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Our guest today is Kelly Pacini, chief of strategy for the private sector at the Inter-American Development Bank or
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IDB. Uh we will speak with her about the bank's social impact initiatives and
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specifically the shared value appraisal that the bank uses in its investments. Uh Kelly, welcome to Knowledge at
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Wharton. Thank you for joining us today. Thank you very much. Thank you for having me.
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So to begin with, I wonder if we can start by talking about IDB's approach to
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social impact and specifically uh what is the shared value appraisal and what role does it play in the bank's lending?
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Sure. Uh well, IDB as an institution for many years, of course, uh as a mission-driven
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lender is very concerned and interested in social impact. Uh the shared value appraisal is a
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relatively new tool that we developed specifically to work with our private sector clients because there's a big
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area of the bank uh that I'm part of where we're supporting for-profit investors um
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across Latin America and the Caribbean. Uh and the intent of that instrument is to help those private investors really
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find the intersection between their business challenges and drivers for better, stronger, more robust growth of
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their companies. Uh the intersection of that with the social needs and sort of social surroundings uh
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in the place of operation where their companies are operating. So it's really
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surfacing opportunities that really can address both elements at the same time. So let's discuss one concrete case,
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right, where you use the shared value appraisal. And this is the uh San Ignacio University in Lima, Peru. Can
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you tell us about that deal and how the shared value appraisal was used? Sure, absolutely. Uh that was a a really
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wonderful opportunity for us to put this tool to work. Uh university was established back in
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1995. It's growing robustly and it came to IDB for, let's say, a a basic
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brick-and-mortar expansion loan. We do a lot of infrastructure lending uh across
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all sectors. Uh it is for-profit university and they need to expand. They need to build more
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campus buildings to accommodate the growth in in students. Um yet from our knowledge of the region, we know that in
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Peru uh there's a dramatic lack of access to quality education, especially at the higher uh
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tertiary levels for income low-income students and disadvantaged students. Uh And so when they came to us for an
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expansion loan, we said, "Okay, well, we you know, we want to help you expand and
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uh while we're looking at the credit, let's look at your business model because we think we could put this new
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tool" We had we had developed it recently when they had come to us back in 2012.
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"We think we could put this new tool to work to really figure out how to enable
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you to grow and meet these growth projections." Because remember, we're a
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lender. So we're looking at their growth projections to make sure they can repay.
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Um if you really want to meet these growth projections, you can't rely on what is potentially shrinking segment of
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your base, which are tuition-paying students. Um and so let us use this methodology
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that we've developed to really figure out how we can enhance your business model and also
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enhance access to students that wouldn't otherwise have access to your quality
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institution." Uh so it was a it was really a win-win um of putting the two together.
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So when you approach situations like this, how do you balance the financial considerations versus the social
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considerations? Right, that's a very good question because it's a common question and it's not extremely
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obvious to many people when we're going about doing this, including our clients.
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Um and what we really our practice area in this in this instrument is to say, "Look, what I tell my team is if this is
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not going to have a beneficial impact to in a tangible way to the bottom line of
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this company, this case the university, then we're not prepared to really put it
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forward. This is not a CSR program. It's not something that we will submit or assert will generate
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revenue by some form of goodwill. Like we want to see concrete increase in revenues.
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Um and therefore there's no there's no trade-off. You know, and that's for us
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that was a big move when we we sort of discovered the whole shared value concept, which is
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it's really not if if social gains, you know, financial returns lose and vice
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versa. It's really how to really pursue both at the same time. So so once we
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remove this trade-off kind of paradigm that we've lived with for a long time, uh
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we get into this zone of how are we really pushing the envelope and really it really increasing the overall pool of
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economic capital. Uh and that's what makes it exciting because you really, you know, when you
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discover there are ways to do that, um it really really feels good because you're really serving your client and
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you're really serving again our mission, which is um improving, you know, lives
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of of people across the region. And I want to follow up on on what you'd said,
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you know, you said it's not this isn't CSR. And I think there's been a lot of
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skepticism about corporate social responsibility, arguing that it's just kind of marketing, it's window dressing,
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it's not it's not real and authentic. So do you think this shared value approach
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is the kind that can um give rid of that skepticism and really build a an authentic approach to corporations
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having a social impact? Right. Well, let me be clear. I don't have anything against CSR and I think companies who
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who commit to robust corporate social responsibility programs can be fabulous and can have a dramatic impact.
