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Women’s bonds: high risk or high growth potential?

This article examines the importance of funding women entrepreneurs and how it can benefit the entire community.

In emerging markets, women own between 31 to 38 per cent of all small and medium-sized enterprises (SMEs). Yet the average growth rate of a female-run SME still lags significantly behind that of an SME run by a man1.

The constrained growth of women-owned SMEs is typically due to financing barriers as these businesses tend to be smaller and more informal.2 This places them in a higher risk category which makes access to financing more difficult. It’s a vicious cycle, exacerbated by the generally lower education levels of female entrepreneurs in emerging markets, originating largely from historical inequalities and cultural biases. As such, this group is often seen as a high-risk investment.

However, the payback local and regional communities and investors can expect when investing in these businesses is both attractive and impactful. From an investor perspective, the early successes of Women’s Livelihood Bonds (WLBs) and impact investment highlight the opportunities that gender-equality investment presents. Investing in women certainly makes sound financial sense.

Female-led enterprises: Driving change and profits

In India, Freyr Energy,3 co-founded by entrepreneur Radhika Choudary, is delivering clean and affordable solar power to thousands of households, businesses and remote villages. As a result, these communities have experienced better health and well-being, safer living conditions, greater food security and increased economic growth3.

Freyr Energy is just one of thousands of enterprises to benefit from programmes by the Impact Investment Exchange (IIX), a technology platform that assists what it terms ‘impact enterprises’ in raising capital. Through IIX’s Impact Partners platform, Freyr Energy successfully closed a USD1.5 million Series-A funding round in November 2018. It was also a graduate of IIX’s accelerator programme: Assistance for Capacity-Building & Technical Services (ACTS), which helps these enterprises prepare themselves for the capital-raising process.4

The organisation’s efforts to bring women to the forefront of capital markets arose from the personal journey of IIX founder and CEO Durreen Shahnaz, who experienced first-hand many of the challenges female entrepreneurs in this region face. “Growing up in post-war, poverty-stricken Bangladesh opened my eyes to the realities of inequality and the need to empower under-served communities – especially women – to build a sustainable future,” she said.

Investors also stand to gain

While such investments create beneficial social impact, investors have every reason to expect a return on their capital. An impact enterprise with a triple bottom line, Freyr Energy’s bearing on the community is matched by significant financial gains. The company grew 16-fold in its first four years and turned a profit after just three years. Its success even won Choudary a coveted spot in the Women Entrepreneur Quest competition in India5 – proof that doing good can pay dividends in all senses of the word.

Supporting women entrepreneurs makes sound economic sense. Analysis by Boston Consulting Group (BCG) revealed that for every dollar of funding received, start-ups founded and co-founded by women generated 78 cents, compared to 31 cents6 generated by male-founded start-ups. Companies with a gender balance at every level tend to be more profitable and innovative. 7 8

“Greater diversity fosters innovation, but it can also strengthen resilience – the capacity to survive the unexpected – which is an equally important weapon heading into the next decade,” said Veronica Chau, Partner and Director of Sustainable Investing and Social Impact at BCG.

The tides are changing

With increasing investor interest in socially-linked investment products, a number of financial institutions have developed bonds with gender in mind, raising funds for programmes that impact the livelihoods of women and benefit the community as a whole.

This trend has been growing at a steady pace since 2013 when the International Finance Corporation issued the first-ever women’s bond, raising some USD165 million for enterprises owned or run by women in emerging markets.9 In 2017, eager investors put in orders over USD8.25 billion for Australia’s USD400m QBE Insurance Gender Equality Bond.10 The funds were used to support women in leadership programmes, gender pay reporting, return-to-work programmes, parental leave and domestic violence assistance.

Significant inroads are also being made when it comes to assessing the impact of socially-linked investment products. For example, IIX’s Shahnaz developed the proprietary Impact Assessment methodology, which measures the effect and return from philanthropic, social and impact investments. It has now become the most widely used industry reference in Asia.11

Building on the success of the first WLB, IIX closed the second in January 2020. Supported by the United Nations, the USD12 million bond focuses on supporting 250,000 women across the region12. These bonds enable a group of entrepreneurs and businesses, which may have been excluded in the past, to thrive.

With the spread of the COVID-19 virus having devastating impacts on economies across the globes, stock markets tumbled. Yet at least initially, WLBs proved resilient. In a March op-ed, Shahnaz noted one of the IIX-investors' comments to her "The market is crashing but WLB is up by 3.8%, thank you.”

