Innovative Finance for Inclusive Value Chains: why it's needed now more than ever.
The title of this has so many jargon-riddled words it has the potential to make your head spin. It's why I opened the session that I moderated (on behalf of Catalyst 2030), with the same title at the 2020 Virtual Skoll Forum, with some basic definitions!
Innovative Finance is essentially the bringing together of different funding types (grant, debt and equity) from different funding sources (charitable trusts and foundations, government, impact or traditional investors) at different stages in a project or ecosystem. Traditionally, early stage investment or seed funding has been supported through non-returnable grants; mid-stage companies who need working capital to build robust and capable systems with debt through loans; and those looking for scale and growth tend to give up a piece of their business through equity shares. Sometimes I think banking types make it sound more complicated than it is on purpose...
In order to create, in this instance, lasting and sustainable development, we are looking to create Inclusive Value Chains. What does that mean? Inclusive businesses are ones that enable market creation across their full business operations (value chains) that not only sustain livelihoods but also ensure resilience in their supply chains. Inclusive value chains can open up access to products (by selling in different formats/ sizes or changing the way people pay to include renting, lease financing or less prohibitive repayment plans); the distribution channels (so ensuring that, most often, rural populations, are able to become self-employed sales agents and a vital part of new market development), or in the case of manufacturing, that operations not only produce quality outputs, but also provide sustainable livelihoods for the worker/ producers.
Why's this important now?
As we’ve seen in the last few months as the COVID 19 pandemic has spread across the world, the interconnected and interdependent nature of our supply chains have demonstrated real vulnerabilities. Dependencies to meet our global consumption needs has been led by profits, price efficiencies (fx) and cost effectiveness (cheap materials and labour) rather than thought about more holistically. What happens when you have to shut down whole countries, close borders and stop the manufacturing? Economic meltdown. And all of a sudden the world takes notice. Even today, states in the USA are having to bid and out-price each other to determine who gets face masks and PPE equipment to keep Americans alive. It's a system gone bonkers.
What we've seen is that for countries like India, where the majority of the 1.3 billion population work in the informal sector, workers who are predominently low paid migrants, have been told to return back to their home states and villages to ride out the pandemic. They have now, over night, no income, no social security, access to over-stretched government hospitals but limited funds to pay for medicines and live in confined areas. This is not just a health care disaster, it's one of our economic systems that have artisan workers referred to as being at "the bottom of the supply chain", yet in reality they are, and should be considered, the heart of the business model system.
Those of us in the sustainability and sustainable development worlds have done bit of a disservice to our colleagues in value chains as we've been distracted by what we thought were important issues for businesses to focus on as "responsible citizens" like human rights, good working conditions and things we consider important to basic human dignity. Though I'm clearly being facetious here, these have been a bit of a smokescreen for the perpetuation of the old systems of power and capital flows rather than providing the impetus for real innovative design and thinking when it comes to supplier engagement. The time is now to readdress the balance of both of these.
Neelam Chhiber from Industree who is spearheading the development of a new Innovative Finance model for Inclusive Value Chains at Catalyst 2030 is a proponent of the tried and tested co-operative business model which has largely been forgotten in India and has certainly not been used for the up-lift of manufacturing or agricultural workers, not to scale at least. According to Neelam, owner-enterprises are the most effective to ensure agency, equity (gender and financial), and sustained livelihoods that will have workers as recipients of dividends on top of their income. Workers in the ecosystem that she's already been successful in creating, receive health insurance, social security and are being paid for the duration of the current lockdown. Having working partnerships with global brands like Ikea and H&M shows that the model is able to achieve standards, scale and market reach. What Neelam is effectively doing is moving previously informal economy participants to agents in the formal market; with rights, dignity and their own stake in the game as a result.
What's in it for business?
Resilience. Vishali Misra from Ikea spoke passionately about the importance for the buisness to know that they have diversified supply chains that don't just have skilled workers, but have enterprises that are capable of surviiving market as well as global shocks. Where workers have sustainable livelihoods, are invested in the success of their companies and are financed for scale. This is all in addition to the increasing consumer demand for both transparency and accountability for products and a willingness to pay a price premium for goods that demonstrate inclusivity and sustainability at their core. For our session participants, when polled and asked what they were willing to pay, the majoirty (admittedly, a self-selecting set of socially conscious folks) said that 10-20% premium would work. This makes good business sense all around.
The innovation in the capital flows is that working capital for employee-owned co-operatives has previously been slim and this model draws out these businesses and creates a working system for support, capacity building and growth. Creating a rich mixed-income approach provides the mechanisms to tap into financing at different stages of the model, where it's most needed and is the most appropriate funding structure based on the business, not on the market. For Abha Thorat from The British Asian Trust, the power of Innovative Finance is the ability to test the role of blended finance in its different forms, using and tapping into the traditional products available and adapting them to be about long-term sytemic change, not just short-term financial gains. Businesses that want to survive need to adopt this mindset or just won't make it.
What does the future hold?
Given what we're fast learning through this pandemic, we've not been prepared and the systems need changing, now's the time. The shocks unfortunately, are only just beginning and for our audience, the key barrier to creating inclusive businesses is the lack of understanding of what they really are. That gives those of us that champion these movements the impetus to go out there and talk about it more, make it accessible and less jargon-heavy and to make clear that inclusivity means making businesses sustainable in its truest and fullest form - for all of us in the value chain - from grower, to manufacturer, to distributor and to consumer and most significantly, for the businesses and investors that want to see market resilience when the shocks come.
The full Skoll World Forum panel discussion is available here.
Do check out Catalyst 2030 and get involved.
*Picture credit: Deepa Mirchandani (2014). Patola weavers in Gujarat prep silk thread in the pre-weaving stage of garment production. They form part of the value chain for RWeaves, a social enterprise that supports rural artisans to preserve ancient crafts such as this by providing the following: non-debilitative loans for bulk silk buying (so it's more cost effective), product design innovation and capacity building to help cater for changing consumer trends (less women wear saris regularly but may adopt to buying tops/ bags/ scarves etc made out of the silk), centralised retail and sales so that artisans don't have to spend time in sales and marketing, fair and upfront payment packages thereby mitigating cash flow risks. The artisans I interviewed, talked about the peace of mind of having sustained income, better pricing and their ability to send their children to school, pay for clean water and lighting for their villages because of the increase in disposable income - all improving their overall quality of life. Coming back to Innovative Finance, RWeaves is part of the Aashray Finance ecosytem which I worked with in Gujarat. Seed funding is provided by corporate CSR/ Sustainability philanthropic funding, loans are underwritten by an NGO dedicated to enabling sustainable livelihoods and growth equity is supported by a traditional venture capital fund.