Brazil: innovations in private social investment
Mattos Filho’s experts discuss key private social investment topics and the need to review compliance standards to support grassroots organizations
Private social investment has become an increasingly prominent aspect of corporate business strategies as companies seek to address social and environmental issues linked to business activities. Technology solutions are helping to break through the barriers social organizations have traditionally faced vis-à-vis private investment – particularly in regard to mapping supported initiatives (and their associated causes), as well as reducing the costs of transactions and facilitating their execution by companies and other funding organizations.
In this scenario, Mattos Filho and the socialtech Simbi organized an event titled ‘Innovations in Private Social Investment’. The event was led by Mattos Filho’s innovation program – attix – which connects domestic and international startups with Mattos Filho and companies across various sectors, providing exclusive access to innovative solutions and cutting-edge tools.
The event sought to foster fundamental reflections on private social investment, addressing the perspectives of companies and leading social investment entities, as well as the role organizations and compliance play in combating inequality and enabling support for grassroots projects.
Potential for growth in Brazil
The potential for social investment to increase in Brazil is evident when compared with developments in the United States. According to data from 2020 provided by Simbi, social investments in Brazil represented merely 0.14% of the country’s GDP, equivalent to BRL 10.3 billion. In comparison, this percentage reached 2% of GDP in the United States, equivalent to USD 420 billion.
A significant number of actors are currently studying and funding private social investment projects worldwide, particularly in regard to three priority issues:
- Climate change;
- Safeguarding democracy – especially in relation to fake news and algorithm distortion; and
- Combating inequality.
Transversality and data usage as trends
Influenced by the trend toward seeking transversality – addressing opportunities more comprehensively and with multiple agendas – the pursuit of efficiency in social investment remains a priority.
In some cases, information asymmetry exists among different institutional investors, perpetuating inequality. For instance, regions that receive substantial social investment in education may still struggle with more severe problems like a lack of decent housing and basic sanitation.
As such, the use of data in decision-making is on the rise, with companies beginning to conduct tests with artificial intelligence tools to take advantage of this practice.
There is also a shift in the profile of the organizations being supported – the presence of impact businesses among organizations eligible for receiving investment is increasing. Those capable of combining positive social impact with profit increasingly stand to benefit from companies’ direct contributions or grants from institutes and foundations. This development reflects a shift from the traditional social investment model to a social innovation ecosystem.
Quality use of tax incentives
Tax incentives remain a significant driving factor in boosting social investment in Brazil. Therefore, it is essential for major funding organizations to ensure their taxes are properly allocated – guided by prior planning and ongoing revisions of strategy in sync with the digital transformation and effective compliance risk management.
Social intelligence hubs can pave the way for better coordination among funding organizations. Keeping track of regulatory legal updates on tax incentives is also crucial, such as new regulations for the system for financing cultural initiatives and incentives for the recycling industry.
One of the challenges in managing social investments and tax allocations concerns the maturity level of organizations’ compliance frameworks, particularly organizations in their early stages or that originate from more marginalized, vulnerable communities.
Thus, organizations must view compliance as a partner in overcoming these challenges, aiming for intelligent risk management and reduced information asymmetry.
Rejections in compliance audits and due diligence reflect inequality
Data from Simbi shows that in the current scenario, grassroots organizations seeking lower sums of funding are more likely to be rejected in investors’ audits. The rejections mostly occur due to a lack of documentation and difficulties in organizing themselves from a legal standpoint.
Racial equity is also a major challenge in reducing inequality in Brazil. Organizations rejected in compliance audits and due diligence processes tend to have more marginalized profiles, such as those based in quilombola, indigenous or riverine communities. Essentially, these organizations often lack access to adequate resources and therefore lack an adequate institutional structure, leading to rejections.
However, companies can harness the growing trend toward ESG protocols (based on appropriate metrics) to address the imbalance.
Rethinking internal compliance policies and procedures
Companies and funders should review and simplify internal policies and procedures to account for the reality of early-stage and less mature organizations in terms of formalization and compliance.
Initially, such organizations commonly struggle to meet the high standards investors generally apply. However, change will only occur through dialogue and specific actions involving boards and executives, with aligned support of the company’s (or institute or foundation’s) department that manages the social investment actions and compliance measures.
A short-sighted view of risks linked to inadequate compliance flows – with requirements that do not make sense for developing social organizations and businesses – should be avoided. In this situation, candidates that fail to meet such requirements are simply based on the investor company’s risk appetite.
Tackling inequality in social investments
It is natural for more sophisticated and established organizations to push their suppliers and business partners to increase formalization, professionalization and compliance, but this journey requires effective support.
Beyond capacity building and direct financial support, certain actions can have systemic impacts across the social investment system:
- Re-evaluating internal company policies, processes, procedures, and risk appetite;
- Financing and supporting institutions that work to accelerate change and that aim to certify and support less developed or marginalized organizations, among other efforts; and
- Engaging in collective action coordinated by companies and funders capable of influencing the entire universe of investors, organizations, and social businesses.
Behind every company and organization, there is an individual. Behind every social project in Brazil are human stories of overcoming challenges and individuals who have built and shaped these initiatives to address longstanding social problems.
The foundation of trust in private social investment is of utmost importance. Decision-makers must seek information about projects, understand the needs of communities, and engage in dialogue with community leaders who are driving these transformations.
Transformation happens at the grassroots level rather than major business centers, which provide the fuel for generating change. Therefore, those leading these projects must be heard by the managers of companies interested in making investments.
Simbi is a socialtech supported by attix that specializes in managing social investments. Through direct or incentivized funding, Simbi connects those who can generate social impact in the most intelligent ways. In combining technology with human care, Simbi has developed an ecosystem of social investment solutions that connect investing companies with social initiatives in order to scale up their positive impact on society. Committed to transforming society, Mattos Filho’s highly specialized professionals support Simbi in expanding its reach and capacity to make social impacts.