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Our guest today is Kelly Pacini, chief
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of strategy for the private sector at
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the Inter-American Development Bank or
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IDB.
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Uh we will speak with her about the
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bank's social impact initiatives and
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specifically the shared value appraisal
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that the bank uses in its investments.
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Uh Kelly, welcome to Knowledge at
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Wharton. Thank you for joining us today.
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Thank you very much. Thank you for
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having me.
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So to begin with, I wonder if we can
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start by talking about IDB's approach to
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social impact and specifically uh what
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is the shared value appraisal and what
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role does it play in the bank's lending?
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Sure.
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Uh well, IDB as an institution for many
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years, of course, uh as a mission-driven
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lender is very concerned and interested
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in social impact.
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Uh the shared value appraisal is a
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relatively new tool that we developed
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specifically to work with our private
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sector clients because there's a big
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area of the bank
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uh that I'm part of where we're
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supporting for-profit investors um
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across Latin America and the Caribbean.
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Uh and the intent of that instrument is
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to help those private investors really
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find the intersection between their
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business challenges and drivers for
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better, stronger, more robust growth of
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their companies.
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Uh
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the intersection of that with the social
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needs and sort of social surroundings uh
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in the place of operation where their
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companies are operating. So it's really
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surfacing opportunities that really can
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address both
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elements at the same time.
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So let's discuss one concrete case,
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right, where you use the shared value
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appraisal. And this is the uh San
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Ignacio University in Lima, Peru. Can
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you tell us about that deal and how the
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shared value appraisal was used? Sure,
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absolutely. Uh that was a a really
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wonderful opportunity for us to put this
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tool to work.
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Uh university was established back in
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1995. It's growing robustly and it came
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to IDB for, let's say, a a basic
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brick-and-mortar expansion loan. We do a
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lot of infrastructure lending uh across
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all sectors.
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Uh it is for-profit university and they
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need to expand. They need to build more
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campus buildings to accommodate the
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growth in in students. Um yet from our
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knowledge of the region, we know that in
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Peru uh there's a dramatic lack of
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access to quality education, especially
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at the higher uh
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tertiary levels
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for income low-income students and
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disadvantaged students. Uh
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And so when they came to us for an
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expansion loan, we said, "Okay, well, we
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you know, we want to help you expand and
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uh while we're looking at the credit,
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let's look at your business model
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because we think we could put this new
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tool" We had we had developed it
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recently when they had come to us back
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in 2012.
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"We think we could put this new tool to
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work to really figure out how to enable
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you to grow and meet these growth
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projections." Because remember, we're a
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lender. So we're looking at their growth
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projections to make sure they can repay.
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Um
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if you really want to meet these growth
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projections, you can't rely on
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what is potentially shrinking segment of
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your base, which are tuition-paying
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students.
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Um and so let us use this methodology
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that we've developed to really figure
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out how we can
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enhance your business model and also
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enhance access to students that wouldn't
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otherwise have access to your quality
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institution."
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Uh so it was a it was really a win-win
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um of putting the two together.
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So when you approach situations like
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this, how do you balance the financial
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considerations versus the social
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considerations? Right, that's a very
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good question because it's
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a common question and it's not extremely
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obvious to many people when we're going
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about doing this, including our clients.
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Um
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and what we really our practice area in
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this in this instrument is to say,
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"Look, what I tell my team is if this is
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not going to have a beneficial impact to
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in a tangible way to the bottom line of
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this company, this case the university,
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then we're not prepared to really put it
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forward. This is not a CSR program. It's
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not something that
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we will submit or assert will generate
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revenue by some form of goodwill. Like
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we want to see concrete increase in
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revenues.
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Um and therefore there's no there's no
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trade-off. You know, and that's for us
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that was a big
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move when we we sort of discovered the
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whole shared value concept, which is
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it's really not if if social gains, you
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know, financial returns lose and vice
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versa. It's really how to really pursue
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both at the same time. So so once we
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remove this trade-off kind of
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paradigm that we've lived with for a
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long time, uh
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we get into this zone of how are we
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really pushing the envelope and really
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it really increasing the overall pool of
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economic capital.
