Durreen Shahnaz started her career with Morgan Stanley in 1989 and was the first Bangladeshi woman investment banker on Wall Street. After stints with various organizations including the Nobel Prize-winning Grameen Bank in Bangladesh, Shahnaz went on to set up Impact Investment Exchange (IIX), the world’s first social stock exchange, in 2009 in Singapore. So far, IIX has mobilized more than $13 million in capital for development, has generated $20 million in social value and empowered more than 10 million lives.
The IIX has just launched a Women’s Livelihood Bond worth $8 million, which is structured to create a special purpose vehicle (SPV). Through the SPV, funds are raised from investors who seek financial as well as social returns and are lent to microfinance institutions and impact enterprises. The goal is to benefit, through the bond, some 385,000 women across Southeast Asia.
In a conversation with Knowledge at Wharton and Nick Ashburn, senior director for impact investing at the Wharton Social Impact Initiative and also the co-host of Wharton’s radio show “Dollars and Change,” Shahnaz says that of all social impact areas, women’s livelihood is one of the toughest and most important issues. “If you don’t have one half of the equation there, how do we move forward?”
Below is an edited transcript of the conversation.
Knowledge at Wharton: Nick, you talk about impact investing quite a bit on your show. Could you tell us what the state of impact investing is, both in the United States and around the world?
Nick Ashburn: Sure. So, it is quite interesting, depending on where you live, where you’re deploying capital and where you might be receiving capital. I think regardless, though, there’s a lot of buzz and hype around the industry right now. Some positive, some negative. [Organizations] like the U.S. Forum for Sustainable and Responsible Investment do a survey every couple of years. And they’re reporting that there’s about $8.7 trillion in the U.S. that is earmarked for environmental, social and governance type of things. Or impact investing, too. That’s actually up 33% from 2014. So, it’s a big increase.
But when you talk to the big banks here in the U.S., they’re not actually seeing that type of capital move. A 33% increase would be quite visible within the bank. So, there’s a debate. But what I will say is the macroeconomic trends of the preferences of women, the preferences of millennial investors, those are real. I do think that investors are taking that really seriously. There’s a lot of experimentation in terms of capital structures and how we do impact investing. And I think that’s what really leads us to our conversation today.
Knowledge at Wharton: Durreen, what do you think is the state of it right now?
Durreen Shahnaz: Well, before we talk about the state, I think it would probably be good just to define what it is. Impact investing refers to investments that are done with the intention of creating social and environmental good. It means that at the core of it you need to have that social change and environmental change in a positive way, to happen with that investment. So, just like any other market, you need the supply side of the capital. You need the demand side of capital. You need platforms for them to come together. And you need structures to come together.
So, I think in terms of what Nick said, absolutely, there is a lot of good intention on the supply side of the capital. But on the demand side of the capital we have to get organizations ready. We have to have structures in place. We need to have platforms in place. And interestingly, Impact Investment Exchange, IIX, which I founded eight years ago, was one of the pioneers in this space. I was part of the team which kind of started the whole term, impact investing. And also, [we looked at] the measurement side of the impact.
I think what’s been very interesting is that in Asia, we have really grown by leaps and bounds over the past eight years, in terms of the space. I always use the analogy of how mobile phones just took over in Asia. Because we didn’t have that many land lines, when the mobile phone came it grew by leaps and bounds. It’s exactly the same [with impact investing]. I think in the U.S., perhaps, things are a little slower. Because you do have a financial market which is very established, and you have a lot of products there, there’s a lot of talk about ESG [environmental, social and governance]. [But] impact investing is not ESG. It is much deeper, much more beyond. I think what’s happening, at least in the U.S. is that people are looking at each other and thinking someone else will start it. The intention is there, but I think it has not kept up with the supply of the capital. Nick, wouldn’t you say that?
Ashburn: I absolutely agree.
Knowledge at Wharton: How did you start Impact Investment Exchange? Give us the back story on that.
“There is a lot of good intention on the supply side of the capital. But on the demand side of the capital we have to get organizations ready.”
Shahnaz: Well, it all goes back to 1989, when I came out of Smith [College] for my undergraduate and joined Morgan Stanley. You have to remember, in those days, there were very few women in Wall Street, let alone anyone from Bangladesh, where I’m originally from. One of the big learnings for me, where I was coming from, was really seeing the bastion of wealth. And there was such a disconnect.