The vision of IIX to "radically transform financial markets for social good" born following the 2008 Global Financial Crisis  gave Shahnaz, she noted, a glimmer of hope that the lessons of 2008 weren't all for nothing.

A wealth of opportunity

Investing in areas that have traditionally been under-resourced offers a wealth of opportunities to investors, while allowing them to positively impact communities at the same time.

“Gender equality and sustainability can no longer be regarded as separate issues, especially in emerging markets where many women have little access to finance,” said Simon Cooper, Chief Executive of Standard Chartered’s Corporate, Commercial and Institutional Banking division. “A significant aspect of sustainable financing is focusing on the most vulnerable sections of society, providing them with financial support as well as ensuring that they have the infrastructure to utilise it. Our methodology allows clients to design solutions that can drive both social and financial impact where it’s needed most.”

To this end, Standard Chartered backed the IIX, which recently closed its ASEAN and South Asia focussed WLB series, raising USD12 million. The bond was offered to High Net Worth Individuals and Insitutional Investors focussed on impact via a private placement route.13 The bond, which offers credit protection from both the United States Agency for International Development (USAID) and the Rockefeller Foundation, was listed on the Singapore Exchange14 and aims to create sustainable livelihoods for women in Asia.13

“This bond works by lending funds to seven microfinance institutions and developmental enterprises within India, Sri Lanka, Philippines, Indonesia and Cambodia,” explained Rahul Sheth, Executive Director,Debt Capital Markets and Head, Sustainable Bonds at Standard Chartered. These institutions, which have been diligence via a stringent criteria by the IIX, provide financial inclusion services to women.

“The funds will specifically target areas that increase income generation through microcredit and SME loans, financial security through microinsurance, ownership of personal assets, productivity through life skills training, and access to essential products that improve the quality of life for women and their families,” he added.

As United Nations Development Programme economist Anuradha Seth wrote in a 2019 report for UN Women16, “A growing body of evidence shows that economic growth is a gendered process, and that gender inequalities can be barriers to shared prosperity.”

Veronica Chau at BCG said the firm’s analysis shows that “if women and men participated equally as entrepreneurs, global GDP could rise by approximately 3 per cent to 6 per cent, boosting the global economy by USD2.5 trillion to USD5 trillion.”17

The links are clear. WLBs have the capacity to help women access financing so that they can build successful businesses that contribute to the economy. And that’s good for everyone – men and women alike.

1 https://www.ifc.org/wps/wcm/connect/2a9123b3-d369-4115-8cbf-19083218ce64/G20_Women_Report.pdf?MOD=AJPERES&CVID=jqeI-xk p. 5

2 https://www.worldbank.org/en/topic/smefinance

3 https://iixglobal.com/india-based-solar-energy-firm-freyr-energy-raises-us1-5m-series-a-on-impact-partners-the-worlds-largest-crowdfunding-platform-for-impact-investing/

4 https://iixglobal.com/enterprise-spotlight-freyr-energy/

5 https://iixglobal.com/india-based-solar-energy-firm-freyr-energy-raises-us1-5m-series-a-on-impact-partners-the-worlds-largest-crowdfunding-platform-for-impact-investing

6 https://www.bcg.com/publications/2018/why-women-owned-startups-are-better-bet.aspx

7 https://www.bcg.com/en-us/publications/2018/how-diverse-leadership-teams-boost-innovation.aspx

8 https://qz.com/612086/huge-study-find-that-companies-with-more-women-leaders-are-more-profitable

9 https://www.reuters.com/article/worldbank-women-bond-idUSL2N0IR1IN20131106

10 https://www.reuters.com/article/qbe-debt-bonds/update-1-qbe-insurances-dollar-gender-equality-bond-more-then-20-times-oversubscribed-idUSL3N1NJ384

11 https://iixglobal.com/durreen-shahnaz

12 https://iixglobal.com/singapore-based-impact-investor-iix-closes-12m-womens-livelihood-bond-2-deal-street-asia

13 https://www.finews.asia/finance/30726-impact-exchange-in-singapore-completes-issuance-for-pro-women-bond

14 https://iixglobal.com/wlb_series_wins_p4g_award_2019

15 https://unfccc.int/climate-action/momentum-for-change/financing-for-climate-friendly-investment/women-livelihood-bond-2

16 https://www.unwomen.org/media/headquarters/attachments/sections/library/publications/2019/gender-equality-and-inclusive-growth-en.pdf?la=en&vs=3753

17 https://www.bcg.com/publications/2019/boost-global-economy-5-trillion-dollar-support-women-entrepreneurs.aspx

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