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Uh and that's what makes it exciting
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because you really, you know, when you
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discover there are ways to do that, um
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it really really feels good because
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you're really serving your client and
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you're really serving again our mission,
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which is um improving, you know, lives
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of of people across the region. And I
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want to follow up on on what you'd said,
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you know, you said it's not this isn't
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CSR. And I think there's been a lot of
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skepticism about corporate social
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responsibility, arguing that it's just
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kind of marketing, it's window dressing,
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it's not it's not real and authentic. So
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do you think this shared value approach
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is the kind that can um give rid of that
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skepticism and really build a an
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authentic approach to corporations
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having a social impact? Right. Well, let
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me be clear. I don't have anything
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against CSR and I think companies who
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who commit to robust corporate social
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responsibility programs can be fabulous
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and can have a dramatic impact.
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The distinction I make is that
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um
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what we're looking for is not something
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that's going to be a cost center because
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what what I've seen in my years of
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business and particularly in the context
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of uh
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IDB where I work with the private
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sector,
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CSR programs, as wonderful as they may
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be, when budgets get tight, it's first
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thing to get cut, right? And so what
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we're looking for is really sustainable
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change, transformational change. And you
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can't really rely on that tremendously
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if you at any time risk it gets cut
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because, "Oh my god, we got to go back
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to core business because this extra
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thing that we love and we've shown great
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results with, we just can't afford it
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anymore."
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And so when you weave in these
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investments that will derive social
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impact that's part of their core
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business, you get rid of that risk. You
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you seriously mitigate that risk. I
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mean, of course, you know, you always
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have some risk, but you certainly have
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dampened
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this dichotomy of this arm of the
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business is doing these great things and
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this arm of the business is continuing
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to produce revenue. Um and really, you
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know, that nexus of of weaving them
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together so they're inextricably linked
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um is really the sweet spot that we're
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after.
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So let's say you weave together the the
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financial considerations and the social
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impact. One of the big challenges uh of
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course is that measuring social impact
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is very hard.
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Mhm. Uh can you walk us through how you
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do that uh using your shared value
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approach? Sure, it is very hard. Um and
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we what we do is we we take a basic
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cost-benefit analysis uh you know,
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methodology that's that's known all over
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um and we apply it to figure out how to
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prioritize
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uh you know, we start at the the
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starting point is what's your challenge
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to growth? So it's very much a business
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starting point.
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Um
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in the case of the university, business
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challenge was, "I may not have as many
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new students entering and
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uh you know, and and paying tuition."
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It's a pretty primitive business model,
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you know, when you get down to the
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sources and uses of capital for to run a
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for-profit university. Um and so
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if we said, "Okay, so if that's your
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challenge,
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what can we do to help you ensure that
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you will really increase
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your sources of revenue?" Um and then
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when we look at
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this from the social angle,
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what are the pockets that are
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tremendously in um
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sort of inordinately underrepresented
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to attend university? Peru's had a rapid
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expansion in what we consider emerging
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middle class, which is a tremendous
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success story. They've had robust um GDP
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growth and so forth. But there's still
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large pockets um that just don't have
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access. 50% of the youth actually don't
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graduate high school. So you're already
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dealing with half of the potential
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universe to potentially enter college.
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Um
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So when we look at those things, we
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figure out how can we best
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design a program that will enable you to
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recruit more students
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and not only recruit them, but retain
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them because the highest dropout rates
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are from this demographic.
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That their opportunity cost to not go
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out into the labor force immediately,
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even if it's not a high-paying job, is
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so high
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that the dropout rate continues to be a
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big struggle.
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Um and so in this case, we said, "Look,
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let's figure out how to create programs
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that you you, university, will have to
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invest in
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that will
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create a platform that will enable these
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students to make it to the finish line.
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Not only recruit them, but retain them.
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Um and so we measure that by in case of
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the university, of course,
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my public sector colleagues have all
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sorts of data that is well established
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in terms of you know higher income and
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so forth for people who do graduate from
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college as opposed to
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high school graduates or or even not
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graduates. So in that case it was um
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sort of the social impact
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empirical data pool that we could rely
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on was was quite great and some of the
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other projects that we've looked into
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engagements we've worked with
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we had to extrapolate at times but we do
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we do a lot with stakeholder analysis.
