The Case for an Impactful Private Sector in Latin America

Globalization has set a new interconnection scheme between the private sector and global value chains that, until recently, was not a priority: The creation of business models with an impact is a current trend that Latin American companies are implementing.

An Impact Economy refers to responsible and sustainable business conducts, which in turn provides social, environmental and economic benefits in the context in which they operate.  Historically, such conducts have been present, but have not been integrated into the core business of companies. While impact business models were initially regarded as a corporate responsibility strategy, and as a way to mitigate corporate risk, they are now perceived as a business opportunity and a platform to become good corporate citizens. 

Many of the corporations that have chosen to operate under impact schemes work under the premise that a responsible company is set to become a competitive company.  This commitment has required the support of public sector stakeholders to design public policies that support and ensure effective implementation of impact management policies.  Thus, actions that were once of voluntary compliance (minimum environmental conditions, impact on the community, among others) are now being regulated and are mandatory for private sector stakeholders. 

Private sector’s actions around impact policies have led to increased opportunities and influence.  Consumers are now more active in the search for products that are socially and environmentally responsible, which is why many companies are beginning to place more emphasis on long-term factors of sustainable production, rather than costs.

The growing recognition of shared problems impacting the environment and community relations have resulted in novel approaches implemented by companies. Practices such as hiring and developing local talent, allowing the insertion of micro-entrepreneurs into global value chains, transfer of best practices to producers, migration to more environmentally friendly production processes are beginning to be implemented by companies in Latin America.

International organizations have led campaigns and programs that aim at stronger linkages between the private sector and their social and environmental context.  Initiatives such as He for She of UN Women and the OECD Principles of Responsible Business Conduct are some examples.

This trend towards impactful investments has led multilateral entities, including CAF, to prioritize projects based on their social and environmental impacts.  In April 2019, CAF, together with 60 other entities, joined the Impact Investment Principles, which aim to generate greater transparency, credibility and discipline in the impact investment market.

As a development bank, CAF incorporates the impact economy into all its actions. In 2004, CAF approved funds for a USD 1 million equity investment in Pronaca’s Agri-investment Trust*<span/span/>.  Since there are about 5,000 small and medium-sized corn farmers in Ecuador, many of whom lack access to financing, Pronaca (main customer of local corn production) established a trust to provide credit facilities for producers to start their growing cycles and pay back later with their harvest.  In addition to access to financing for working capital, the support package included technical assistance and crop purchases. Until the end of 2016, productivity of beneficiaries tripled since the start of the program, thanks to a combination of availability of better inputs, certified seeds and timely financing. The Agri-Investment Trust is a good example of how the private sector can generate value chains anchored in sustainable mechanisms that underpin the development of suppliers.  

The private sector is finding more competitive benefits by taking a more active and collaborative role in development. More importantly, continuity of these benefits should be ensured and underpinned by the public sector, through institutional arrangements and public policies that guarantee sustainability of private commitment.