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What Save The Children learned from becoming an impact investor

When Save the Children launched its first impact investment fund in the middle of the COVID-19 pandemic, we knew it was an ambitious step.

But we also knew that without unlocking significant, new sources of funding, the world would struggle to solve its pressing social and humanitarian problems.

Despite the pandemic creating an unfriendly economic environment, we secured cornerstone investments from insurance giant QBE, along with Save the Children, and smaller investments from a range of existing supporters to successfully raise $7.4 million.

Since then, we have deployed almost 50 percent of this capital into six investments: Ngutu College; Inquisitive; Dataro; ThinkMD; Oho and Intellischool.

What we got right

Before COVID, it was estimated that we faced a US$2.5 trillion annual funding gap to meet the Sustainable Development Goals.

Since then, the combined effect of the pandemic, conflict and climate change has made the situation even worse.

While philanthropy and grants will always be critical to Save the Children achieving its mission, we must find large, alternative forms of funding to close this gap.

We are now more confident than ever that impact investing can be a significant source of funding for achieving the sustainable development goals.

Impact investors represent a huge, largely untapped opportunity. It is estimated that the current size of the impact investing market is somewhere between US$500 billion and US$2.3 trillion. This market is continuing to grow despite the broader global economic challenges.

The other thing we got right is our investment hypothesis

We believed that if Save the Children invested in health, education and child protection – the three thematic areas where we have deep technical expertise and global networks – we could help start-ups have much greater social impact, faster, as well as making strong financial returns.

An example of this working in practice is when we recently helped Inquisitive win a $1.95 million grant from the Commonwealth Department of Education, Skills and Employment to help them reach 1,000 schools, with over 100,000 students, in low socio-economic areas of Australia and reduce learning inequalities exacerbated during the pandemic.

The grant also included funding for a Save the Children social enterprise, the Centre for Evidence and Implementation, to conduct a rigorous evaluation of the impact on student learning outcomes. If a private firm is going to receive public money, we need to be confident that taxpayers are enjoying a genuine public good in return.

What we have learned

Prior to launching the fund, we spent 12 months meeting with impact investors and their advisors to understand how to make our fund attractive to them.

Some were sceptical that Save the Children could operate a successful impact investment fund. But we didn’t let that deter us.

Aid organisations like Save the Children are the ‘original’ impact investors. And having worked across the private, public and civil society sectors, I can attest that solving the planet’s most complex social and environmental problems is much harder than generating financial returns.

Other potential investors, including some of Australia’s most established philanthropic institutions, welcomed an impact-first fund manager like Save the Children.

However, despite their initial enthusiasm, we often failed to satisfy their myriad advisors and investment committees. They were happy to make six-figure grants to Save the Children but not six-figure (or even five-figure) investments.

The grant-making and investment management parts of these institutions appeared to inhabit completely separate worlds, even where they had made ambitious public commitments to invest their corpus for impact.

We also found that when push came to shove, very few impact investors were truly impact-first.

While you can make investments at market rates that avoid doing harm and even have a positive impact on society, it’s much harder to address deep social or environmental problems where there is significant market failure, while also meeting the ambitious return hurdles of many venture capitalists.

We have also learned that the quality of impact measurement is highly variable.

The first question we ask entrepreneurs when we meet them is how they measure their impact. At first, many have very limited evidence of the relationship between what they are measuring and the impact they are seeking to achieve. Its perhaps not surprising, then, that 66% of impact investors are concerned about ‘impact washing’.

Improved impact measurement is an area where the whole impact investing community needs to make significant progress.

We also expected that a larger proportion of our portfolio would be debt. This flexibility was intended to allow us to invest in return-generating activities of not-for-profits, who cannot issue equity.

So why haven’t more not-for-profits approached us for debt?

Perhaps the low interest rate environment has allowed them to access cheaper loans elsewhere. If that’s the case, as interest rates rise, we may find more opportunities.

However, I also think the sector’s capacity to structure its activities in a way that allows them to utilise non-philanthropic sources of capital is limited. This challenge is exacerbated by overly conservative boards.

Let’s hope that the growing number of accelerators and incubators supporting the not-for-profit sector are able to help improve capacity and change culture.

Why it matters

Society desperately needs to unlock large, patient chunks of capital that we can use to scale innovations that can solve the biggest social and environmental challenges the planet faces.

And this is why at Save the Children we are just getting started on this journey.

We have recently established Global Ventures to be our in-house team taking innovative finance and new technologies to scale not only in Australia, but around the world.

Over the next 12 months, we hope to launch additional impact investment funds and, like any good start-up, graduate from a minimum viable product to become a sustainable impact-first fund manager, helping to solve some of the most pressing problems facing children.