BIO: a paragon of impact finance

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Solar farm Ten Merina Ndakhar

Ten Merina Ndakhar (Senegal), one of the largest solar farms in West Africa, received a loan from BIO. © BIO

INTERVIEW - Impact finance, the Belgian Investment Company for Developing Countries (BIO) has been committed to it for years. But what exactly is it and why is it so important? We put some questions to CEO Luuk Zonneveld.

Impact finance? That is the act of purposefully making investments, not primarily to make a profit, but to help achieve certain social benefits. And there is great need for this, especially nowadays as we are facing numerous challenges.

Piet Colruyt, among others, is strongly promoting impact finance in Belgium. Our country lags behind compared to neighbouring countries. This is why a proper Belgian Impact Week was organised at the end of November 2022. And that immediately marked the start of IF Belgium - the Institute for Impact Finance Belgium - a new independent not-for-profit institute.

Not only typical Belgian impact finance providers such as Incofin, KOIS, BIO, the King Baudouin Foundation and Triodos participated to the Impact Week but also a classical bank such as BNP Paribas Fortis. BIO, short for Belgische Investeringsmaatschappij voor Ontwikkelingslanden (Belgian Investment Company for Developing Countries), was also present (see box). BIO has extensive experience in impact finance. So we got CEO Luuk Zonneveld to answer some questions to give us a clearer idea of the concept.

Caroline Gennez and Luuk Zonneveld

Luuk Zonneveld, CEO of BIO, together with Minister of Development Cooperation Caroline Gennez. © BIO

What exactly does impact finance involve? What kind of impact is meant?

An internationally accepted definition states that impact finance is about investments that purposefully seek a particular impact, yet also have a reasonable financial return. Although the return is secondary here, it remains an important indicator of a project's sustainability. Because only if there is a reasonable profit can the project survive and has the investment not been in vain.

A fine example in Belgium is social housing. If you can provide housing units, with small rooms, intensive supervision and acceptable rents, you will help vulnerable people move forward.

BIO's impact is related to what the Belgian Development Cooperation is striving for: sustainable development and the SDGs. More jobs, especially for women, more tax revenue in developing countries, etc.

What is BIO?

BIO is an instrument of the Belgian Development Cooperation that supports the private sector in developing and emerging countries. In this way, BIO aims to promote sustainable development and help achieve the Sustainable Development Goals (SDGs).

BIO is a typical bilateral development finance institution (DFI) of the sort that many rich countries have. Multilateral DFIs include the African and Asian Development Bank.

How do you manage to have as much impact as possible with your investments?

With all our investments, we pursue change according to what is known as the Theory of Change. For each project, we consider which impact objective is most relevant. If we support SMEs, we can create jobs for women, for example.

When we finance solar panels however, we create fewer jobs. Because once they are installed, at most two people are needed for maintenance. But we did provide renewable energy that will last a long time.

Those goals are part and parcel of the finance contract. After all, we can only achieve our goals if the company itself is backing those goals. Social goals - decent work, with reasonable pay and decent working conditions - usually serve the company's long-term interests.

Suppose an employee becomes pregnant. Then you won't fire her, but make sure she can have the baby in good conditions and take care of it for a while. That way you retain your good employees and they are also happy about their jobs. Eventually, that becomes part of the business model. And then, even if the funding stops, the company has every interest in keeping the same model.

So our development goals clearly make sense. When we urged customers to switch from fossil fuels to renewable energy, we often met with some resistance at first. But since the war in Ukraine, our customers are very happy to rely less on gas and oil! We take a long-term perspective and sometimes we have to convince our entrepreneurs of the benefit.

Can you illustrate your impact with some figures?

It is well known that quantifying the impact is challenging. We require our clients to report annually on their most significant impact. But what about the indirect impact? Take our Compagnie Cacaoyère du Bandama (CCB) project in the Ivory Coast that processes cocoa beans. You buy the beans at a good price, they also have to be transported and so on. In the end you create added value for the whole community which, in turn, leads to more jobs.

We have a model that can fairly accurately estimate that indirect impact. For CCB in Ivory Coast, for example, the indirect increase in incomes and jobs is up to seven times higher than the direct increase. Directly, we created 500 jobs, but indirectly it's thousands!

Control room CCB

Control room of the cocoa processing company CCB. © BIO

Can you give examples of investments with a great impact?

CCB is a good case in point, but there is also Pula, a Kenyan start-up. The single-biggest challenge with small-scale farming in the South is crop failure. Most small farmers, with hardly any reserves, can then barely survive.

The World Bank has been searching for a solution to this problem for many decades. Millions have been spent on pilot projects with microinsurance, but every single one of them failed. The farmers considered the insurance of 100 euro too expensive, especially because they were not sure they’ll really need it.

Pula did find a way to solve the problem. The start-up has a large data tool that allows it to estimate the risk very accurately. For each km², the likelihood is calculated of crop failure for that type of crop, in those weather conditions, etc. They use drones, satellite imagery and so on for this purpose.

Finally Pula succeeded in developing a concept which has the premium factored into the cost of the product. This way, farmers can get insurance at a reasonable cost. Because it is the buyer who pays, not the farmers themselves.

The impact is huge! Pula, meanwhile, has reached as many as 2.7 million small farmers. And the breakthrough is all the more relevant given that climate change is set to lead to higher risks. Pula started in Kenya and now works in seven other countries.

