Carrots as well as sticks are required to generate more private sector interest in social impact, according to the Schwab Foundation’s Daniel Nowack.

Radical thinking is required if private sector investment is to help close the funding gap for social development in emerging markets, believes Daniel Nowack, head of social innovation at the Schwab Foundation for Social Entrepreneurship.

According to Nowack, current aid funding cuts make it necessary to “double down” on efforts to make social impact financing attractive to the private sector.  

Developing countries face a $4.3trn annual financing gap for sustainable development, of which $1.8trn is for climate needs, according to the most recent UN data. The prospects for narrowing that gap have not been improved by shrinkage in official development assistance from developed nations, which the OECD has forecast will fall by between 9% and 17% in 2025, following a 9% fall in 2024. 

The policy toolbox to encourage environmentally, or socially impactful work still mostly consists of negative incentives aimed at preventing or discouraging companies from doing more harm, such as carbon taxes and the current framing of company disclosure requirements, explains Nowack.

“We are mostly working with sticks at the moment. These are a good starting point, but the positive aspect of it is also important,” Nowack says. “We know from behavioural psychology that incentives just work better to encourage change, and that’s where we think the toolbox is currently void. We have limited opportunities to really incentivise positive contributions to society and to the environment.” 

In an effort to remedy this situation, the Schwab Foundation – alongside SK Group’s Center for Social Value Enhancement Studies (CSES) and Rockefeller Philanthropy Advisors – published a report earlier this year outlining some innovative solutions that they think can mobilise significant private sector funding for social development themes, if they can be scaled up.

Chief among these is tradeable impact, the idea of creating exchanges on which credits derived from making social impact can be traded, taking a lead from the development of carbon credits markets.

Given the number of different types of social impact and the numerous metrics used to measure them, this would seem a more complicated task than establishing a market based on the single metric of carbon emissions saved.

But Nowack says those designing methods to combat global warming at international scale in the late 1990s, following the signing of the Kyoto Protocol, also had a number of possible metrics they could have focused on before narrowing them down to carbon emissions. 

A similar process could take place with social impact credits, he argues, noting that gains in different social sectors tended to overlap, allowing for the creation of a marketplace that could revolve around a core measure, such as rising income.  

“By creating better healthcare outcomes, you may be able to increase life expectancy by a year, and at the same time also your incremental income. So, there are ways of standardising so you can trade credits across different input aspects,” he says.

There is already overlap developing between carbon credits and social impact, with carbon credit buyers, such as Microsoft and Salesforce, applying premium pricing to credits with verified social impact claims in areas such as job creation, food security and health outcomes. 

Nowack acknowledges that putting social impact trading markets in place and scaling them up will require years of collaboration across a web of stakeholders and will not be an immediate solution to the impact funding crisis. Most importantly, it will require a system that puts communities first in defining the impact that is most meaningful to them and their contexts, he points out.

Key enablers for impact trading identified in the report include shared frameworks for defining and assessing impact; methods for assigning value and enabling trading; the creation of registries and exchanges; verification and assurance systems; financial and regulatory incentives to stimulate demand; and governance frameworks prioritising transparency, legitimacy, and equity.

“It’s a long-term process to get to scale for sure, but if we don’t start the journey now, we’re not going to be anywhere in five years from now,” says Nowack.

Pilot markets at a regional or community level focused on specific types of impact, such as healthcare or education, are the most obvious starting points. 

Meanwhile, some small-scale blueprints for electronically-based marketplaces already exist, such as Common Good Marketplace, which provides a platform for conversion of social and environmental outcomes in the developing world into standardised verified impact assets, which can be purchased to support progress towards the UN Sustainable Development Goals. 

One related area championed by the Schwab Foundation and its partners that is already gaining traction is the use of community currency schemes. These incentivise social impact by providing people who do socially valuable work with redeemable impact credits to add to any existing regular income they may have.  

Under the Zlto community currency system in South Africa, around 500,000 young people, often from disadvantaged areas, earn credits for doing work in the community, which they can then redeem using a phone app at over 3,000 stores in exchange for food, clothing, mobile data, and transport-related purchases.

Further pioneering work is being done in countries such as South Korea, where community currencies are issued by some local governments to encourage consumers to spend on local produce and in locally based stores. 

In the short-term, other better-established solutions to tap both private and public investment, such as outcomes contracts, may be better placed to draw in the private investment that is urgently needed.

“A lot of the tools related to social impact bonds have been set up in partnership with the public sector, but we want to get more companies to the table to become outcomes payers,” Nowack says. “Already today, the Korean SK Group, the second largest conglomerate in the country, has supported over 400 social enterprises with $51 million in Social Progress Credits, a system that rewards them for the social impact they are creating.”

A driver for this could be increasing pressure on multinational companies to address social impact issues in their global supply chains.

“These companies may currently work on one-on-one partnerships with NGOs, but outcomes funding can enable them to actually address social impact in their supply chains through more of a market mechanism by creating the demand for certain social outcomes,” he says.

The Schwab Foundation is currently building coalitions with partners to see how this approach can be taken further. Nowack says the focus initially will be on how companies can pay for improved health outcomes in their own supply chains. 

Companies are also being encouraged to invest in pre-existing outcomes structures to get a better understanding of how they can be used to positively impact their own material social risks.

One existing structure with similar attributes Nowack highlights is a $75m facility provided by IFC to PepsiCo Mexico in 2024, allowing the company to offer preferential short-term financing to its suppliers with rates aligned to hitting environmental and social targets for decarbonisation, child labour and forced labour. That deal is part of the IFC’s wider $1bn Global Trade Supplier Finance programme.

In terms of scaling up these innovative approaches to private sector participation in social impact markets, the Schwab Foundation is keen to support the implementation plans of organisations that have experience in the space, moving beyond South Korea and South Africa, where it already has pilots.

Another approach the Schwab Foundation is considering carrying out in parallel is scenario analysis using artificial technology, which allows simulations to be run showing the impact on an economy of running different mechanisms that boost social sector investment.