So, it was from there that things started forming in my head. Then I went and joined this bank called Grameen Bank [in Bangladesh], which eventually got a Nobel Prize. Grameen Bank was doing this whole practice of microfinance — giving very small loans to rural women to start up their business. This is back in 1991-1992. If you think about it, I went from Wall Street, literally, to the back streets of the world. And if you fast-forward — this is exactly what impact investing is trying to do now.
So, back in 1999, I started my first company, which was a global marketplace for handmade goods. It was the Etsy of its time. I grew it and sold it to National Geographic. One of the big lessons for me there was how difficult it was to have a company which had a social side. The investor didn’t care about the social side. It was very difficult. Because, if you think about it, what did Milton Friedman say? Milton Friedman said, basically, as a company, your task is to maximize profit. That’s what we are taught. But it is really not about maximizing profit. It’s actually maximizing value. And part of the value is what good you’re doing to society. What good you’re doing to the environment, as well. Because otherwise, you won’t survive as an organization.
This spirit wasn’t there in the late-1990s, early 2000s. But interestingly, I think when the financial crisis happened in 2008, that was a big eye-opener for everyone. That you cannot be just pushing the system to always maximize profit and sacrifice the other components. And that is when Rockefeller Foundation got us together — and I really salute them for their innovation. They’re the ones who brought a group of people together in Bellagio in Italy. And the result of that was this whole impact investing initiative. Because Rockefeller really pushed at it, and they turned to me and they said, “Durreen, you have to go back and be an entrepreneur again. Go and do the impossible, like you are saying, and we will support it.”
This was the first and last time in my life I got a blank check. And it was fascinating. The second part of the story is even more fascinating, because I went back and I said, “Okay. So, I’m going to create a social stock exchange. And this is the most impossible dream, but this is really the beacon. We’re going to work towards it, and I’m going to create the entire thing underneath that as well. The value chain of unlocking capital.” And I went back, did all the numbers. And I put on my Wharton hat, and I came up with the number $495,000, which is, of course, very little. And so I went to them and I said, “Okay. It’s $495,000.” They’re like, “Are you sure?” And I said, “Yeah, I know. It seems like a lot. But you see, I’ve never asked for grant funding or anything. So this is what I need.” Even to this day Antony Bugg-Levine, who was the managing director at Rockefeller at that point, teases me about it. He says, “We would have given you any amount. And you asked for $495,000.”
Ashburn: Yeah. Half a million dollars is not a lot for them.
Shahnaz: Exactly. So, I’m like, “Well, you know what? That’s the money I thought I needed. And I worked with that. And guess what? Eight years later, we proved that we have done the exchange, and so much more.” So, you know, there’s a good ending to the story.
Ashburn: Durreen, tell us a little more about the Impact Investment Exchange. What are some of its components? You said you had to build the infrastructure. So, what did that look like? What does it look like?
Shahnaz: We literally had to create the road to travel on it. As I said, we started off creating the exchange. And in eight years we also created, in Asia and I think probably globally, the largest equity crowd-funding platform where we are closing six to eight deals every year. And then, we are also creating these structured products that can go up on the exchange, like the bond that we just closed. We also have a lot of interesting accelerators where we work with organizations making sure that their social side is coming out, and they are financially viable, and they can give a financial return. And then we put them on that capital journey. As a last component of that now we are creating a fund because in Asia, outside of India, there are very few funds. As an infrastructure for capital markets, you need funds as well.
Ashburn: Durreen, I want to get your opinion on something that I hear in the industry quite often. When you speak with impact investors, they say, “There aren’t enough quality deals.” And then when you speak with entrepreneurs, they say, “There’s no one willing to invest.” Where do you sit? It seems like you are doing all of the above.
Shahnaz: Well, we sit in the middle, right? And then sometimes we’re both. We’re also investors, and we’re also the entrepreneurs. And the reason is because we are creating the market. So, we have to put on all the hats in Asia. I think in the U.S., it’s nice there are many more players. I think what we see is, a lot of times people are all sitting on the edge, and you almost have to make that first move to bring them into the circle.
Ashburn: Right.
Shahnaz: And that’s exactly what we’re doing. So we said, “Okay. You think that the deals are too small? Well, we have this structured deal, where you can put up some more.” Or, “Well, you think that you’re interested only in investing in Vietnam? Well, guess what? We actually have some organizations who are doing X, Y and Z.” Or, “You’re interested in just the financial return first? That’s okay. But as long as I actually care about the social return as well, then you can look at this, this and this.”
One of the big things we say is, along with unlocking capital, which is one of our pillars — and we do it different ways — the two other things we do hand in hand is knowledge management, where we actually go and teach about impact investing, and bringing in the stakeholders. And that is so important.