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The distinction I make is that um what we're looking for is not something that's going to be a cost center because
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what what I've seen in my years of business and particularly in the context of uh
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IDB where I work with the private sector, CSR programs, as wonderful as they may
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be, when budgets get tight, it's first thing to get cut, right? And so what we're looking for is really sustainable
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change, transformational change. And you can't really rely on that tremendously
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if you at any time risk it gets cut because, "Oh my god, we got to go back to core business because this extra
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thing that we love and we've shown great results with, we just can't afford it
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anymore." And so when you weave in these investments that will derive social
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impact that's part of their core business, you get rid of that risk. You you seriously mitigate that risk. I
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mean, of course, you know, you always have some risk, but you certainly have dampened
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this dichotomy of this arm of the business is doing these great things and this arm of the business is continuing
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to produce revenue. Um and really, you know, that nexus of of weaving them together so they're inextricably linked
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um is really the sweet spot that we're after. So let's say you weave together the the
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financial considerations and the social impact. One of the big challenges uh of course is that measuring social impact
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is very hard. Mhm. Uh can you walk us through how you do that uh using your shared value
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approach? Sure, it is very hard. Um and we what we do is we we take a basic cost-benefit analysis uh you know,
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methodology that's that's known all over um and we apply it to figure out how to
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prioritize uh you know, we start at the the starting point is what's your challenge
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to growth? So it's very much a business starting point. Um in the case of the university, business
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challenge was, "I may not have as many new students entering and uh you know, and and paying tuition."
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It's a pretty primitive business model, you know, when you get down to the sources and uses of capital for to run a
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for-profit university. Um and so if we said, "Okay, so if that's your challenge,
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what can we do to help you ensure that you will really increase your sources of revenue?" Um and then
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when we look at this from the social angle, what are the pockets that are tremendously in um
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sort of inordinately underrepresented to attend university? Peru's had a rapid
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expansion in what we consider emerging middle class, which is a tremendous success story. They've had robust um GDP
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growth and so forth. But there's still large pockets um that just don't have
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access. 50% of the youth actually don't graduate high school. So you're already
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dealing with half of the potential universe to potentially enter college. Um So when we look at those things, we
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figure out how can we best design a program that will enable you to recruit more students
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and not only recruit them, but retain them because the highest dropout rates are from this demographic.
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That their opportunity cost to not go out into the labor force immediately, even if it's not a high-paying job, is
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so high that the dropout rate continues to be a big struggle. Um and so in this case, we said, "Look,
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let's figure out how to create programs that you you, university, will have to
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invest in that will create a platform that will enable these students to make it to the finish line.
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Not only recruit them, but retain them. Um and so we measure that by in case of the university, of course,
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my public sector colleagues have all sorts of data that is well established in terms of you know higher income and
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so forth for people who do graduate from college as opposed to high school graduates or or even not
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graduates. So in that case it was um sort of the social impact empirical data pool that we could rely
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on was was quite great and some of the other projects that we've looked into
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engagements we've worked with we had to extrapolate at times but we do we do a lot with stakeholder analysis.
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We go out we do a lot of interviews with people. What will really matter to you?
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What will really improve your quality of life? And many times another fascinating
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thing of the tool as we've been implementing it has been the answers we collect back and we bring
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back to our client are different from what their expectation had been. So even when clients have been
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entertaining I really you know I feel in my gut that something I we need to do something.
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Um when we bring back the answers of this is what would matter most because from a financial perspective that's what
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you want to invest in if you want bang for your buck. They say really? Cuz I thought it was this other thing.