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We go out we do a lot of interviews with
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people. What will really matter to you?
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What will really improve your quality of
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life? And many times another fascinating
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thing of the tool as we've been
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implementing it has been
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the answers we collect back and we bring
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back to our client are different from
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what their expectation had been.
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So even when clients have been
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entertaining I really you know I feel in
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my gut that something I we need to do
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something.
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Um when we bring back the answers of
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this is what would matter most because
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from a financial perspective that's what
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you want to invest in if you want bang
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for your buck.
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They say really?
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Cuz I thought it was this other thing.
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So it's been a really um
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it's been a really useful tool also just
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as an eye opener. Um even for companies
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who are on the journey so to speak of of
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looking for possibilities
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to prioritize and kind of re-stack the
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deck of look if you really want this to
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be
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impacting your bottom line you really
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should go this way.
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Quick follow up. Can you give an example
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of that?
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Something that surprised you in this
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way.
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Sure.
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Our first engagement we did with
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avocado producer in in Chile.
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So it was a had been a small size
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company really started growing. Again
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they came to us for an expansion loan.
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And we said you know we think this is
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it's such a high it's such a densely um
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sort of high employment type industry in
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terms of agribusiness. They have all the
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pickers and packers and everything. Um
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we said what's your biggest challenge
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and they said well our biggest challenge
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is turnover. You know people leave the
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farm and we have to retrain people and
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it's a huge cost
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and drain on net income right? Because
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we have good gross income and then we
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have to you know it gets used up.
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Um
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so we said um
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well
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what have you been you know what have
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you been contemplating on your own
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before we got here to address this? And
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they said well you know we're
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we know we've got to figure out some you
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know the key to cost avoidance
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is getting is retaining better retention
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and better retention we think will be
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some form of loyalty and we really don't
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know what that is. But we're thinking if
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we just
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bite the bullet and and invest the money
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to build a daycare center that might be
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the ticket because people will want to
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come and you know they'll have a place
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for their children so forth.
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And we said well that sounds great. You
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know well that let's put that into the
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kit of things that we explore.
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So we did.
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Uh and what we
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through the process and the methodology
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that we followed what we surfaced for
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them was well you know it turns out the
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two million dollars that it would take
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you to build the daycare center
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probably would not be your optimal
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investment vis-a-vis
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cost avoidance for retraining.
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Because
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between yourself the people who work for
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the company as well as sort of
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outsourced supply chain farmers of
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20,000 total
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you'd reach maybe 100 that would be able
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to walk
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to the facility of the daycare with
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their kids.
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And so those 100 would certainly stay
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with you but you got to figure out how
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to retain
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you know
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20,000.
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So
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when we did the stakeholder analysis
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what we found was more and more and
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predominantly was women that were
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employed uh and that
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they needed to increase the retention
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of.
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And more and more the answers were well
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if the company had some program so that
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my kids could get an education and
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basically they wouldn't be
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this wouldn't be their only option you
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know to to be gainfully employed. That
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would make me really want to stay with
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the company.
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And so we said okay so instead of taking
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the two million dollars that you were
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prepared to spend to invest in this
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daycare center you'd need to set it up
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for educational credits for for the
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various employees and redirect. So again
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it's not an increase in spending right?
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Cuz again CSR you know people say oh how
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much are you spending? Can you spend
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more?
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This is an optimization and reallocation
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of resources that they were already
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prepared to spend.
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Um that will drive that retention which
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of course then drives better bottom
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line.
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So that was a interesting and it was our
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first you know our first case out of the
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gate.
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Out of the gate.
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It is it is. So you know when you
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approach the issues through this shared
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value do you find the clients receptive
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to to the approach and are there some
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challenges with getting them to to
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understand why you're doing it and how
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they can implement it?