I would say one of the most important components for us really has been to bring in the traditional banks and the traditional law firms, traditional accounting firms, etc., in every single deal we work on. This really has been one of the key things because impact investing is not some weird animal out there. It is literally another financial avenue. And everyone should be part of it.
Knowledge at Wharton: But you have to build out that network. And bringing all these different pieces together, that’s a process in itself. To be able to not only connect all those companies, but I was thinking in terms of Asia, to be able to connect all these different entities within these different countries, as well.
Shahnaz: You are absolutely right. One of the ways we did it is really having a lot more partnerships. But then also, interestingly, we wrote a lot of papers and articles about it. The three things that I always see as the powers of the world: one is media, two is finance and number three is the whole development space. And all of these three [together] is what can create an equitable society. So with IIX, we really did that. We brought in people from the NGO space. We brought in people from the donor space. We brought in people from the financial markets, and then obviously from the academic side, and then media as well.
Building this infrastructure where everyone feels that they are a part of it becomes very important. Because if impact investing goes mainstream — and it will — I think we all need to be equal stakeholders. It can’t be something that some big organization takes on. No, everyone. Big or small.
“Impact investing is not some weird animal out there. It is literally another financial avenue. And everyone should be part of it.”
Knowledge at Wharton: Almost like it’s part of the global economy right off the bat.
Shahnaz: Yes, exactly. And it has to be like that. Because, and this is where the idealistic side of me comes in, I do see impact investing as really a space where people who didn’t have a voice before in the financial markets, they can come in and have a voice. And as a woman, that was very important for me. Because women didn’t have a voice in the financial market, and they can have a voice now. You can have the marginalized communities. You can have the environment, which didn’t have a voice in the financial market. They can have a voice now. So for me, it was just this wonderful thing that was coming together. You know, it’s its own United Nations, in some ways.
Ashburn: Why we’re also here is a new product that you’ve developed, this bond [the Women’s Livelihood Bond]. And again, from the investor side we hear so much, not only are there not enough deals — meaning, like, direct investments into enterprises, but there’s not enough product available. And in my opinion, there’s not enough product that has some accountability to it, as well. To your point around the impact part of it, I’m reminded of green bonds, for instance. They’re a pretty mainstream product now. I don’t know what the market size of it is, but it’s substantial. For those that don’t know, it’s relatively a vanilla bond. Just what most people would understand, but earmarked for a green-type environmental sustainability product. There’s not much accountability, beyond just the earmarking of it. Some investors are starting to request more information, once the capital is deployed. But I was more curious around, if we understand that model, what’s your bond about?
Shahnaz: Nick, you just nailed it. With green bonds, once again, I think it started off with a great purpose, and I hope that it goes deeper in that. But really, some of the things that you’re hearing in the market is that it’s not green enough. It is literally things that would have happened anyway. They’re just kind of being earmarked as green. But that’s okay. For me, it’s a start, and we can go deeper on that.
What we did was several things. One of the things that we kept on hearing in impact investing is that the deals are too small. So, we would obviously be working with bringing clean water to the rural part of the Philippines, or clean energy in India, or we will have a health care solution, low-cost devices for an eye operation, in a remote part of Vietnam. So, we would work on all of this. But again, they’re small. The most you could invest in it is a million, two million. That’s it. And again, we would do this whole equity crowd funding.
So we said, “You know what? That is just not going to move the needle. We need to have bigger amounts of capital.” If you think about the capital market, it’s about $75 trillion, right? Most of the assets are held by institutional investors. They will never come into tiny little deals like this. We said, “Okay, let’s experiment. How do we create a structure where larger amounts of money can come in?” That’s what got me thinking. And I said, “Okay. How about we pool together a group of entities, and we will actually do the risk diversification in that pool. And who are the ones who have the best risk profile right now in the space?” It’s actually the micro-finances, in Asia.
So I said, “Okay. Let’s bring in a couple of the microfinances.” They have a track record of 30 years, the ones which have not come into the market. And most of them have not. And they’re doing really well. And then, we bring in some of the impact enterprises and mix them together, and do a risk analysis. And you have to understand, in traditional space, you look at risk and return. For us, we have to look at risk, return and impact.
So, there are three angles to it, right? We had to make sure of the impact side. We said it has to basically impact a substantial number of women. And we said about 400,000 women who would be basically getting a livelihood from this. On the return side, it had to be high enough that we can actually say that the investors will be interested in it. So we ended up with a coupon of 5.65% which is incredible in the fixed-income side.
Ashburn: Quite a lot for fixed-income, yeah.
