tbli nordic 2015 - maria kronsteiner - impact investing in emerging markets

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Impact Investing in Emerging Markets: What have we learned? Lessons Learned from Results Measurement 16 June, 2015 TBLI Conference Nordic 2015 Copenhagen, Denmark Maria Kronsteiner, Senior Development Effectiveness Specialist, [email protected]

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Page 1: TBLI NORDIC 2015 - Maria Kronsteiner - Impact Investing in Emerging Markets

Impact Investing in Emerging Markets: What have we learned? Lessons Learned from Results Measurement

16 June, 2015 TBLI Conference Nordic 2015 Copenhagen, Denmark Maria Kronsteiner, Senior Development Effectiveness Specialist, [email protected]

Page 2: TBLI NORDIC 2015 - Maria Kronsteiner - Impact Investing in Emerging Markets

www.iic.org

IDB Group Impact Investing Tagging Approach

2

DEVELOPMENT

IMPACT FILTER • Generates social and environmental externalities • Contributes to economic growth and/or private sector development • Complies with ESG criteria

• Follows a specific Impact Investing approach: • Deliberately aims at generating social/environmental impact in

addition to a financial return • Is accountable for both financial and social outcomes

Generates direct/visible social impact by: • Creating income and employment opportunities for BOP/

disadvantaged populations; and/or • Delivering essential products and services to BOP/disadvantaged

populations

SOCIAL IMPACT FILTER

IMPACT INTENTION

FILTER

FINANCIAL VIABILITY

FILTER

•  Project involves a financial instrument (private debt, guarantees or equity investment)

•  Investment is expected to return at least nominal principal

Yes

Yes

Yes

Yes

= DEVELOPMENT FINANCE

= HIGH IMPACT SECTORS

= IMPACT INVESTING

!

"

#

$

Page 3: TBLI NORDIC 2015 - Maria Kronsteiner - Impact Investing in Emerging Markets

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Development Finance $7.2 bn, 517 projects

Generate positive social/environmental externalities

High Impact Sectors $3.8 bn, 311 projects Generate tangible social/

environmental impact

Impact Investments

1.1 bn, 131 projects

Explicit intention to generate and measure social/environm ental

impact

Preliminary Results: Impact Investment within a Development Focused Portfolio

+ ~ 200 projects ~ $39M

The IDB also has a portfolio of more than 200 small impact investing projects ($39M in value) corresponding to the first phase of the Social

Entrepreneurship Program (approved prior to 2006). This program is administered by the MIF

and provides small long-term concessional loans to high-impact social enterprises.

Page 4: TBLI NORDIC 2015 - Maria Kronsteiner - Impact Investing in Emerging Markets

www.iic.org

Inter-American Investment Corporation (IIC): Private Sector Window Dedicated to SMEs %  Member of the Inter-American

Development Bank Group %  Non-sovereign private sector lending %  Mission: promote economic

development by financing small and medium-size enterprises (SMEs)

%  45 member countries are shareholders from the Americas, Europe, Asia/26 borrowing members

%  Based in Washington DC, established in 1984

%  Long-standing partner for impact investments in Latin America and the Caribbean Region

IIC’s PORTFOLIO (2014)

Development-related Assets Portfolio US$ 1.1 billion

Portfolio profile

229 projects in 20 countries + regional

48% of portfolio in smaller countries

68% of total portfolio involves financial services for on-lending to SMEs; 32% is in direct SME lending for agriculture, infrastructure, investment funds etc.

Private Sector Resource mobilization US$ 274 million

SMEs financed 27,000

SMEs benefitted from technical assistance and knowledge transfer (e.g. Sustainability Week training) www.iicsustainabilityweek.org.

8,000

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Development Results Framework: Focus on Measurements and Results

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How

When

Why %  ‘What gets measured gets done’ %  Accountability and Learning %  Strategy

%  Throughout project cycle

%  Development Impact and Additionality Scoring System (DIAS); Result Matrix (sector and cross-cutting indicators)

%  Evaluation: Expanded Supervision Reports (XSR)

Page 6: TBLI NORDIC 2015 - Maria Kronsteiner - Impact Investing in Emerging Markets

Systematic Approach to Selecting Relevant and Sustainable Projects

Criteria Questions Tools Objectives

%  Relevance % Does the project meet country development priorities?

% Does it address market failure?

% DIAS % Provide access to Finance for SMEs

% Provide financing otherwise unavailable

%  Effectiveness % What are the project’s development objectives?

% What are expected results including baselines and targets?

