Finance
And CSR
REVIEW
How Financial Innovation
Can Save the World
by David Bank
The new lords of ?nance come, not to bury
capitalism, but to re?ne it
Financial innovation got a bad rep in the
?nancial crisis. But inside the wellbarricaded Federal Reserve Bank in
downtown San Francisco last month, the
?nancial engineers were at it again.
Teams of ?nancial statistical whiz kids pitched complex new
bonds, loan-guarantees, and hybrid structures of debt and
equity. Their target? It wasn't mortgages. It was women's
economic empowerment. It was energy ef?ciency
improvements and ranchland conservation. It was small
businesses in Africa.
The Occupy movement has tarred Wall Street with a broad
brush, while economists like Yale's Robert Shiller have tried
to rescue ?nance from the consequences of its excesses. At
the Fed, the MBA students competing in the second
International Impact Investing Challenge were part of a new
crop of ?nancial engineers taking a different tack: tweaking
risk and reward to directly tap at least a small part of the $60
trillion private capital markets for positive, measurable
social impact.
The contest winners, who come from Stanford, have a plan
to bring electricity to remote Indonesian islands -- and 5 to 7
percent returns to investors -- by ?nancing local micro-grids
through special-purpose vehicles owned jointly with
community co-ops. The runners-up, from the Kellogg
School of Management at Northwestern, aimed to help
slum dwellers in Mumbai get higher-paying jobs, ?nancing
job-training by offering private investors 7 percent of
graduates' paychecks for two years.
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