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There are definitely challenges yes. Um
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I think the why is probably less of a
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challenge right? Cuz we are the IDB and
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so anyone who's who's coming to us for a
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loan
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has a certain expectation that you know
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they are aware of our mission. They know
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we're really not uh engaging them for
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profit reasons. So
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so they figure we're going to be coming
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with something right? And and for many
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years that something has been
00:15:35
we'll support private activity to a do
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no harm standard. And so we have very
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high standards for you know social and
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um
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environmental compliance.
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In this space what we've said is yeah
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that that's still there.
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That's not going anywhere.
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But this is to really tap into
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a different way of doing business and
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really shift your
00:15:57
business as usual. So challenges.
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Challenges have been
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um
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initially often times we get kind of
00:16:06
redirected to whoever they have in
00:16:08
charge of sustainability
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um
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or if they have a CSR program you know
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we're talking to that person. Uh and
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what we found absolutely 100% of the
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time and when I talk to practitioners
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who are doing similar types of
00:16:22
engagements you need the C-suite. You
00:16:24
need
00:16:25
either the CEO or at a minimum the CFO
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to be on board with us cuz it does have
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to be part of the core business. And so
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saying yeah I'd love to talk to your CSR
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person but I really need to talk to that
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CFO.
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And
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the unique ability of us to accomplish
00:16:42
that is that of course we are usually
00:16:44
coming also with a loan. We're not just
00:16:47
consultants coming in as you know
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providing advisory services. They're
00:16:50
also looking to us for a loan
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uh for some kind of expansion or
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sometimes you do greenfield projects you
00:16:55
know that didn't exist before. Um
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and clearly in that capacity we're
00:17:01
talking to the CFO and the CEO. And so
00:17:03
we say no no no.
00:17:05
Um
00:17:06
sir or ma'am we have one more agenda
00:17:09
item we want to talk to you about
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not with the guy down the hall. Uh so so
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that's you know that's a recurring
00:17:16
challenge but we we seem to manage it
00:17:19
and we uh
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we've got a lot of good mean the the
00:17:23
projects we've we're now we've now done
00:17:26
almost a dozen of these
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and
00:17:29
every time when we do make that sort of
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business case to the people in charge
00:17:35
they really you know they really get it.
00:17:36
It hasn't been
00:17:38
that tremendous a struggle.
00:17:40
It's just
00:17:41
getting the time and and maybe you know
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getting the agenda item to be properly
00:17:46
worded
00:17:47
so that we have the time. As you were
00:17:49
developing the shared value methodology
00:17:52
um what were some of the challenges you
00:17:54
faced in in in in developing it? And and
00:17:59
what would be your assessment of what
00:18:00
the model does well and what it doesn't
00:18:02
do as well?
00:18:05
Well let's see. Um
00:18:07
some of the challenges initially were we
00:18:09
know we brought in some outside
00:18:11
consultants that big consulting firms
00:18:13
you know to help us really build
00:18:16
the nuts and bolts of of a model
00:18:19
that we could use. Uh and there we
00:18:22
encountered far too frequently than
00:18:26
than I would have expected
00:18:28
this
00:18:29
sort of
00:18:30
um creeping along into kind of the
00:18:35
the well it'll produce goodwill. Like no
00:18:38
you know we're going to be really really
00:18:41
hardcore like I need to see dollars and
00:18:44
cents of what it's going to produce
00:18:46
vis-a-vis the bottom line because if
00:18:47
it's too
00:18:50
um intangible
00:18:52
it's not going to meet my bar to say to
00:18:55
the CFO who I'm insisting to talk to not
00:18:57
the CSR guy
00:18:58
uh it's not going to meet the bar to say
00:19:00
this deserves your attention. This needs
00:19:03
to be part of your core business. So
00:19:04
that was you know was a challenge. I
00:19:06
think now you know we've been working
00:19:08
with some of the same folks and they
00:19:10
know
00:19:11
we're rather dogmatic on that.
00:19:13
Uh and so it's happening less.
00:19:15
Um
00:19:18
So I think the the methodology is robust
00:19:21
in that sense
00:19:23
um and that's really what makes it kind
00:19:25
of click.
00:19:27
So where do you see IDB going in the
00:19:28
future in the area of social impact
00:19:30
investing?
