The Future of Investable Social Finance
With the beginnings of a track record to back up its claims (including that much longed-for evidence of successful exits) finance remains a solid bet for impact investors. The future looks positive as a new generation of impact-backed financial service providers hone their skills, diversify their products and discover untapped markets of underserved clients in different parts of the globe.
Many of these customers will be in emerging economies, where demand will be fueled by growing populations needing access to financial services. There will be a continued need for small-scale lending to individuals, such as that provided by groups like Kiva, as well as philanthropically motivated programs to provide vital financial services at the bottom of the pyramid. Increasingly, however, there will be a demand for more sophisticated services and products in emerging economies as populations there urbanize and become more affluent.
These consumers will be joined by successful local companies, which, as they scale up, will need access to more sophisticated services on a bigger scale. Evidence suggests that such companies may still lack access to mainstream banking services, and so will need to rely on specialist finance providers in order to grow and gain access to world markets. Experienced social finance providers, like Root Capital, are already beginning to expand and diversify their offerings to meet the needs of maturing market sectors.
To effectively serve these markets, financial providers will need local knowledge and a good feel for the needs of specific consumer groups in specific locales. Providers with experience in certain markets; for example those that have grown out of philanthropic programs to become self-sustaining for-profit businesses; will be well positioned to use their knowledge to successfully, and profitably, meet client needs. Impact investors should be on the lookout for finance providers with a track record that stretches over years and gives evidence of deep local knowledge and connection.
The developed world also holds growth potential for finance businesses with impact aims. Though countries like the UK and the US are well-served with mainstream providers, many individuals still lack access to affordable credit and other services. Some are forced to rely on expensive payday loan services and other potentially exploitative forms of credit, often compounding their debt problems. Meanwhile, many poor citizens remain “unbanked” for a variety of social and economic reasons. There is scope for alternative finance providers, some working in cooperation with local governments, to provide solutions to these and other finance-related issues.
Home finance should be another area of focus in developed economies. Kicked off by poor practice in mortgage lending, the financial crash saw mainstream lenders backing away from what they saw as risky markets, leaving a gap in service provision to poorer communities that can be filled by specialist financial providers under the umbrella of “community development finance“. Increasing environmental regulation, and the need to bring down energy spending, will drive government-backed home improvement initiatives (such as installing insulation and clean energy systems) and green construction programs, which in turn will require financial facilities to see them through.
Impact investors can expect to see more regulation and oversight in the social finance market in the future, especially in emerging economies. This is good news. Though it may affect profits, oversight will also make finance more attractive for mission-driven investors who want to back positive change. The application of impact metrics and quality ESG standards will be key to distinguishing good financial providers from not-so-good ones, and this will help investors choose the best places to put their capital. In time, the evolution of metrics, rankings and accreditation for social finance companies will help make practice on the ground more effective as the industry matures and grows.
These are just a few examples of what the future may bring for impact-backed financial service providers. In brief, there is great potential for impact investors to get behind innovative businesses bringing the benefits of appropriate, ethical finance to underserved markets. The potential for impact is huge; and the positive results are already being seen in some sectors. Having already come a long way from its humble origins in microlending, the practice of socially responsible finance provision continues to grow in popularity and evolve to meet a wide range of needs. Impact investors have played an important role in its success so far; and there’s no reason why they should stop now.
This blog is part of a three part series on impact investing in finance. Read part one: Why Finance is (and Always Has Been) an Important Sector for Impact Investors. Read part two: A Guide to the Different Forms of Impact-backed Finance.
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