- GIIN: What is the Inter-American Development Bank Group (IDB Group)?
- Luis Alberto Moreno:
The Inter-American Development Bank was established in 1959 and is the oldest and the largest multilateral lender for Latin America and the Caribbean with 48 member countries, of which 26 are borrowing members in Latin America and the Caribbean. We promote economic and social development by working with governments, companies, and civil society organizations. In addition to the Inter-American Development Bank, the IDB Group includes the Multilateral Investment Fund, the biggest provider of technical assistance for the private sector in Latin America and the Caribbean, and the Inter-American Investment Corporation, the only multilateral lender focused primarily on lending to small and medium-sized companies.
- GIIN: How does impact investing fit in with the IDB Group's work?
Impact investing is an integral part of our work philosophy with the private sector. We see it as a powerful tool to fulfill our mission to reduce poverty and inequality. It is a win-win-win situation for all: the IDB Group boosts its development impact, impact investors diversify their portfolio by getting access to underserved markets, and local businesses get access to the financing and technical expertise they need.
- GIIN: How does the IDB Group approach impact investing?
There are four specific units of the IDB Group that work directly with impact investors. At the Inter-American Development Bank, our Structured and Corporate Finance Department partners with investors to finance large-scale projects while our Opportunities for the Majority unit invests in and supports innovative projects focused on base of the pyramid business models. The Multilateral Investment Fund works closely with impact investors on venture capital funds and is a major player in microfinance, while the Inter-American Investment Corporation directly finances the business development of small and medium-sized firms.
Through this work, the IDB Group has established itself as a pioneer in this sector. The Multilateral Investment Fund (MIF), for example, has been involved in impact investing since 1996. The MIF currently has 36 funds under operation. The funds invest in a wide range of areas including: clean and renewable energy, agribusiness, and businesses that deliver goods and services to low income populations.
To further strengthen the IDB Group's commitment to impact investing, the Opportunities for the Majority initiative, was set up in 2007. Its main goal is to support market-based, commercially viable, replicable, scalable, and innovative projects that generate measurable social and economic benefits to people living at the base of the socio-economic pyramid. Since it was established, Opportunities for the Majority has approved nearly USD 200 million to fund these projects and has leveraged approximately USD $120 million in additional funds through co-lenders or equity investments.
More recently, we have started to expand our partnerships with impact investors. Since 2010, the IDB Group has closed 10 transactions with a dozen different impact investors, including Blue Orchard, Oikocredit, and Incofin. Seventy percent of these syndications have been in the region's small and vulnerable countries such as El Salvador, Honduras, and Paraguay.
- GIIN: What types of products/instruments does the IDB Group use to invest? Who are the typical recipients of these investments? What are your typical rates of return?
We offer loans, make equity and quasi-equity investments, and provide guarantees, grant funding, and technical assistance. Our loan syndication program is an important tool to mobilize third party resources. Our deals are based on market pricing and are structured to ensure repayment of resources invested in the project plus interest. The IDB lends to national, provincial, state and municipal governments as well as autonomous public institutions. Civil society organizations and private sector companies are also eligible for IDB financing. In terms of rate of return on our investments, for the most part, the IDB Group seeks market-based rates of return and we are repaid like any other lender or investor.
- GIIN: How are IDB's investment activities different than those of traditional banks?
As a development finance institution, our financing is not only linked to financial performance but also to the social, economic, and environmental benefits that our financing can generate. We have built tremendous goodwill among our member countries and our culture of responsibility gives us the ability to build bridges to make deals happen. That means we can invest in areas or sectors that are underserved by regular commercial banks.
Our goal is not to compete with commercial banks or investors but rather to create new markets through investing in underserved sectors and companies. In fact, one of our strategic priorities is to protect the environment and to promote renewable energy. As a result, we direct a large part of our resources to these sectors to promote financially, environmentally, and socially sustainable development. For its part, the Multilateral Investment Fund acts as a development laboratory and predominantly provides grant funding.
- GIIN: What are the sources of the IDB Group's capital?
Our capital comes from our 48 member countries, including 26 borrowing members from Latin America and the Caribbean and 22 non-borrowing member from around the world.
We borrow against this capital to finance our operations. Since 1962, the IDB has held the highest possible triple-A credit rating. Our financial strength is based on our solid capital base, our conservative investment and lending policies, as well as our financial performance and the backing from our member countries.
- GIIN: Do your contributing member countries make a return on their contributions?
Since the IDB Group is a multilateral development bank, it does not distribute a direct financial return to shareholders. Instead, money repaid to IDB is re-used to finance additional projects.
- GIIN: How do private investors partner with the IDB Group on impact investments?
Private investors can team up with us to provide grants or act as co-investors or co-lenders. The IDB has adopted GIIN's IRIS indicators for describing the social, environmental, and financial performance of target organizations. This makes it easier for impact investors to work with us as we have an independent and consistent set of definitions for performance reporting.
- GIIN: You mentioned that IDB uses IRIS to track performance of your investments. Tell us more about that process.