% Results Matrix % Focus on key development indicators (i.e. jobs created, # of SMEs reached; GHG reduced etc.)

%  Efficiency % Do expected financial and economic benefits justify project costs?

% Financial and Economic Analysis

% Portfolio Approach

• Achieve attractive financial and economic returns

%  Sustainability % What are prospects for project sustainability?

% What can be done to mitigate Environmental and Social Risk?

% DIAS % Financial sustainability % Environmental and Social

sustainability assured

%  Additionality % How can we add value (Financial and Non-financial)?

% DIAS % Provide better terms % Mobilize resource % Improve ESG standards

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The DIAS Result Framework

Based on 340 projects approved between 2008-2013 High outcomes are measured as high and medium ratings, or any score from 70% of the maximum performance score.

IIC Strategic Objectives

Project or Company Business

Performance 84%

Contribution to Economic

Development

Environmental & Social Performance

66%* *excludes FIs

Private Sector Development

99%

82%

87%

DEVELOPMENT OUTCOME

ADDITIONALITY 100%

38%

Financial Additionality

Non-Financial Additionality

Percentage of projects with high

outcomes (projected)

DIA

S

Granularity: Indicators by

sector

Emphasis on final

beneficiaries

Gender Strengthen

non-financial additionality

Intrinsic part of the project

cycle

Data collection throughout

project cycle

Project logic improves

Evaluability

Result focus: Baseline and

Targets

Approach Elements

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Balancing Financial Viability and Development Impact

8

Page 9: TBLI NORDIC 2015 - Maria Kronsteiner - Impact Investing in Emerging Markets

What have we Learned from Results Measurement?

“What gets measured gets done” Results measurement is a critical vehicle for continuously improving project design and optimizing development impact

%  Strengthens accountability to stakeholders %  Results indicators must focus on key development objectives with few meaningful indicators %  Overall standardized results measurement system must permit performance comparison by sectors and

aggregation %  Set realistic targets against which performance will be measured %  Quality of data is important %  Agree on reporting requirements with client and preferably in loan agreement %  Offer TA support for improving client capacity to measure results %  Adopt common standards to facilitate comparison with other DFI institutions %  Consider offering incentives for investment officers to develop pipelines of projects and for development

results achieved Financial viability and development impact are strongly correlated: “Doing well by doing good”

%  Financially successful projects allow for higher demonstration effects and provide a basis for replicability

Cooperation between private investors and MDB’s leads to higher development impacts

%  IIC resources are insufficient to meet market needs which places a premium on syndications, privatizations, PPPs, co-investments etc. to generate additional resources

Improving ESG standards leads to long-term sustainability %  Financial performance and ESG performance are correlated %  Makes companies sustainable and more attractive to investors %  Enhances public opinion regarding investments

SMEs can be reached successfully with resulting positive impacts on employment, productivity and ESG standards.

Page 10: TBLI NORDIC 2015 - Maria Kronsteiner - Impact Investing in Emerging Markets

www.iic.org

“IIF” Fund $18M Calvert Foundation

IDB Group

Borrowers

$2M

Equ

ity

%  Innovative facility supported by all private sector windows of the IDBG

%  Calvert pools capital raised from individual investors for impact investment projects

%  BUT, need help developing pipeline

%  Creating a vehicle where the IDB is contributing US$2 million in equity and Calvert is providing US$18million in debt

%  Calvert will co-invest in current and future deals with a weighted average duration of five years

•  Facility is in signing stage

Example: IDB Group-Calvert Fund

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Inter-American Investment Corporation • www.iic.org

Page 12: TBLI NORDIC 2015 - Maria Kronsteiner - Impact Investing in Emerging Markets

ANNEX

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The IIC invests in healthy foods in Mexico

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KUA: A Food and Beverage Producer and Distributor in Mexico %  KUA seeks to invest in healthy

products for Mexican population

Solution: %  US$ 9 million equity investment by

IIC to support company’s growth strategy, which consists in acquisitions and investments to incorporate and consolidate healthy food products

%  The equity investment will support KUA’s portfolio diversification, innovation and healthy promotion

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Rural Costa Rica: SME Forestry Project Led to Improved ESG Standards

Expected Results Actual Results Development

Outcome 5.96 (out of 6.5) Highly Successful

Additionality 3.05 (out of 3.50) Excellent

Improvements in Environmental

Standards

•  IIC required company to obtain Forest Stewardship Council (FSC) certification in Nicaragua and maintain it in Costa Rica ensuring sustainable forestry practices

