An Ecosystem Approach in Impact Investing to Advance Social Impact and Commercially Viable Products and Services

There are different approaches to impact investing, each with their own advantages and limitations. Two of the most common approaches are the:

• Human rights-based approach; and
• Generalised or “one size fits all” approach

In this article we discuss both approaches, and compare them to the ecosystem approach –a third option? which has particular relevance to advancing social change in the agricultural sector. The ecosystem approach focuses on understanding the needs of local SMEs to provide financially inclusive solutions.?

Let’s discuss each of the approaches in turn.?

Human rights-based approach?

The human rights-based approach is commonly employed by international development or humanitarian practitioners. This approach is adopted to design a charitable? program? or to create humanitarian programs.?

The human rights-based approach has many positives: it focuses on promoting citizenship amongst marginalised groups, ensuring marginalised groups have access to health care, water and sanitation, and provides these groups an opportunity to gain an understanding of their legal rights. However, the strong focus on human rights can place a variety of burdens on public institutions. In addition, the human rights-based approach may be relatively inflexible or not highly receptive, as they often lead to solutions requiring aid and external support. For example, the smallholder farmers may be provided with organic farming training, however, they may not have the opportunity to implement the knowledge they have gained due to lack of market access or due to time constraints and or availability of labour; compared to traditional farming, organic farming is labour intensive and time consuming.

Generalised or “one size fits all” approach

Development practitioners may adopt a different approach when seeking to create positive social impact –a generalised or “one size fits all” approach focused on financing people at the bottom of the income pyramid. This approach can sometimes be inflexible. Under this approach, one “cookie cutter”? is used in programs with the intention to provide solutions, but without the detailed consideration of the specific community circumstances i.e. context. The positives of this approach are that it features all the basic requirements of a typical social impact program with minimal need for adaptation. However, this also means that not all key stakeholders may become involved and opportunities may be overlooked. For example, programs can be set up quickly and efficiently, but smallholder farmers –a key stakeholder who supply raw materials and may be able to offer valuable insights– may not become involved, in cases where the standard procedure is to only consult with the middle-person on a project.?

Ecosystem approach?

The ecosystems approach borrows from the positives of both the human rights-based approach and the generalised approach. In addition, it focuses on stakeholder consultation along the value chain, and also uses a market development approach to consult with stakeholders, particularly with those in the private sector including the smallholder farmers. Self-sustainability is also an important element. By focusing on market development whilst also considering stakeholders within the ecosystems, this approach opens doors to a more sustainable path to economic empowerment. For instance, it is crucial to understand the needs of local SMEs in order to provide financially inclusive and sustainable solutions. Impact investing practitioners that incorporate an ecosystems approach can utilise the advantages of the aforementioned approaches while also limiting the negative impacts (see the DO NO HARM Framework). As a way to promote self-sustainability and be inclusive of all stakeholders, the ecosystem approach utilises capacity building and boosting market development to involve relevant stakeholders and to avoid leaving behind marginalised groups who may have limited advocacy.

In involving stakeholders, it is essential to understand the context with which the community is operating within. Impact investing practitioners must take into consideration the needs of the community being served, the area or regions, and seek to include all stakeholders within an ecosystem. Relying on the private sector where public institutions are limited is one way of integrating context. While acknowledging the importance of a contextual approach, it is important to understand the value of market based approach. Incorporating a more holistic ecosystem approach is critical in providing sustainable solutions to the SMEs and their respective communities.?

It is also essential to understand the positive role that impact investing plays in providing sustainable solutions to people at the bottom of the income pyramid and to also understand where a social issue requires commercial viability. For instance, entrepreneurial innovation is significant because it can be a way to solve social issues whilst also providing a solution that is profitable and/or can be scaled. Impact investing could provide capital to businesses with the view that they will eventually become profitable, and therefore provide sustainable solutions to the community it aims to serve.?

When seeking to alleviate poverty within this system, understanding each step in the value chain is paramount before implementing solutions. At a deeper level, an agricultural value chain ecosystem starts with input suppliers who provide the seeds, tools, fertilisers and pesticides to farmers. Farmers (of various sizes) then produce the commodity (e.g. a protein like meat or fish, or food like chilli or maize) which the traders then buy to on-sell to food processors and off takers - or in some cases the processors then sell to off takers.?