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So it's been a really um it's been a really useful tool also just as an eye opener. Um even for companies
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who are on the journey so to speak of of looking for possibilities to prioritize and kind of re-stack the
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deck of look if you really want this to be impacting your bottom line you really
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should go this way. Quick follow up. Can you give an example of that? Something that surprised you in this
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way. Sure. Our first engagement we did with avocado producer in in Chile. So it was a had been a small size
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company really started growing. Again they came to us for an expansion loan. And we said you know we think this is
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it's such a high it's such a densely um sort of high employment type industry in
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terms of agribusiness. They have all the pickers and packers and everything. Um we said what's your biggest challenge
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and they said well our biggest challenge is turnover. You know people leave the farm and we have to retrain people and
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it's a huge cost and drain on net income right? Because we have good gross income and then we
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have to you know it gets used up. Um so we said um well what have you been you know what have
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you been contemplating on your own before we got here to address this? And they said well you know we're
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we know we've got to figure out some you know the key to cost avoidance is getting is retaining better retention
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and better retention we think will be some form of loyalty and we really don't
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know what that is. But we're thinking if we just bite the bullet and and invest the money
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to build a daycare center that might be the ticket because people will want to come and you know they'll have a place
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for their children so forth. And we said well that sounds great. You know well that let's put that into the
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kit of things that we explore. So we did. Uh and what we through the process and the methodology
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that we followed what we surfaced for them was well you know it turns out the two million dollars that it would take
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you to build the daycare center probably would not be your optimal investment vis-a-vis
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cost avoidance for retraining. Because between yourself the people who work for the company as well as sort of
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outsourced supply chain farmers of 20,000 total you'd reach maybe 100 that would be able
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to walk to the facility of the daycare with their kids. And so those 100 would certainly stay
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with you but you got to figure out how to retain you know 20,000. So when we did the stakeholder analysis
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what we found was more and more and predominantly was women that were employed uh and that
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they needed to increase the retention of. And more and more the answers were well
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if the company had some program so that my kids could get an education and basically they wouldn't be
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this wouldn't be their only option you know to to be gainfully employed. That
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would make me really want to stay with the company. And so we said okay so instead of taking
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the two million dollars that you were prepared to spend to invest in this daycare center you'd need to set it up
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for educational credits for for the various employees and redirect. So again it's not an increase in spending right?
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Cuz again CSR you know people say oh how much are you spending? Can you spend more?
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This is an optimization and reallocation of resources that they were already prepared to spend.
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Um that will drive that retention which of course then drives better bottom line.
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So that was a interesting and it was our first you know our first case out of the
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gate. Out of the gate. It is it is. So you know when you approach the issues through this shared
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value do you find the clients receptive to to the approach and are there some challenges with getting them to to
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understand why you're doing it and how they can implement it? There are definitely challenges yes. Um
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I think the why is probably less of a challenge right? Cuz we are the IDB and so anyone who's who's coming to us for a
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loan has a certain expectation that you know they are aware of our mission. They know
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we're really not uh engaging them for profit reasons. So so they figure we're going to be coming
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with something right? And and for many years that something has been we'll support private activity to a do
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no harm standard. And so we have very high standards for you know social and um environmental compliance.
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In this space what we've said is yeah that that's still there. That's not going anywhere.
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But this is to really tap into a different way of doing business and really shift your
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business as usual. So challenges. Challenges have been um initially often times we get kind of
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redirected to whoever they have in charge of sustainability um or if they have a CSR program you know
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we're talking to that person. Uh and what we found absolutely 100% of the time and when I talk to practitioners
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who are doing similar types of engagements you need the C-suite. You need either the CEO or at a minimum the CFO
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to be on board with us cuz it does have to be part of the core business. And so saying yeah I'd love to talk to your CSR
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person but I really need to talk to that CFO. And the unique ability of us to accomplish
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that is that of course we are usually coming also with a loan. We're not just
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consultants coming in as you know providing advisory services. They're also looking to us for a loan
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uh for some kind of expansion or sometimes you do greenfield projects you know that didn't exist before. Um
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and clearly in that capacity we're talking to the CFO and the CEO. And so we say no no no.
