This trend was explained by a group of experts in the field gathered together by the Asian Development Bank for its 2nd Inclusive Business Asia Forum on February 17.
“The distinction we have to make is that there is no trade off between an inclusive business firm’s profits and its social impact. They are businesses first and need to be profitable to succeed just like every other business,” said Eriko Nishikawa, the global head of Inclusive Business at the International Finance Corporation (IFC).
A lot of these successful business just happen to be working in sector where they can also make a measurable impact and share value with employees, such as agriculture, she added.
It proves that inclusive businesses around the world that can be commercially viable and yet have measurable social impact like lifting people out of poverty, Nishikawa emphasized.
The IFC operates as an investor which aims to jumpstart private sector development in countries and recent trends are evidence of the global investors appetite for these new Inclusive business models.
“The return on the inclusive business portfolio vis a vis our whole portfolio is the same for debt and actually slightly better for equity," Nishikawa said.
What’s more, even retail investors have shown significant interest in inclusive businesses.
The IFC issued 200 million Inclusive Business bonds a year and half ago and it was such a success that we will continue to issue it, she said.
Since it was issued by IFC, the risk was very low and so were the returns, but what helped make them so popular with investors was the psychological return they got in that they are investing in something that will help people, she explained.
Commercial banks interested
The IFC is part of the World Bank and so is expected to fund these kind of projects but commercial banks are also beginning to get in on it too, said former Finance Secretary Lito Camacho who now serves as Vice-Chairman of Credit Suisse Asia Pacific.
“Inclusive Business is a growing interest of our clients and as a business it behooves as to get involved in a major way because our clients are asking us to work with them on these projects,” said Camacho.
One attraction of these kind of businesses is that they allow banks to spread their risks. This is especially pertinent given the risks of having too much risk in one kind of asset as revealed by what happened to big banks during the 2008 global financial crisis.
“As an asset class, inclusive businesses are quite unrelated to the risks we take as a financial institution so that we so getting into this asset class provides us real diversification,” Camacho explained.
Another attraction is that the growing sophistication of inclusive businesses have led to the establishment of organizations, like Cambridge Associates, that provides professional benchmark and allows banks to measure risks.
“These institutions provide us with the metrics that allow Credit Suisse as money managers to measure success. We are in in the business of making money for our clients after all so we have to make sure we can get the returns we are expecting”, Camacho explained.
He also pointed out that he came across many studies that show that inclusive businesses in fact generate returns that are no different from returns of hedge or private equity funds.
“I’ve seen a study that shows that 70% of investments made in inclusive businesses have brought returns of 10% northwards, while a large percentage would generate in excess of 20%,” he said.
Room to grow in PH, Southeast Asia
Despite this growing trend, inclusive businesses have been slow to scale in the Philippines and in Southeast Asia, said Bambang Susanto, who serves as ADB Vice President for Knowledge Management and Sustainability.
“In Southeast Asia, inclusive business investments remain nascent due to high risk aversion, a culture where imitation is more widespread than innovation, and an environment in which caring for the poor is done actively by the private sector through philanthropy and CSR,” Susanto said.
A recent ADB study on the Philippines found that there were only about 100 commercially viable inclusive business models across the country. Of the 100, perhaps only 15 were investable, meaning they have sufficient scale for growth and a large enough rate of return to make it interesting to investors.
Susanto added however that the number is growing quickly with the same study estimating that that the number of investable inclusive business will rise from 5 in 2015 to 50 on 2025.
In monetary terms, that investment size is expected to expand from $94 million (P4.47 billion) to $940 million (P44.75 billion).
“Its just a matter of time, it’s a work in progress and we shouldn’t be disappointed and where we in terms of an inclusive business ecosystem considering where we came from,” Camacho said.
Nishikawa for her part said that the trend is clear and cited the success of firms like homegrown Manila Water and India based giant Jain irrigation as signs that point to the future.
Manila Water, a unit of Ayala Corporation, developed a sustainable model of water pricing to suit poor households through flexible financing options and a socialized tariff schemes.
The model allowed them profit as it accrued more customers and has since exported its model throughout Southeast Asia.
Jain irrigation meanwhile empowered farmers by teaching them new irrigation techniques and connecting them to available government subsidies to increase their productivity.
This helped farmers increase their productivity and wages and at the same time allowed the firm to grown into the largest fruit and vegetable processing company in India.
“They are the first movers and they show that Inclusive business not just a fashion and it’s its not going away. In the future inclusivity will be the norm,” she said. – Rappler.com
$1 = P 47.61