An ecosystem based approach is holistic and able to study all actors within a value chain and ascertain the needs of each target to better implement solutions to the social issue to be solved. In some scenarios, the farmers may receive only a small portion of the profit in the value chain, while the processors and off takers receive a substantially higher portion and? therefore, poverty alleviation programs need to be targeted towards farmers. With this in mind, program designers can focus on providing commercial solutions? to farmers. As an example of a commercial solution, a program may seek to improve farmer output, and after investigation will have found that farmers may lack the collateral required to obtain loans to expand their operations. Ultimately, the ecosystems is approach differs from the approaches outlined above (i.e., the human-rights based approach, and a more generic and broad approach) in that it identifies the needs of the actors in the value-chain, targets the program, monitors the impact of the initiative and can be scaled up in other regions thus multiplying the impact of the program. Furthermore, by incorporating the private sector in the program, a commercially viable solution can be developed which allows for a sustainable solution to be implemented for that community or group, which can also ensure scalability.?

Case examples of the ecosystem approach?

Catholic Mission Sewing School in Chennai-India

Catholic Mission designs and runs a sustainable sewing training program for underprivileged girls in Chennai, but only if there is demand from garment factories (as such it is driven by the market). Once they receive demand from workers, the sisters start recruiting young female community members and train them in sewing and tailoring. The sewing school has received a training licence from the local government.

CROWDE - Chilli Agri Value Chain

Reducing Food Wastage in the Chilli Agricultural Value Chain

To be able to feed Indonesia’s 280 million inhabitants in 2030, McKinsey estimates that agricultural productivity needs to increase by 60%. This can be done by increasing yields, but can also be achieved by reducing post-harvest losses and by improving storage, packaging, processing and transportation logistics to the main cities and harbours. Indonesia records the 2nd largest food waste in the world, wasting 300 kg of food per person per year and an estimated amount of 50%-70% of harvested crops never make it to markets.? These inefficiencies in the agricultural sector, alongside the high cost of food, pose a significant issue and constitute the main reason why 70-90 million Indonesians will remain below the poverty line in 2030.

Training Women in Food Processing

Through a DFAT-funded Gender Lens Investing partnership with Good Return, CROWDE aims to advance women’s participation in agricultural value chains. Through CROWDE’s ‘field needs’ assessment in Sukabumi (West Java), they have identified value-added training for women farmers to reduce food wastage and increase productivity in the chilli agricultural value chain. CROWDE helps women farmers benefit from the sale of second-grade chilli, which is then turned into chilli paste and powder. CROWDE then assists women farmers to complete the product’s life cycle from farm to markets: through CROWDE's packaging training, the chilli products are prepared for markets and are now available in local modern retailers. CROWDE further aims to replicate this gender-lens model in their 31 outreach centres in Indonesia to provide further sustainable agribusiness opportunities for Indonesian women farmers.?

Authors:

Fifi Rashando?- Impact Investment Manager

Fifi manages Good Return’s gender-lens investment team, business advisory support, and stakeholder engagement to support agricultural value chain financing and build inclusive economies in the Asia-Pacific region. Holding a Strategic Leadership for Inclusive Finance certificate from Harvard Business School and an MBA from University of Wollongong in Australia, she has over 20 years of management and consulting experience in inclusive finance, impact investment, international development and humanitarian sectors. She has contributed towards the growth of reputable organisations to build inclusive economies, ensuring participation of marginalised people including women and people with disabilities. She also serves as Executive Committee Member of Australian Disability and Development Consortium and Non-Executive Director of the Leprosy Mission Australia.?LinkedIn

Jenny Collins- Research Assistant

Jenny holds a master’s degree in International Development Practice and has a particular interest in workplace gender analysis. Jenny works as a legal professional and has expertise in workplace relations, human resources and governance/policy. Jenny has many years of experience in research, writing and analytical skills working across many sectors including education, contract services and corporate. At Good Return, Jenny is part of the impact investment team.?LinkedIn

Mathew De Corrado - Impact Investment Research Assistant

Mathew is an experienced financial services professional with a large portion of his career spent working in business development across the investment management industry. Mathew has also worked as an industry analyst at IBIS World, and as a broker for the environmental services firm TFS Green. Mathew holds a Bachelor of Commerce (Finance) and a Bachelor of Arts (Mandarin) from Deakin University. At Good Return, Mathew is part of the Impact Investment team. LinkedIn