Gearing up for GIIRS

It’s an exciting time to be part of the emerging impact investment industry. Whether you believe that impact investing is an emerging asset class, or just that we’re witnessing a significant movement of capital by people who are interested in creating social impact alongside financial returns, it’s undeniably a time of great activity. With an emerging field of practice comes the window of opportunity to set standards for years to come.

It’s in that context that we at CASE are excited to announce our new research partnership with B Lab and the Global Impact Investing Rating System (GIIRS). With support from the Rockefeller Foundation (which also funds both B Lab and GIIRS), we are leading an effort to evaluate and create research priorities for the unique data being collected by B Lab and GIIRS. We’re holding two webinars in March (dates and times at end of post) to introduce interested researchers to the project.  Our hope is to engage a broad group of experts in answering critical questions about socially responsible business and impact investing.  The formal announcement is available here but we wanted to provide some additional context though our blog.

So, why is this important?

First, B Corporations represent a unique set of data on what privately-owned pioneering companies do to create social impact.

B Corporations represent nearly 380 privately-held companies that have filled out a detailed (and transparent) survey on their practices and intentions around social and environmental impact and have exceeded a threshold score, qualifying them to be labeled a “B Corporation”.  They have agreed to do other things as well, namely take stakeholder interests into account at the board level and document that in their articles of incorporation, so it's not a low bar to become a B Corporation.

The result of this survey is a unique data set. There are hundreds of studies on corporate social responsibility, sustainable companies and employee engagement. But how many of them are based on broad sets of data on the social impact practices of privately-owned companies?  As far as we can tell, there aren't any. Private companies have had little incentive to share impact practices beyond the anecdotal or in their own private reporting.  And yet structurally private companies have the flexibility to be pioneering in what they do to create social impact. Without public shareholders to please, CEOs and their teams can experiment with many things, both inside and outside of their companies. Policymakers in at least 10 states in the US think so too, as they consider creating legislation mirroring that passed in Maryland and Vermont to allow companies to incorporate as “Benefit Corporations.” This emerging group is garnering some real attention.

We think all sorts of new questions can be asked about how companies who aim to be impactful carry out their objectives, how they compare to other companies, and to each other. Do smaller companies with missions that are highly aligned with their product end up with more satisfied customers? Do certified B Corporations really create more and better impact than non-certified companies? From employee governance to community-building to profit donating to sustainability strategies to creating core beneficial impacts as part of how they do business: there will be many new insights.

Second, the new data from GIIRS gives us the opportunity to set standards and evaluate what impact means and should mean for the entire field of impact investing.

As a 10 year researcher on social entrepreneurship and impact investing, I can tell you this is, quite frankly, one of the most interesting emerging sets of data I’ve ever seen.  GIIRS is a rating system for impact investing funds and companies. It allows companies to fill out an online survey on their impact goals and practices and scores their answers. Funds fill out the survey and ask their portfolio of investment companies to do the same. The funds are rated for both their own actions and those of their portfolio.

GIIRS then creates a multi-star rating (think Morningstar but for impact, not finances) for each fund or company. GIIRS benchmarks practices in key areas and over time, will be able to show how a fund or company performs socially compared to its peers. GIIRS will also include some basic financial info that I believe will be extremely important to researchers. Will valuations of the companies correlate with certain kinds of impact practices? Will highly-rated GIIRS companies have more financially successful exits? The questions become juicy rather quickly. Deloitte clearly thinks so too – they’ve come on board as GIIRS’ assurance partner (it would be auditing, but since the data is not primarily financial, it’s assurance), working to verify survey answers as a regular part of the GIIRS review process.

That brings us to our second important question: why are we organizing research priorities and not just doing some research on this data ourselves?

The answer is that the data collection instrument is still in process. We have the chance to influence the kinds of questions that are asked and the kind of data that ultimately becomes built in to these new databases for an emerging field. We’re trying to engage a broad group of researchers from different fields of inquiry to help us improve the survey instruments as they are currently being tested and refined in the field. The GIIRS staff is about to launch its 30 country world tour to accomplish its Beta test and the GIIRS survey itself will be updated and versioned on a regular basis. We’ll have data from over 200 GIIRS-rated companies in less than a year – companies working in microfinance, energy, agriculture, health, housing, entrepreneurship and economic development, etc. – some of the most interesting players in the global marketplace for social entrepreneurship, and the funds that invest in them.

