Moving towards a robust support ecosystem for inclusive business in Asia

East Asia and Pacific
South Asia
8. Jun 2016

The 2nd IB Asia Forum, held in Manila in February, was much more than just another conference on inclusive business. This was in large part due to the range of stakeholders that were actively involved in sharing knowledge. There were the practitioners themselves ranging from social entrepreneurs to heads of inclusive business divisions at large corporations. The investors were there – impact investors, commercial banks and the development banks. As were representatives of government, donor organisations and business associations. The importance of the roles that this multitude of actors play in the inclusive business space and indeed the role they should play to build a robust support ecosystem was a theme that ran across a number of sessions. Here I focus on government, investors and commercial banks, and business associations. 

Government

Asia is unique in already having some governments that are actively embracing the inclusive business agenda, setting up accreditation systems and reforming their industry policies to promote inclusive business.  There is a wide array of tools that Government can consider to support inclusive business. 

Incentives can include accreditation, policy alignment, priority purchase agreements, bureaucratic smoothening, etc. There was broad discussion that tax incentives or company subsidies were not necessarily helpful or feasible, although the value of subsidy was highlighted through the case of Jain Irrigation.  Government subsidy to encourage water efficiency has enabled farmers to access highly productive technology, with five million farmers benefiting to date.  Fintech companies are finding the policy environment broadly supportive, though needing to evolve quickly in this sector.  Supportive action by Government was prioritised strongly by Forum participants.   In the participant feedback forms, government was the actor that Forum attendees felt most needed to act to promote inclusive business.  

Regional initiatives play a role in supporting and connecting governments.   The G20 and the APEC both have decided to include inclusive business in their work program. A side event organised by the G20 provided a space for governments to share ideas and challenges on their promotion of the inclusive business agenda and the new G20 platform has a focus on understanding policy contexts that work for inclusive business.

Figure 1: Government can play positive and negative roles in inclusive business

Government interest in Pakistan: The Secretary for Planning in the Government of Punjab (Pakistan) explained how inclusive business could fit into the government’s ambitious growth strategy.  Pakistan faces multiple challenges of the demographic bulge, and needs job creation and educational capacity.   Inclusive business is at a very early stage, but there is potential to promote inclusive business in key growth sectors under the industrial sector plan, to accredit inclusive business, and to bring in abundant Islamic finance to drive it.

Challenges in the policy content: Rocky Mountain Coffee identified five challenges it faces in its smallholder sourcing in Philippines.  Three of these relate to government:

  • Corruption of local government
  • Unwillingness of local government units to accept transparent legal framework
  • Absence of protection mechanism for private sector investment in the countryside.

Investors and Commercial Banks

The roles of development banks, commercial banks, and other investors, such as private equity investors, were compared and contrasted in discussions.   Investments in inclusive business are expected to increase rapidly in the coming years, with more flowing both from impact-oriented equity investors and from commercial banks.  Several reasons could be driving this, including investor needs to diversify, pressure to show more development value, or emerging evidence on financial returns that can be achieved from inclusive business investment.

Growing interest from commercial banks was notable, with 45 bankers attending a full day training, the day before the full Forum. Their important roles in scaling businesses of different sizes, and adapting their processes to inclusive business was highlighted. However, the sum of their investments is still small, given the small number of bankable deals, risk perceptions in the sector, and investment procedures that discourage small size deals.

Despite new deals and new investors coming in, inclusive business is expected to remain - by volume - a niche asset class given the small size of typical deals ($3-$50 million) relative to mainstream banking and investment.  Unitus, for example, reported that their deals are typically around $0.5 - $2 million.  LGT Venture Philanthropy illustrated the small scale of impact investment, and the variety within it.

The role of different types of instruments was discussed. Some, like LGT Venture Philanthropy, can deploy a mix of debt and equity according to investee need.  Others such as Aavishkaar, have different vehicles for different instruments.   All the investors noted that their investees have often also drawn on grants, such as from governments or challenge funds and these are an important part of the ecosystem. DFIs are also critical investors in impact investment funds: Aavishkaar noted that 75% of their funding to date comes from DFIs and non-DFI finance needs to increase.  Consensus was that while instruments will be driven by investor mandates, it is useful for the market to contain a diversity of instruments and mandates within the broad spectrum of impact investment. In addition, as impact investment is still evolving, further iteration of instruments and models is likely.

For all types of investors and bankers, more information and more exchange about appropriate risk assessment and innovative structuring of financing were highlighted as essential.

Business Associations

Business associations are seen as critical for mainstreaming inclusive business in the business sector and building a more supportive ecosystem.   With attention shifting beyond individual firms to the wider business case for inclusive business, there was a strong call for business association to take a prominent role.  While impact investors focus on the firm level, and government focuses on the wider policy context, business associations can focus on the middle of the value chain, where improvements are needed to improve value chains and public goods for inclusive business. Discussion focused on three particular gaps:

  • Business cannot act alone.  The future of inclusive business lies in multi-stakeholder initiatives.  So business networks and associations have a leading role to play in supporting and catalysing these.
  • Discussions about the role of business in society are wider than just inclusive business – human rights and sustainability are key themes too. Business association can help place inclusive business within these wider agendas.
  • Business associations can also help with advocacy and knowledge promotion to support mainstreaming of inclusive business more widely in the business community.

Figure 2: Philippine Business for Social Progress

Philippine Business for Social Progress (PBSP) is an example of a business association that is working with its members to encourage the uptake of inclusive business models. Established in the 1970s, PBSP is a corporate membership organization in the Philippines whose stated objective is to promote business sector commitment to social development. All PBSP members commit one percent of pre-tax net income to social development projects through the organization. In recent years, PBSP has been working to make its members aware of the benefits of inclusive business. PBSP Executive director Rapa Lopa stated at the Forum that has been an uphill task explaining the need for inclusive business to its members and that increasing awareness of the business benefits is necessary.

While great interest of business associations was noted (for example in the Philippines), the actual activities are still small. It was suggested that development institutions and development banks partner more with industry associations on inclusive business.