Mumbai: Sam Parker, director of Shell Foundation, talks about impact investment, early-stage investing in social enterprises to meet the ambitious sustainable development goals (SDGs) of the United Nations, lack of capital for such early-stage enterprises and how the independently run charity set up by energy giant Shell is trying to create new pools of capital for the same.
In an interview, Parker also talks about why India is the biggest focus region for the foundation and why areas such as access to energy, small and medium enterprises (SMEs) and mobility are focus areas for the foundation. Edited excerpts:
In the last few years, we have seen new pools of capital come into the late-stage impact investing space, including some traditional private equity managers. How does the early-stage space, where Shell Foundation operates in, fare when it comes to availability of capital for social enterprises?
That late-stage space has attracted a lot of interest. We are certainly pleased that there is a concentrated effort from traditional investors to focus on such companies that are creating social and environmental outcomes. Where we are in the way the market is going, I think successful stories of social enterprises that are genuinely accelerating the SDG targets are not very many.
We need more early-stage funding to get more of these companies up and running and viable and investable. And that capital is still very scarce. There is a considerable growth of capital chasing later-stage opportunities, but still a significant scarcity of patient, risk-tolerant capital for the early-stage work.
Where will that capital to fund early-stage social enterprises come from?
You are looking for people who are willing to take a 100% risk on their capital. You are looking for people to provide grant funding to private enterprises that may one day be profitable. So at the moment you are talking about foundations, some high net-worth individuals (HNIs) and to some extent the DFIs (development finance institutions). There is a certain amount of capital earmarked from DFIs for start-up companies. But it is very limited.
We would love to see other foundations, DFIs allocating more capital to early stage investments, because today most of it is looking for de-risked businesses, safer bets.
The opportunity is maybe carve out some of the capital that is earmarked for some of the de-risked impact investing, to fund the early stage, to build more of a pipeline. Because without the pipeline the late stage investors will have noting to invest in.
How is Shell Foundation trying to attract new pools of capital in this space?
We as Shell Foundation work at the very early stage of these enterprises. Impact investors are sort of waiting at the end of the spectrum for de-risked companies. What about the middle? In order to bridge the companies, where we are investing, to the late-stage impact investors there is a need for mid-stage investments to take them through their growth period to make them more attractive to impact investors.
We are looking to create a capital pool that is in between the complete grant based capital and the commercial capital that is seeking market returns, where you can have concessionary capital mixed with returnable capital in order to have an aggregate cost of capital close to zero. We believe this could be a fantastic way of building the bridge between early stage and impact investors.
We are trying to pull together foundations, HNIs, banks and DFIs to figure out how that can work. If we are able to create this mid-stage capital pool, then we can accelerate the number of investable companies that are available for the commercial markets. That is a missing piece in the capital markets at the moment.
How significant is India in the overall scheme of things for Shell Foundation and what are your focus areas in India?
Globally, we have a total portfolio of 50 social enterprises that we have co-created and we are supporting, of which 20 are operating in India. Certainly for the next foreseeable future, we will be heavily focused on India.
In India, we have ended up with a portfolio that is very much focused on energy access that is not just entry level solar lighting but also productive use. So we support companies that are providing energy for businesses, energy for agriculture and then even larger scale mini grids and rural utility type models.
Mobility is another big area of interest for us, which is really focusing on helping cities plan for population growth, plan systems which enable people and goods to move around in a way that firstly reduces carbon, but also enabling people to participate in city life—to move around in a way that is safe, clean and affordable.
We are also supporting companies in India which are disrupting the way people and goods move around in rural India.
Historically, financial services has been one of the most important pillars of impact investing. Is that a space where Shell Foundation has focused less on in India, by choice?
There has been no conscious decision to not focus on financial innovation. We have learnt that it’s hugely important. An increasing proportion of our budget goes to building financial services that helps these organizations grow.
In India, we co-created a working capital financing company with Intellecap called Intelligrow. We have set up a facility where we provide working capital financing to off grid solar companies and we have also founded an organization called Sangam Ventures, an early-stage incubator/VC company that invests in early-stage energy related companies. That’s an equity provider, which we saw was a gap in the market. We also have a company that is focusing on credit assessment of SMEs. So we are working in some sub-sectors and we will continue to do that. Receivable financing is another area we are quite interested in.
Additionally, there are other funds that we are helping to set up that will be available for India as well.