Expert view: UBS Optimus Foundation on what’s next for social finance

Phyllis Costanza, CEO of the Swiss-based UBS Optimus Foundation, expects new social finance approaches including blended and outcomes-based tools to help mobilise more capital towards the SDGs this year

The Swiss wealth manager UBS actively encourages its clients to engage in philanthropy, and has set up several platforms for this purpose.

The UBS Optimus Foundation, founded more than twenty years ago, is the most important of such platforms, and today oversees more than 350 grants, in approximately 20 countries.

The foundation started off supporting children and has now broadened its portfolio to include thematic areas like health, the environment and innovative social finance. It expects to award grants worth around 175m Swiss francs (€172m) this year.

“A lot of high-net-worth individuals don’t know where to start their philanthropy work, and many who are already on the journey don’t feel satisfied,” explains Phyllis Costanza, CEO of the UBS Optimus Foundation.

According to a survey conducted by UBS some time ago, more than 90% of their large clients gave philanthropically, but less than 20% were satisfied with their impact.

“So, we try to offer them a strong perspective”, says Costanza. “It’s all about creating real social impact, results that are meaningful and measurable.” She was involved in launching the Educate Girls Development Impact Bond (DIB), the first DIB in India and in education globally, in collaboration with NGO Educate Girls.

The charity identified out-of-school girls aged 7-14 in the villages where it was active, and enrolled many of them in education, with UBS investing in the bond. After the successful completion of the project, the investment was repaid by the Children’s Investment Fund Foundation, which acted as the outcome payer.

Outcomes-based

DIBs are part of an increasing number of financial options available for philanthropists, from traditional charitable giving, all the way to impact investing. 

Strategic philanthropy and social finance fall somewhere in between the two, says Costanza. “Social finance still falls within the philanthropy category because you’re getting concessional returns, as opposed to market rate returns.”

“Our clients are really interested in these new financing mechanisms to address the SDGs. They want to do things more efficiently. They want their money to have an impact.”

The COVID-19 pandemic has aggravated social problems in developing economies and widened the wealth gap. Conservative estimates place the funding gap needed to reach the SDGs at $2.5 trillion annually; more recent estimates post-COVID point to the gap being four times larger.

“Something must change”, Costanza says, “and we believe social finance will play an increasingly significant role, particularly where outcomes-based investments use concessional capital to de-risk private investments, crowding in funds to advance the SDGs.”

“Our clients are really interested in these new financing mechanisms to address the SDGs. They want to do things more efficiently. They want their money to have an impact.”

Phyllis Costanza, UBS Optimus Foundation

In her view, the essence of social finance is leveraging public or philanthropic capital to mobilise private investment, and produce measurable social or environmental benefits, frequently through outcome-based contracts. 

Despite the enormous challenges, Costanza, is optimistic. “I think new initiatives, like the recently launched SDG Impact Finance Initiative, in which the UBS Optimus Foundation is participating, will succeed in raising substantially more money, and create new breakthroughs in social finance.”

She also notes a growing interest in low- and middle-income countries to embrace outcomes-based funding structures to meet their own development goals. 

“These countries have to rebuild societies that are ravaged by the secondary effects of the pandemic.” This includes, for example, hundreds of millions of children worldwide who have missed basic schooling for months or even years – outcomes-based finance allows cash-poor governments to de-risk provision of services like health and education.

Costanza also expects climate strategies and nature-based solutions using outcomes-based funding to further develop this year, as the sense of urgency in relation to the climate crisis intensifies. 

“Outcomes contracts and other mechanisms can help correct for market failures, also in the area of climate and biodiversity, by de-risking investments in the private sector.” 

Collective action

UBS Optimus Foundation is also pioneering a new approach based on the concept of ‘collective action’. A few months ago, it launched three UBS Collectives, focusing on innovative social finance, child protection, and climate and biodiversity.

Under this approach, donors engage in a three-year strategic education programme with peer philanthropists and social investors. The idea is that this collective action allows clients to shape the projects they fund, by participating on the ground.

“By pooling funds and expertise with fellow philanthropists and delivering aligned outcomes, you can achieve exponentially more impact”, Costanza says. So far, some 60 clients from all over the world have committed more than $20m to the three collectives.

“In the future, we hope to grow this collective approach further with many more of clients engaging in this new strategic approach to philanthropy.”

As mentioned earlier, Phyllis Costanza is an optimist. “This is not just wishful thinking, there really is a big need for social finance. We have these new financial tools that can create more impact. I really believe 2022 can be a breakthrough year for this.”