Nalin Kulatilaka on a “New Approach to Funding Social Enterprises”

in Emerging Research, Faculty, Finance, News
February 24th, 2012

From the January-February 2012 Edition of Harvard Business Review

Nalin KulatilakaIn a new Harvard Business Review article “A New Approach to Funding Social Enterprise,” Nalin Kulatilaka along with co-authors Antony Bugg-Levine and Bruce Kogut propose increasing investment by unbundling social benefits and financial returns.

Kulatilaka is the Wing Tat Lee Family Professor in Management at Boston University.

The article explores how financial engineering can allow social enterprises to draw investment from the financial markets, rather than from resource-strapped charities, where they have traditionally sought the majority of their support.

Since investors have different appetites for social and financial benefits, the authors argue, social enterprises can use financial engineering to offer different risks and returns to different kinds of investors.

Explains Kulatilaka, “Charities forego private returns for social benefits, while some investors will not sacrifice any below-market financial returns for the sake of social returns.  But most investors lie in the broad spectrum in between these two extremes. Our idea is that financial engineering can tailor different mixes of financial and social returns and associated risks to suit investor preferences.”

Financial engineering can tailor different mixes of financial and social returns and associated risks to suit investor preferences.

In an interview about how his recent Harvard Business Review article ties into his ongoing research on the energy and environment sector, Professor Kulatilaka points out that consumers also have different preferences for social versus private benefits arising from the goods and services they purchase: some will pay a premium to buy fair trade goods or “green electricity,” while others are driven purely by low cost.  “Recognizing this spectrum of consumer preference could induce more environmentally friendly behavior by firms,” Kulatilaka says.

This, in turn, leads to different challenges that draw on marketing, strategy, and other management disciplines: “It is very difficult to signal the social value of a good to consumers, and it is very hard for consumers to recognize ‘greenwashing’ from the ‘truly green.’  And since consumers cannot actually quantify the social value of a product or service, they frequently can’t decide how much of a premium to pay,” Kulatilaka explains.

See more about “A New Approach to Funding Social Enterprise,” by Antony Bugg-Levine, Bruce Kogut, and Nalin Kulatilaka, at Harvard Business Review.