How do we pursue a portfolio approach to impact in Latin America?

The catalytic nature of philanthropy is incredibly misunderstood—and it is to everyone’s detriment. Most business leaders and investors still draw a strict line between philanthropic endeavors and traditional profit-driven investment. But in making this false separation, they fail to see how philanthropy plays a unique role in de-risking investments in new and unproven markets and attracting other forms of financing to take on the world’s trillion-dollar challenges.

Let’s look at Latin America as an example. In a region with remarkable untapped potential, philanthropy and other capital tools have a unique ability to transform the status quo.

I recently spoke at the Women Working for the World Forum in Bogota, Colombia, and met with philanthropists, young changemakers, investors, entrepreneurs, and policymakers. Their ambition and ideas were inspiring. But a key problem was loud and clear: there are too many investors shying away from Latin America due to its real or perceived risks.

Enter stage left, venture philanthropy: a vital tool for Latin America. While Mexico and Colombia have the most established philanthropic sectors in the region, according to a milestone 2018 report, relevant assets in both countries make up just 1% of GDP, compared with 4.8% in the US. But there is still cause for optimism. The average spend rate of charitable foundations in Mexico was $16.4 million higher than any other country in the world, while regionally speaking, Brazil, Colombia, Chile, and Argentina also shone (and in that order).

Throughout my 20-year career in innovative finance and philanthropy, I have witnessed on many occasions how a relatively small amount of philanthropic capital, used as either first-loss capital; seed financing for a new social enterprise, startup venture, or impact investment fund manager; or technical assistance grants can transform the trajectory of a business, program, asset manager, industry, or sector in emerging and frontier markets as well as in the US. For example, during my time at Water.org, we were able to raise and transform $200 million in philanthropy into $5 billion in commercial capital for small microloans to provide access to safe water and sanitation to 63 million people in emerging and frontier markets.

Later, as part of the founding team at WaterEquity (a sister organization of Water.org), where we needed to demonstrate to investors the bankability of investing in the global water crisis in emerging markets, we saw an opportunity to use philanthropy in additional creative ways. Our second fund mobilized $5 million in philanthropic capital as a first-loss guarantee, which enabled us to attract an additional $50 million in debt and equity from impact investors, including Bank of America, the Skoll Foundation, the Hilton Foundation, the IKEA Foundation, the International Development Finance Corporation, and others. That philanthropic cushion inspired confidence and met the risk threshold these investors had to meet to invest in water in emerging and frontier markets for the very first time—and in ways that were tangibly providing access to critical water and sanitation services and solutions among low-income families. That’s a total of $50 million unlocked—10X the original philanthropic dollar amount in that guarantee: a great opportunity and value-add for the philanthropists who contributed to this guarantee.

In the case of WaterEquity , which is now a high-performing global asset manager that has deployed $360 million, philanthropy was essential in the organization’s early success and in creating a financially sustainable asset manager that is truly making progress toward solving this crisis. Philanthropy is what seeded the organization, which required time to prove the bankability of investing in microfinance institutions and enterprises providing safe water and sanitation to millions of consumers in emerging markets.

Water.org and WaterEquity's success and examples can not only inspire all sectors and organizations, but the strategic use of catalytic capital can be a blueprint for people, profits, and planet. The result of this work not only helped provide access to safe water and sanitation for millions of people, but also catalyzed positive transformations in their lives by addressing crucial local and global issues such as gender equity, girls’ education, climate change, and poverty. Our investments have a ripple effect.

To build a thriving Latin America, we need a portfolio approach to impact that leverages philanthropy in similar creative ways. From commercial ventures to more early-stage enterprises that need philanthropic support or more affordable financing to get started, there are a mix of complementary investment opportunities across the risk, return, and impact spectrum that are building sustainable economies. Polymath Ventures is a good example.

The female-founded and led fund has built and invested in transformative companies for Latin America’s emerging middle class, such as Elenas, the largest social commerce platform on the continent. Elenas, which has (on average) quadrupled income for its female users, estimates that 11 million women in Latin America sell consumer items via catalogs and door-to-door sales methods. The company is digitizing the process and empowering the continent’s untapped middle class. Elenas stands as testimony to something that Polymath has shown through quantitative research to be true: that women are the bedrock of Latin American society. Over 70% of consumer spending decisions are made by women in Latin America, and 36% of Latin American middle-income households are single-women head of households, compared to 28% globally.

Acumen is another great example. The organization invests in the brightest social entrepreneurs around the world, including Latin America, whose enterprises serve low-income individuals and potential customers at scale. From small holder coffee farmers to solar energy for rural homes, their ventures in countries like Colombia, Peru, Guatemala and Nicaragua showcase impact and returns for investors. Acumen uses philanthropic capital to seed the pathway for so many ventures that are serving underserved consumers.

These are entrepreneurs whose innovation is driven by necessity and informed by local context. Latin America and the Caribbean is the world’s most unequal region and particularly vulnerable to climate change (it will need to invest between $470 billion and $1.3 trillion to deliver on the Paris Agreement goals). With the right support, social entrepreneurs can be a critical part of the solution. Already, they are paving the way for Latin America’s circular economy and green transition, from forest schools to greywater recycling to sustainable textiles, while training and employing locals from underserved communities.

Latin America needs far more from the likes of Polymath Ventures, Elenas, and Acumen to support the entrepreneurs across the region who are transforming every industry in ways that are sustainable, creating jobs, and building a better future for all. Through a portfolio approach that leverages catalytic philanthropy and paves the way for more investment, organizations and investors can attract more public and private sector capital to respond to the needs of emerging consumers and generate more value in a region deeply impacted by climate change and inequality. We don’t need to compartmentalize philanthropy as a source of capital that is just in one bucket, or for traditional giving. It can seed a roadmap towards financial sustainability that simultaneously ensures we are truly meeting the needs of all communities, particularly during a time when inequality is rapidly rising.

Globally, philanthropy has about $2-3 trillion to its name, which we can use to unlock more capital from capital markets, which boast $100 trillion (not to mention government funding on top of that). I want to see philanthropy bridge the divide and unleash ‘risky’ investment capital, catapulting projects from pipedream to reality. We’re talking here about a truly massive snowball effect for parts of the world economy that need it most. The results would be game-changing for Latin America—and the global economy as a whole.