You already touched on the importance for profit, even though that is more likely to come second in impact finance. Does BIO make a profit and what happens with it?

Even with impact finance, a project that doesn't make a profit can never be viable. If a company does not propose to have profit in its proposal, it's not worth investing in it.

It is true that BIO makes a small profit, about 2% on average. That money flows to the government, which then decides what to do with it. Either pay a dividend to the government or plough it back into development projects. But since the difficult corona years, we have not made a profit anymore.

What exactly distinguishes your approach from that of traditional investors? By law, you can only fund projects that 'the market' would not fund. What does that mean?

Traditional investors primarily seek profit, our projects seek sustainable development. With every project, we ask the question: should we invest in it? Can't a local bank do it or is the risk too high? Only when the traditional financial sector can't or won't do it, do we step in. But our goal is always to encourage others, such as wealthy investors and pension funds to commit to impact finance.

Last year, 11.11.11 and the Coalition Against Hunger levelled criticism at BIO. According to a study they commissioned, job creation and economic growth were said to take precedence over the environment and human rights. Some of BIO's projects were reported to harm people and the environment. Where do you stand on this?

That is not true. We always target several objectives. In other words, we target job creation and economic growth and respect and promotion of environmental and human rights. Every year, we examine 600 potential investments. When we select projects, we want to make a difference. We want to promote change.

Suppose a company discharges wastewater into the river. This is not good. If we were to do nothing, wastewater would continue to flow. But we do invest and clearly state in the contract that by the end of the contract, all wastewater must be treated or recycled. Then even though you may say that we're investing in companies that are bad for the environment, we're investing with a view to improving the situation.

More traditional banks or insurance companies, including BNP Paribas Fortis, Belfius and Ethias, also took part in Belgian Impact Week. How can they become impact finance providers? Isn't their pursuit of profit at odds with this?

It is true that those banks or insurers avoid risks at all costs and strive to make profit. But that's changing, because they’re pressured by their customers. The EU, too, wants finance to become more sustainable.

As a first step, they can honour the 'do no harm' principle: avoid causing any harm. That's what we refer to as responsible investment. They have a list of what they don't do: don't invest in weapons, don't invest in alcohol, don't invest in oil or gas ... But that doesn't quite qualify as impact finance yet.

That's only the second step: proactively seeking impact. But that's difficult for a bank. It takes a lot of effort, you have to be well aware of the impact and so on. This is true in Belgium, and certainly overseas. The big banks are still sniffing out impact finance for the time being, it's still early days, but the future's bright.

Do you think it's realistic for the entire financial world to move towards impact finance? Can BIO serve as an example in this regard?

Every investment has its impact. But is it positive or negative? With a normal investment, it's often negative. So you need to (1) become more aware of the impact and (2) focus more on positive impact.

The EU has developed a taxonomy with guidelines that any investment must meet. As I said, while the first step is 'do no harm', the second step moves towards impact finance.

It often requires a lot of time and effort before something gains full acceptance. How many years has it taken electric cars? It started with an idea, then there was Tesla demonstrating that it can be done etc.

Sometimes big scandals can force a breakthrough. Do you remember the collapse of the Rana Plaza textile company in Bangladesh, where many workers lost their lives? Well, that heralded the breakthrough of socially responsible investment. Suddenly, a paradigm shift took place.

So it is slowly seeping through. How many years of struggle did it take to get the minimum income established? What was initially an absurd idea is today taken for granted. The same goes for women's suffrage. I expect something similar for impact finance as well.

Today, only 2.5% of investments in Belgium involve impact finance. Piet Colruyt and IF Belgium want to go to 10% by 2030. Do you think that's realistic?

I do, definitely! The biggest pressure comes from the consumer. As a consumer who has children of their own, can you tolerate buying products that require child labour?

It can happen much faster than you think. A female doctor found that many people in her practice suffered from preventable diseases. She found out - she took a year off for this - that investments from her own pension fund were harming people. Since then, she and others have been insisting on sustainable investments by pension funds, which they are gradually moving towards.

BIO has the SDG Frontier Fund in which 14 Belgian institutional and private investors are involved. These include Belfius, Ethias, AG Insurance and VDK Bank. We invest, they co-invest. Even wealthy families who think it's important to invest correctly are jumping on the bandwagon. That's how we pull them along.

Climate disruption inevitably leads to greater risks to business anyway. Floods can flood a farm, drought can destroy crops. Since BIO is publicly funded, it can afford to take more risks than traditional banks. You will have to continue to play your specific role as a development finance institution, right?

DFIs do play their own role, yes, such a niche is needed. Investing in wind and solar energy is relatively low-risk, but a traditional bank will not invest in a country that’s experiencing a civil war.

Yet there are enormous opportunities in the South, even for traditional finance providers. People in rural areas do not buy mobile phones because there's no telecom tower, but there's no telecom tower because people do not use mobile phones. BIO is, therefore, investing in those towers. From then on, people will start using mobile phones and the towers will gradually become very profitable. Why couldn't KBC or ING make such an investment?

Our perception of developing countries is often more negative than what they really are. Just consider that a whole host of developing countries have much higher economic growth rates than we have. The perception is that Africa is poor. But countries like Tanzania and Ghana are among the fastest growing in the world.