunities to optimize social returns per philanthropic dollar invested, and scale solutions.
Today, there is a $12 billion demand globally among families at the base of the economic pyramid (BOP) for access to microfinance to meet their water supply and sanitation (WSS) needs. This is a huge market waiting to be discovered. Water.org’s WaterCredit model strives to tap into this demand, and enable local microfinance institutions (MFIs) to provide small and affordable loans to families at the BOP for WSS needs. To date, Water.org has directed $10.9 million in philanthropic capital toward its 51 MFI partners to help them jumpstart WaterCredit loan portfolios. As a result, these MFIs have attracted more than $100 million in commercial and social investment capital to provide WaterCredit loans. That’s $100 million Water.org did not need to fundraise from philanthropic supporters.
The impact? At a macro-level, this means this model leverages philanthropic resources to attract much larger pools of investment capital to address WSS needs at the BOP. At the household level, this means a family living in an urban slum in India, for instance, can participate as a customer, and pay for the construction of a toilet or water connection at home. Globally, Water.org has reached 2 million people through WaterCredit.
While this progress is encouraging, ongoing investment capital constraints for WSS lending at the BOP in key markets such as India still represent a significant barrier for scale. Our local MFI partners repeatedly emphasize how much more they could accomplish if they had access to greater and more reliable sources of social investment capital to meet the growing demand for WaterCredit. In its quest to continue attracting more capital to the water sector, Water.org saw this challenge as a unique opportunity to develop and launch the WaterCredit Investment Fund.
Building on the achievements of WaterCredit, this new $12 million Fund will connect, for the first time, social impact investors in the US and Europe directly with WSS needs at the BOP in India. Supporting Water.org’s highest performing MFI partners in this country, this Fund will provide a targeted, annual pre-tax return to investors of 2 percent. And while this is a modest financial return, the potential for social impact returns is tremendous, particularly as the Fund will help scale a proven model – WaterCredit.
Moreover, Water.org has identified $36 million in demand among just a handful of MFI partners in India alone for access to lower cost capital to scale their WaterCredit loan portfolios. Just imagine how much larger that demand becomes when looking at capital needs for WSS lending across India, and around the globe. Water.org plans to build on the lessons learned and achievements of its pilot WaterCredit Investment Fund to address these larger capital needs.
How is Water.org bringing this effort to life? By continuing to garner the support of leading strategic funding partners that have a strong appetite for innovation and embrace risk, and see the role catalytic philanthropy and impact investing can – together – play in achieving systemic change that works for the poor. Over the past few years, Water.org has secured $40 million in commitments from a growing community of change-makers and visionaries such as the IKEA Foundation, PepsiCo Foundation, The MasterCard Foundation and Caterpillar Foundation for its WaterCredit programs.
And while impact investing is still a new “tool in the toolbox” that needs time to develop, it is one that presents a great potential for creating a win-win-win situation – for the investors, the implementers and the recipients of impact. What better reason for Water.org to venture into this field in pursuit of scaling what already works?