Making an impact through SMEs
The advent of impact investing is only the most recent milestone for the broad movement to ensure that private enterprise engages the poor in a meaningful way. Just as the microfinance industry has matured, small and medium enterprise development has gained momentum. Investment vehicles and business development services have multiplied as for-profits and non-profits alike try to figure out to best tap this undeserved market. At the same time, development organizations have provided technical training and assistance to move small producers up the value chain and engaged corporations to integrate small producers into their supply chains.
Amidst this flurry of experimentation there is a crucial component missing. Social impact data. Just as the microfinance industry is belatedly working to create standards for social performance reporting, SME services remain a black box. The recent SME initiative at Innovations for Poverty Action is a step in the right direction, but it will take more than a select number of RCTs to learn how social dollars can best be allocated across industries, products, and services. Standards for reporting changes in income, jobs, and net assets of SMEs, as well as the cost of service, would allow donors and social investors to compare estimated social returns as they do financial. If an organization doesn’t invest in estimating its social impact (and its economic cost-effectiveness) with the same seriousness it brings to financial analysis and accounting, it’s not taking a business-like approach to social venture, it’s just doing business. Doing business in underserved markets is itself good, but it is not necessarily the best bang for your philanthropic buck.
In addition, the lack of quality data reporting preempts comparison of the relative social impact of financing, technical assistance, integration into corporate supply chains, etc. Is the social impact of subsidizing a granary and introducing a corporate procurer to a local trade association consistently high? How does the social impact of providing a dollar of working capital to a mid-sized firm compare to providing that same dollar to smallholder farmers in the form of equipment? Surely, there would be a host of analytical challenges (namely estimating the counterfactual) were this data consistently reported, but at this point it is even difficult to ascertain how the approaches differ in terms of orders of magnitude. Unfortunately, there’s little incentive for pioneers to poke their head out and say that they spend $100,000 per job-paying-$1,000 created.
The Global Impact Investing Network has launched the Impact Reporting and Investment Standards, which have been adopted by a number of organizations. At the same time, the standards fail to address the question of impact. Take their fictitious example of Free-to-bee honey, a company that “purchases honey from approximately 6,000 smallholder farmers and operates a packaging facility in rural Eastern China where it produces organic honey for export. F2B purchases exclusively from smallholder farmers and provides technical assistance and group based training to suppliers in order to improve farmers’ honey yields.”
What was the farmers’ income before and after F2B? What was the change in yield? You would not know from IRIS. But the answers to these question are important to understanding the extent to which this venture is social.
Furthermore, if F2B honey was a development initiative, the answers to those questions would be essential to understanding if it should exist.
To conclude, I am confident that for-profit firms will find a way to cost-effectively serve SMEs, just as Compartamos and SKS did so well in microfinance. There most certainly will be economic benefits to the consumers in these underserved markets and likely second-order effects which will never be captured but will be positive nonetheless. At the same time, if mission-driven organizations fail to collect and disseminate cost and impact data from their efforts to catalyze enterprises that create jobs and increase income for the poor there will be a gross misallocation of scarce development dollars to SME services that have little impact on people in need.
As I push this post into the Twittersphere, I’m curious to know which organizations, initiatives, or reports do the best job at reporting the social impact and cost-effectiveness of SME development services? Tweet @ChrisProttas and I will post them here.