Each IDB Group unit incorporates a set of financial and development performance indicators that are tracked periodically, not only during a project's operations but afterwards as well. Our Opportunities for the Majority unit serves as a good example. Besides adopting more than 300 IRIS metrics, OMJ is now using PULSE, a cloud-based system developed for impact investors that allows OMJ to capture information directly on the ground from each of the companies it has invested in. In addition, OMJ has been collaborating closely with the GIIN on the development of IRIS, sharing specific metrics and lessons learned as a way to strengthen IRIS and the impact investing industry as a whole.
- GIIN: How does the IDB Group source and select impact investments?
We look for profitable projects that will benefit our 26 borrowing member countries in Latin America and the Caribbean in areas that will help promote sustainable and equitable economic growth. These include a variety of sectors ranging from education and health to infrastructure, renewable energy, and access to finance.
- GIIN: Can you offer a few examples of recent impact investments that the IDB Group has made?
The IDB Group has been setting very important milestones in terms of impact investing in the region. In 2010, our Structured and Corporate Finance Department (SCF) disbursed its first local currency syndicated B loan in Peru and completed a loan syndication with the longest tenor ever registered for a financial institution in Ecuador. In 2011, partnering with impact investors, SCF closed its first syndicated loan in Honduras and the first-ever subordinated debt syndication in Ecuador.
Last year, through a partnership with the Spanish Government, the Inter-American Investment Corporation created a EUR 50 million fund that provides financing to local micro, small and medium-sized financial institutions in Haiti. Meanwhile, the Multilateral Investment Fund invested USD 3 million in Colombia's Inversor fund, a venture capital fund that will invest in companies that engage the population at the base of the socio-economic pyramid as consumers, service providers, or employees.
Finally, one of Opportunities for the Majority's 11 approved projects in 2011 was a USD 2 million loan to El Salvador's Banco ProCredit, aimed at improving access to potable water and sanitation in the country's rural and peri-urban areas.
- GIIN: Is the IDB Group planning to expand its existing impact investing activities over time? If so, how?
Yes, we want to continue expanding our impact investing activities, and our new membership in the GIIN's Investors' Council is an important step. Our Board of Governors approved our capital increase and that will allow us to increase investments in Latin America and the Caribbean. We are seeking additional partners, both for co-investments and for the development of the impact investing ecosystem.
In terms of specific initiatives, the Inter-American Investment Corporation, for example, is exploring different partnerships with regional and non-regional investors to provide grant and equity or quasi-equity financing to increase the positive social and environmental impact of small and medium-sized businesses. Opportunities for the Majority is working on providing access to "blended finance" that combines loans or guarantees with grant resources that can fund impact or mapping studies, market research on pre-commercial models, or strengthen existing business models.
I encourage anyone with an interest in partnering with the IDB Group to contact our Office of Outreach and Partnerships and to visit our new webpage on impact investing.
- GIIN: How is the current climate for impact investing in Latin America and the Caribbean?
The climate is extremely favorable. Latin America and the Caribbean weathered the recession well and this region has been an important contributor to the global recovery. Our region grew 5.9 percent in 2010, 4.3 percent in 2011, and is forecasted to grow 3.7 percent this year, according to the Economic Commission for Latin America and the Caribbean.
In the past decade, our region has also made tremendous progress in terms of strengthening institutions and reducing poverty. Poverty rates have dropped from 48 percent of the population in 1990 to around 31 percent today. What's more, in the last decade the actual number of people living in poverty has declined from 221 million to fewer than 180 million. These are people that need better housing, education, health services, and access to credit -areas where impact investors can play an important role.
- GIIN: What are the main challenges to impact investing in this region?
In the short term, the current conditions in Europe and its possible impact on global economic growth could dampen risk appetite and reduce impact investing resources available. The biggest challenge, however, centers around misperceptions of impact investing and what it means to do business with the low-income population. For example, there is a relatively short track record of attractive exits in the region, which can make investors suspicious that impact investing is philanthropy in disguise. In a similar fashion, investors and companies need to understand that profits in BoP business models are based on volume not margins, and that as a result reaching scale is fundamental.
- GIIN: Are there sectors or countries and regions that the IDB Group is particularly excited about?
Some of the largest sector demand is coming from: renewable energy, agribusiness, affordable housing, education, health, telecom, and mobile e-transaction platforms. We have noticed demand coming from all of our member countries and look forward to partnering with impact investors as they discover the wide array of opportunities present throughout the LAC region.
A note to readers from the GIIN:
Diversity is a hallmark of the impact investment market, which has attracted traditional financial institutions, pension funds, private foundations, government-funded development finance institutions, fund managers, high-net-worth individuals, and family offices. As a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, the GIIN aims to bring transparency to this market and to the practice of impact investing. To this end, we believe it is in the interest of the field to share a sample of the diverse viewpoints held by investors who are motivated by social and environmental considerations. The publication of such diverse viewpoints, however, should not be construed as an endorsement by the GIIN of those viewpoints or the individuals or institutions expressing them.