We know there are some very real challenges here from an academic research point of view – the lack of easy counterfactual data, the self-selection involved in people choosing to fill out online surveys, and a question structure that has been almost entirely geared to ease of use, not data validity or reliability. Still, we think the potential is great to find ways around these and we look forward to working with interested experts from academia, consulting firms and other professional groups to do so.

If you’re interested in joining our webinars or our mailing list on this topic, email catherine.h.clark@duke.edu. We look forward to working together to determine what actually works and what impacts are created by some of the  most pioneering impact investment funds and companies in the world.

Webinar times:
March 11, 12-2pm EST
March 22, 2-4pm EST

Download the formal announcement here

An Exciting Week to Teach Microfinance

Yesterday, I started off my MBA elective course on Social Entrepreneurship with a discussion of Grameen Bank and microfinance. I've taught this material for over 10 years, but this week it had an interesting twist. From the recent events in Andhra Pradesh in India, to highly-publicized criticisms of Mohammed Yunus, the Nobel-Prize winning founder of Grameen, to his being sued for libel, writing an editorial in the NY Times last week,  and being released two days ago on bail, we had a lot of new layers to discuss, some political and some structural. Still, David Bornstein's inspiring story of one man figuring out how to use credit to give poor people the power to lift themselves out of poverty does not disappoint.

Most interesting to me: is the commercialization of microfinance a good thing or a bad thing?  Should there be a limit on how much profit investors can reap as returns from lending to the poor? The typical interest rate at Grameen has been 20%, and some microfinance institutions (MFIs) who have recently IPO'd have rates as high as 45%. As these newly commercialized MFIs scale, where do these big profits come from? Either economies of scale in operations (lending more for less cost, e.g., by getting money at a lower cost of capital, or having administrative systems that can handle billions as well as thousands of loans), or in higher interest rates.  Is the latter morally acceptable? If not, what do you do about it? And it appears that many of those MFIs who are the most profitable have also cut down on educational services that are costly but are also proven by nearly all the research literature (see Marc Epstein's fabulous chapter in the recent CASE book, Scaling Social Impact) to be the deciding factor in microfinance's ability to truly impact borrowers' economic well-being.

The issue, I predict, will be one that will rear up again as field of impact investing grows: how much profit is morally acceptable for investors/owners to keep? To be sure,  it's these investors who are taking the biggest risks, putting up the initial funds to create bottom of the pyramid marketplaces that scale solutions to poverty, agriculture, health, energy and education. But will other communities, like Andhra Pradesh, realize that this means that while a little money comes in at first, a great deal more goes out? Will impact investing by multinationals or developed world investors be seen as the new colonialism?  I think we're just getting a taste of what's to come. Some backlash, and perhaps some very worthy discussions about how best to balance local control and impact with the power of markets.

Yunus, of course, has been preaching for years that ownership, especially by the target beneficiaries themselves (Grameen is nearly 97% owned by its borrowers today, and that is under recent threat as well, according to Nicholas Kristof),  is the key to for-profit social business ventures being morally acceptable. But I fear we're so far away from that path and model in the capital markets today that it's an argument that actually hinders the necessary discussion on this point. We're going to have investors, we're going to use markets to scale solutions - what are the guideposts to doing it fairly as well as effectively?

Yunus is pressing for regulation, and this morning, I learned through my twitter feeds that there are some new regulations pending in India. Some seem reasonable, like checking the credit history of your borrowers so they are not caught in an endless cycle of multiple loans from different lenders, others seem as if they will take a while to shake out, like capping the spread between the rate of capital and the interest rate charged to borrowers.

We ended with a quick discussion of Kiva, its business model and its role in the larger ecosytem of microfinance. Through my students' insightful comments, we realized that Kiva's largest social value may be in creating access for MFIs to larger pools of capital, without interfering with the ownership or financial structure of those MFIs. Kiva, as we've discovered at CASE in our explorations of various business models used by social entrepreneurs, is unique as a fee-less broker of microfinance. Most brokers take fees. Kiva doesn't. They connect hundreds of thousands of lenders, investing in increments of as little as $25, to MFIs, allowing the MFIs to scale their lending pools without any of the tensions we'd been discussing during the whole class session about who needs to get paid back or where that intermediary's fee shakes out in terms of its effect on the ultimate interest rate charged to the borrower. It was a new insight for me.


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