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Um sir or ma'am we have one more agenda item we want to talk to you about not with the guy down the hall. Uh so so
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that's you know that's a recurring challenge but we we seem to manage it
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and we uh we've got a lot of good mean the the projects we've we're now we've now done
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almost a dozen of these and every time when we do make that sort of business case to the people in charge
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they really you know they really get it. It hasn't been that tremendous a struggle.
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It's just getting the time and and maybe you know getting the agenda item to be properly
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worded so that we have the time. As you were developing the shared value methodology
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um what were some of the challenges you faced in in in in developing it? And and
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what would be your assessment of what the model does well and what it doesn't
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do as well? Well let's see. Um some of the challenges initially were we know we brought in some outside
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consultants that big consulting firms you know to help us really build the nuts and bolts of of a model
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that we could use. Uh and there we encountered far too frequently than than I would have expected
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this sort of um creeping along into kind of the the well it'll produce goodwill. Like no
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you know we're going to be really really hardcore like I need to see dollars and
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cents of what it's going to produce vis-a-vis the bottom line because if it's too
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um intangible it's not going to meet my bar to say to the CFO who I'm insisting to talk to not
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the CSR guy uh it's not going to meet the bar to say this deserves your attention. This needs
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to be part of your core business. So that was you know was a challenge. I think now you know we've been working
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with some of the same folks and they know we're rather dogmatic on that. Uh and so it's happening less.
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Um So I think the the methodology is robust in that sense um and that's really what makes it kind
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of click. So where do you see IDB going in the future in the area of social impact
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investing? Well I think increasingly we are um we're definitely going more into the
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space of um it's not enough to say it's a great investment and you're meeting these very high
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international best practice standards. It's really about where's this sort of
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voluntary area that you can go in. I mean, the shared value vis-a-vis social impact
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we're also replicating in the climate space and how can our how can we green
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our portfolio and make our companies more energy efficient? How can they invest in natural capital
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in ways that will again drive their bottom line? Working with the some very large forestry
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project sponsors in that space. So, it's really about you know, using that engagement that we have with
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private sector actors, big, large-scale private sector actors to really shift that business as usual
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model into this area of sort of driving profits and driving impact at the same time.
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Yeah, I you know, I I see a big future ahead of us because it really looks it looks like it really works, you know,
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it's it's really dovetails and aligns interest. And once you get the alignment
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of interest, you really can start to look for scale. As as we wind down, could we end perhaps
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with an example of one or two of your green growth investments and and how you went through the
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the financial and social impact analysis there? How how how do you approach it? Sure.
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Um well, the in terms of green growth, we are looking at a lot of um we're doing a you know, the our
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infrastructure practice is doing a huge amount of renewable energy. We're really
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haven't done fossil fuel-based generation projects in several years, which is a fantastic thing for me to be
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able to say because of course, you know, they're still out there. Um What I find I guess most
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uh fascinating is really our ability to get some private investors and private owners of companies to make investments
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that are not urgent. Because so so we the shared value thing was really born on the back of they're coming to us for
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organic growth purposes. They need to expand. And so let's use that entree to say,
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let us tell you about this other really interesting thing for you. Now we're
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we're we're moved beyond that to say, you're operating. You're not coming to
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us for a loan. But you know what? If we surface these opportunities for you to invest, and
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particularly in energy efficiency where usually they're small-scale investments,
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um they that you know, we we are able to lend to you for this, right? So, it's a
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different it's a different starting point. It's not they're coming cuz they need to expand.
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It's we're telling them, "Hey, you know, there's opportunities for you to
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actually save on your energy consumption, save on your bills. The return, you know, on the investment will
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only take a couple of years. We'll make sure we structure the debt in a way that, you know, it work the economics
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work." Um and it's it's building into a whole new um business line that that really changes the dynamic of
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how we're going about addressing the climate change issue and and um really producing, you know, mitigation in ways
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that we hadn't really pursued beforehand. So. Great. Well, Kelly, thank you so much
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for speaking with me. Sure, my pleasure.