•  Obtained FSC for the sustainable reforestation model in Nicaragua

•  Maintained FSC in Costa Rican operations •  Implemented Environmental and Social Action

Plan (ESAP)

Improvements in Corporate

Governance

•  IIC required consolidated financial statements for project appraisal

•  IIC engaged with company in the implementation of their Strategic Business Plan

•  Provided consolidated financial statements •  Implemented Strategic Business Plan

Use of Technical Assistance

•  IIC identified need for TA to address succession plans •  IIC provided TA and SME hired consultant to

carry out study on corporate governance

•  Company identified through FINPYME Diagnostics •  US$ 1.5m loan to expand operations in Costa Rica and initiate operations in Nicaragua •  Financial Additionality: Long-term financing (6 years) is rarely available for plantation

activities. Loan allowed SME to make long-term investments sooner and on a larger scale.

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Small Family-Owned Business: A Successful Transition %  US$ 1.2m loan to finance expansion of a manufacturing company in Costa Rica and Panama %  Excellent terms for small company: 9.5 years was not available in the market

Expected Results Actual Results Development

Outcome 4.86 (out of 6.5) Mostly Successful

Additionality 2.85 (out of 3.5) Satisfactory

Improvements in Environmental

and Social Standards

•  Contributes to social integration of former female inmates thereby enhancing the SME’s corporate social responsibility program

•  IIC requires Environmental & Social Action Plan (ESAP), including annual environmental monitoring reports

•  Hired 50 former female inmates at one of their small plants

•  Implemented ESAP and submitted yearly environmental monitoring reports

Improvements in Corporate

Governance

•  IIC requires audited consolidated financial reports

•  In addition, TA was requested for improving corporate governance of family owned business

•  Audited consolidated financial reports improved creditworthiness

•  Company established family protocol and succession plan

Technical Assistance

•  In 2011, during implementation, IO identified need for TA due to operational and financial issues

•  IIC provided technical assistance from the Korean Trust Fund (US$38,500). Deloitte & Touche prepared business plan proposal, including an action plan

“We have greatly benefitted from the assistance we received from

the IIC family governance program, which has resulted in

better communication and understanding between first- and

second-generation family members (…) helping to ensure

its survival.” President of Company

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A Valid Choice for Reaching SMEs: SME bank in Brazil

•  Financial Additionality: A/B Loans (US$200m+) •  IIC helped transform a relatively unknown SME bank to an established player

attracting international funding. Expected Results Actual Results

Development Outcome 3.89 (out of 5) Successful

Additionality 2.2 (out of 3.5) Excellent Number of SMEs financed *(A-loan)

310-350 1,207

SME Loan Amounts US$175,000 US$107,000

Terms to SMEs 18 months 24 months Increase in SME

Portfolio US$630 million (Baseline 2009) US$2.7 billion

Improvements in Environmental

Standards

•  IIC requires that the bank develop an environmental management system

•  IIC requires that subprojects comply with environmental and labor laws and IIC’s E & S standards and exclusion list

•  Implemented environmental management system •  IIC provided bank with environmental training in

2009 •  Several bank officers have been trained BID/

Febraban in 2010 •  Submitted annual environmental reports to IIC

confirming compliance with IIC’s requirements •  Appointed environmental coordinator •  Contracted data collection services to gather

environmental information from clients

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Unlocking the Potential of a Small Port Operator in Argentina %  US$7m to finance expansion of port infrastructure %  Took advantage of favorable market trends and dynamic trade within Mercosur %  Targets largely exceeded in terms of production, sales, employment, foreign-exchange %  Financial Additionality: Due to the worldwide liquidity crisis, IIC’s terms (7 year + 18 months grace period) was not

available in the market. Mobilized additional US$7m from private sources.

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Expected Results Actual Results Development

Outcome 5.45 (out of 6.5) Highly Successful

Additionality 2.6 (out of 3.5) Satisfactory

Employment 776 (Baseline) 1,001

Sales US$51 million (2012 projections) US$100 million (2012)

Improvements in Environmental and Social Standards

Requires Environmental & Social Action Plan

•  Implemented ESAP •  Submitted Annual Environmental Reports

Improvements in Corporate

Governance

•  Recommends international external auditor

•  Recommends improving corporate governance practices, in particular need for written agreement between shareholders

•  Company hires external auditor •  Participated in the IIC Corporate

Governance Seminar (3 people) which resulted in a revision of family constitution.

“Learning about the experiences of other Latin American companies in family governance led me to reflect

on what we could do differently.”

Chairman of the Board