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Financing global development: is impact investing an investment model with potential or just current hype?

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Lindenberg, Nannette / Caroline Pöll
Analyzes and statements 13/2015

Bonn: German Development Institute / German Development Institute (DIE)

The analyzes and statements on the financing of global development examine important financial and non-financial measures for realizing the new Sustainable Development Goals (SDGs) and discuss building blocks for a new global framework for development financing.

Financing social services is becoming increasingly difficult. At the same time, private investors are increasingly looking for investment opportunities. Some wealthy people and foundations are satisfied with lower returns if they achieve pressing social goals. These so-called impact-oriented investors play a promising role around the world. The aim of impact investing (SII) is to finance projects, organizations and social enterprises in which, in addition to the financial return, measurable social or ecological results are consciously sought. Impact Bonds (IBs) are an innovative instrument: the so-called Social Impact Bonds (SIBs) or, in development cooperation, the Development Impact Bonds (DIBs). Under this instrument, the intervention in question is pre-financed by private investors and governments and donor countries do not provide funding until the desired result exceeds the otherwise achieved effect.
According to proponents of the BISE, IBs are useful instruments for financing the 2030 Agenda. However, they are still largely untested and pose a number of problems. Aside from questionable or pending reviews, these are mainly limited transferability, the still young market, high transaction costs and barriers for investors. In view of the urgency with which funds for sustainable development have to be raised worldwide, it is worthwhile to take a closer look at the IB or BISE instrument in general and to develop it further. Supporting this approach implies the following:

  • In order to be able to critically assess experiences with pilot projects on IBs, make recommendations and train entrepreneurs and investors, the exchange of data and information must be expanded.

  • Further research is needed in order to better understand how the potential for impact can be increased, different instruments can be used in a development context and private investors can be offered exit options.

  • In order to guarantee success and quality, decision-makers must ensure that clear definitions are formulated, a common system for measuring impact is set up and standardized and binding reporting requirements are established.

  • Development Finance Institutions (DFIs) should be more active in this market in order to promote the use of IBs by providing funds. Governments and / or donor countries need experienced partners who provide start-up capital for initial initiatives and act as intermediaries.