Catalytic capital: Scaling impact in Asia
By Co-Axis
October 10, 2024
Photo Credit: Fairventures Social Forestry
Each year, more than 20,000 migratory water birds fly to the Anlung Pring Protected Landscape in Cambodia. In addition to providing a haven from harsh winter conditions, the landscape’s wetlands serve as a significant feeding area for globally threatened species, such as the Sarus Crane. Local farmers also rely on the fertile, water-rich soils of the area to cultivate rice as a source of income and to ensure food security.
Unfortunately, the use of chemical fertilizers has led to negative environmental impacts such as the degradation of arable land and losses in biodiversity.
To mitigate these issues, UK-based charity Wildfowl & Wetlands Trust (WWT) provided philanthropic funding to Mandai Nature – the conservation arm of Singapore’s Mandai Wildlife Group and a member of the Temasek Trust ecosystem – and government organisations in Cambodia to introduce sustainable agriculture practices to local farmers.¹
With this funding, WWT and its partners worked with the farmers to organise community engagement sessions to build trust with local communities; pilot innovative and sustainable environmental solutions; and scale these solutions in other areas such as Vietnam’s Mekong Delta.
As a result, 150 rice farmers were empowered through training and education to reduce their use of chemical fertilisers by 15% and plant drought-tolerant, biodiversity-friendly red jasmine rice over 150 hectares.
WWT’s model of philanthropic funding was strategic, collaborative, and considered the needs of all stakeholders and beneficiaries, as well as urgent imperatives for environmental protection. Allocated to community engagement and to support pilot projects, this kind of funding is just one example of how catalytic capital has allowed positive impact to be delivered at scale.
Catalytic capital refers to capital that is patient, risk-tolerant and flexible, with the goal of unlocking, or catalysing, additional investment for projects that drive positive social or environmental impact. Despite being one of the fastest-growing subsets of impact investing,² it makes up only about 5% of global impact investment.³
In Asia, philanthropists and funders are beginning to look beyond pure grant making to allocating catalytic capital as a longer-term, more focused way of disbursing their funds.
Kevin Tan, CEO and Founder of Tri-Sector Associates, notes that “[a] new generation of wealth owners are adopting models that have proven to work in profit-driven industries and adapting them to impact-focused sectors.” This includes venture philanthropy, which applies principles of traditional venture capital financing to impact-driven philanthropic endeavors. Tri-Sector Associates is an end-to-end impact firm that specialises in creating effective methods of cross-sector collaboration, such as the Pay for Success mechanism, to co-create innovative solutions that tackle emerging societal challenges.
Tan also highlighted that with the attitudes of capital providers evolving, banks and other financial institutions have begun to introduce impact-focused financial instruments that can help to further unlock the deployment of catalytic capital.
Co-Axis, a digital marketplace where global impact communities connect and collaborate, aims to unlock risk capital and harness the power of the global catalytic capital ecosystem to scale solutions that improve socio-economic and environmental outcomes. The platform believes that this kind of philanthropic capital can not only catalyse individual projects and innovations but also "whole industries and markets towards positive change”, states Joycelyn Ong, Head of Co-Axis.
The allocation of catalytic capital plays a critical role in plugging the finance gap needed to achieve the UN Sustainable Development Goals (SDGs) by 2030, which currently stands at an estimated US$4.2 trillion.⁴ Key sectors in Southeast Asia, including infrastructure, renewable energy, energy efficiency, and agriculture, require about US$3 trillion in sustainable investments annually to achieve net-zero by 2050.⁵
Catalysing change
Given that catalytic capital providers are focused on driving positive impact and willing to accept concessional over market returns, they also play a key role in accelerating the development of innovative ventures. Early-stage innovation is typically fraught with uncertainty, especially when focused on developing solutions to address complex, systemic challenges such as climate change. Catalytic capital can cushion potential risks by helping to jumpstart, scale, and even sustain innovative, impact-driven projects. This can help to attract mainstream investors, who might otherwise have been hesitant to fund such projects, in follow-on fundraising rounds.
In this way, catalytic capital can help to unlock investment opportunities that might not have been possible before, whether by financing early-stage innovations with higher risk profiles or supporting projects in geographies that may have limited access to financing due to political instability or currency risks.
One example is German social enterprise Fairventures Social Forestry’s “Regenerative Agroforestry for Climate and Social Impacts in Indonesia” project – one of over 80 curated impact opportunities featured on Co-Axis. By securing philanthropic capital, Fairventures hopes to attract more private capital to set up a Dual Blended Finance Structure (DBSF), which will provide crucial, long-term financing to help their agroforestry initiative to scale.
With the Co-Axis platform’s help, Fairventures’ project has the potential to support 50,000 Indonesian smallholders to become climate-resilient by 2035, by strengthening the governance of farmer cooperatives and providing technical training.
These opportunities are bolstered by promising precedents. For instance, the South East Asia Clean Energy Fund II (SEACEF II),⁶ established by Singapore-based fund manager Clime Capital, demonstrates how catalytic capital can be deployed through a blended finance approach. Blended finance uses capital from philanthropic funders, public funders, or both to fund the early stages of a project, which can help increase private sector investment in subsequent growth stages, all with a focus on sustainable development.
With US$127 million in commitments, SEACEF II is the first blended investment fund dedicated to providing high-risk capital to promising energy-related startups that are in early stages of development. It is looking to make 27 venture debt investments, mainly in Indonesia, the Philippines, and Vietnam, with investees receiving loans of up to US$10 million – 10 times higher than in its first iteration in 2020.⁷
Bringing partners together
Philanthropic capital alone is not enough to tackle complex global issues. Philanthropic-public-private partnerships (PPPPs) are required to scale impactful solutions.
Impact opportunities may sometimes find that private capital providers are hesitant to fund impact-driven organisations. This is often due to the perception that such projects are deemed riskier and less likely to focus on creating a high financial return. The difficulty of ‘pricing’ the value of their impact also deters investments. By incentivising cross-sector collaboration, catalytic capital can help impact startups or projects to overcome these obstacles.
Philanthropic capital absorbs the initial risk for novel projects that have the potential to be scaled up by the public and private sectors. Public sector involvement may include helping to pay for social and environmental benefits that the market does not reward, while the private sector can offer the market knowledge and efficiency needed to continuously refine these solutions and ensure their financial and operational sustainability.
“Multi-sector partnerships are a crucial area that Co-Axis strives to develop”, Ong highlights. “The complex challenges we face today, which often create disproportionate harm for vulnerable and underserved communities, can only be addressed by ecosystem approaches that mobilise all key stakeholders.”
An example of this is Tri-Sector Associates’ partnership with Trampolene, a Singapore-based research and technology non-profit organisation. The latter’s Growing Alternate Talent for Engineering Sector (GATES) employment programme for persons with disabilities was funded by an innovative Outcomes-Based Contract, in which Tri-Sector Associates helped to convene partners, structure the project, and provide strategic capacity-building support to the service provider and other stakeholders. This model allowed upfront philanthropic funders to receive repayments on their capital from public funders if Trampolene successfully achieves its agreed-upon impact outcome targets.
This focus on impact creation, underpinned by accountability, is central to catalytic capital, especially when bringing together stakeholders from across sectors. Tracking and monitoring outcomes is crucial for effective programmatic funding and to ensure that impact is created. Opportunities listed on Co-Axis regularly report on these outcomes and make such information available to project funders.
By facilitating connections and catalysing innovations through its platform, Co-Axis serves as a fulcrum for catalytic capital providers looking to fund inspiring and impactful projects. Learn more about catalytic capital by visiting the Co-Axis platform.