00:19:32
Well I think increasingly we are um
00:19:36
we're definitely going more into the
00:19:38
space of um
00:19:42
it's not enough to say it's a great
00:19:44
investment and
00:19:47
you're meeting these very high
00:19:48
international best practice standards.
00:19:51
It's really about where's this sort of
00:19:53
voluntary area that you can go in. I
00:19:55
mean, the
00:19:56
shared value vis-a-vis social impact
00:19:57
we're also replicating in the climate
00:19:59
space and how can our how can we green
00:20:01
our portfolio and make our companies
00:20:03
more energy efficient?
00:20:06
How can they invest in natural capital
00:20:07
in ways that will again drive their
00:20:09
bottom line? Working with the some very
00:20:12
large forestry
00:20:14
project sponsors in that space. So, it's
00:20:17
really about
00:20:20
you know,
00:20:21
using that engagement that we have with
00:20:23
private sector actors,
00:20:25
big, large-scale private sector actors
00:20:27
to really shift that business as usual
00:20:30
model into this area of
00:20:33
sort of driving profits and driving
00:20:36
impact at the same time.
00:20:39
Yeah, I you know, I I see a big future
00:20:41
ahead of us because it really looks
00:20:43
it looks like it really works, you know,
00:20:44
it's it's really dovetails and aligns
00:20:48
interest. And once you get the alignment
00:20:50
of interest, you really can start to
00:20:51
look for scale.
00:20:53
As as we wind down, could we end perhaps
00:20:55
with an example of one or two of your
00:20:57
green growth investments and and how you
00:21:00
went through the
00:21:01
the financial and social impact analysis
00:21:04
there? How how how do you approach it?
00:21:06
Sure.
00:21:07
Um
00:21:09
well, the in terms of green growth, we
00:21:11
are looking at a lot of um
00:21:14
we're doing a you know, the our
00:21:15
infrastructure practice is doing a huge
00:21:17
amount of renewable energy. We're really
00:21:19
haven't done fossil fuel-based
00:21:22
generation projects in several years,
00:21:24
which is a fantastic thing for me to be
00:21:26
able to say because of course, you know,
00:21:28
they're still out there.
00:21:30
Um
00:21:32
What I find I guess most
00:21:35
uh
00:21:36
fascinating is really our ability
00:21:40
to
00:21:41
get some private investors and private
00:21:44
owners of companies to make investments
00:21:47
that
00:21:48
are not urgent. Because so so we the
00:21:51
shared value thing was really born on
00:21:52
the back of they're coming to us for
00:21:55
organic growth purposes. They need to
00:21:56
expand.
00:21:57
And so let's use that entree to say,
00:22:01
let us tell you about this other really
00:22:03
interesting thing for you. Now we're
00:22:06
we're we're moved beyond that to say,
00:22:09
you're operating. You're not coming to
00:22:11
us for a loan.
00:22:12
But you know what? If we surface these
00:22:14
opportunities for you to invest, and
00:22:16
particularly in energy efficiency where
00:22:18
usually they're small-scale investments,
00:22:20
um
00:22:22
they that you know, we we are able to
00:22:24
lend to you for this, right? So, it's a
00:22:26
different it's a different starting
00:22:28
point. It's not
00:22:31
they're coming cuz they need to expand.
00:22:33
It's we're telling them, "Hey, you know,
00:22:35
there's opportunities for you to
00:22:36
actually save on your energy
00:22:38
consumption, save on your bills. The
00:22:41
return, you know, on the investment will
00:22:42
only take a couple of years. We'll make
00:22:44
sure we structure the debt in a way
00:22:46
that, you know, it work the economics
00:22:48
work."
00:22:50
Um and it's it's building into a whole
00:22:52
new um business line
00:22:54
that that really changes the dynamic of
00:22:58
how we're going about addressing the
00:23:00
climate change issue and and um really
00:23:03
producing, you know, mitigation in ways
00:23:06
that we hadn't really pursued
00:23:08
beforehand. So.
00:23:11
Great. Well, Kelly, thank you so much
00:23:12
for speaking with me.
00:23:13
Sure, my pleasure.