Shahnaz: And then the third is the risk. So what we said was, “Listen, these are really strong organizations, about a triple-B rating. But guess what? We’ll do even more than that.” So, we went to USAID, and we said, “Would you actually come in, for at least some guarantee?” So they came in for a 50% guarantee.
Ashburn: Whoa!
Shahnaz: And then, we did all this fantastic structure. We had five law firms working on it. Sherman and Sterling worked on it pro bono. Hogan Lovells worked thousands of hours. So if you think about it, it has flavors of securitization. And I don’t want to use the word, it has a bad connotation, but using it in a good way. But then it was fascinating, because we created this. And we said, “Okay. Now, the investors should be all jumping in.” And the investors started coming in. It was very interesting. It was mixed. Some people cared about the impact, some people cared about, “Wow, it was a really good return.” And then, a 50% guarantee.
“We also need education on the investor side. Just because it’s about doing good, doesn’t mean that it’s some loosey-goosey product.”
But what was fascinating was a group of them sat there who said, “No, that’s not enough. You actually need to put in a first loss.” And we did. I put in my personal money, and I asked managing director, Robert Kraybill. So the two of us put in our personal money as the first loss. We put everything for the bond to close. But what it showed to me was the fact that we were doing things which probably in the traditional financial markets we wouldn’t have to do. You know, if it was a traditional product.
And so it’s almost like a double whammy. We showed everything in the financial side. But just because there was a social angle to it, all of a sudden people were scared. We had two banks. DBS, which is the largest regional bank in Asia, and ANZ, who helped us sell it in the public market. And DBS was saying, “You know, Durreen, if you just called it a high-yield bond, this would have been snapped up in five minutes.” Because it was called a Women’s Livelihood Bond, all of a sudden people are like, “Whoa. Hold on. Am I going to get paid? What does it really mean?”
So, going back to your question, Nick, we need structured products. But we also need education on the investor side. Just because it’s about doing good, doesn’t mean that it’s some loosey-goosey product.
Ashburn: There’s a professor here at Wharton who’s talking about some of these issues. Her name is Deb Small, in the marketing department. She has a dual appointment in psychology in the college here [at U Penn] and marketing at Wharton. Some of her early research was around philanthropy and altruism. She would give people a profile of two entrepreneurs. Entrepreneur A was pretty traditional. Entrepreneur B, same profile, but then described as altruistic. And a good majority of the experimental subjects said, “I’m going to go with option A over option B,” even though all things were the same. So, she’s wondering about the impact investing space. Is it a marketing issue? What are the heuristics around our perceptions of these products?
Knowledge at Wharton: That was going to be the word I was going to say. Obviously, it seems like it was just as simple as a perception issue as anything, as to why there was concern by some of the people, about jumping on board.
Shahnaz: You’re absolutely right. I think as we have seen in our equity crowdfunding, after the first one or two, all the doubts go away. I guess now the onus is on us to have more products like this in the market, and have more education around it. We are looking to do our next bond here in the U.S. And this is going to be a bond focused on women’s health, and we are very excited about that. Because it’s another very tough issue to tackle. But we want to bring private sector capital in, and I think we can.
Knowledge at Wharton: What do you see the development of this being long-term? Obviously this next issue, with women’s health, is one of the issues that you want to tackle. But where do you see this going?
Shahnaz: For the teams that IIX works with, women is a big theme. The environment is the second one, and the third being the disadvantaged community. So I think what we will do is, at least through our work, we will make sure these three themes are what we tackle as we are bringing more and more products into the financial markets.
Ashburn: But why start with women’s livelihoods? Of all thematic social impact areas, why women’s livelihoods?
Shahnaz: Well, because it was one of the toughest. And for me, it was one of the most important issues. If you don’t have one half of the equation there, how do we move forward? We can be tackling everything in front of the planet, but this, it’s right in front of our face, women are not part of the economy. So, we have to bring them in. And then you can deal with other things. So, yes, women will continue to be our big focus.
Knowledge at Wharton: And part of that, I guess, is just the landscape of what it is in Asia right now, correct?
Shahnaz: Well, in Asia, or even here, right? I think the way we ought to look at it is very practically, from a financial perspective. We see where are the gaps, right? So, where are the gaps where capital can be deployed and you can get a good return? And how can we actually be tackling that? And ‘women’ is one of the big forces for that.
Knowledge at Wharton: For people that would like to find out more, what is the web site for IIX?
Shahnaz: It’s IIXGlobal.com.
Image from https://iixglobal.com/womens-livelihood-bond/
