Uniting Philanthropy and Capital Markets with Water.org

Featuring Gary White, CEO and Cofounder, Water.org & WaterEquity and Paul O’Connell, President of Water Equity

Gary: [00:00:04] The story of Water.org is really one of innovation and efficiency in scale, right? Because once you jumpstart these systems with some philanthropic capital, then they keep going and they tap into the capital markets. And I mean, you think about, you know, $4 billion in loans that are circulated right now. If we had had to raise all that in philanthropy, we would have never gotten there. Right. To have the same level of impact of reaching 53 million people. It would have taken us over 500 years using that kind of traditional model to reach the same number of people that we're now reaching. Right. So it just it's kind of a smarter way to save water. It's a smarter way to use philanthropy and it's efficient and it's innovative. [00:00:54][49.8]

Tulaine: [00:01:02] You're listening to System Catalysts. Each week you will hear personal stories of changemakers who are bringing more inclusive connective system level solutions to our most persistent challenges. I'm to Lane Montgomery. In this episode, Jeff Walker spoke with our guests, Gary White and Paul O'Connell. If you are a fan of our podcast, you probably know by now that to truly fix a system working across sectors is crucial. Yet philanthropy and the private sector haven't always known how to work together. Perhaps because in the past, purpose and profit were viewed as opposite ends of the spectrum. But today, that is no longer the case. Just like consumers, investors are becoming more concerned about social and environmental impact. And this opens up a great opportunity for nonprofits to collaborate with the financial sector in a way that they hadn't done before. Gary White seized this opportunity. Gary is the CEO of the nonprofit Water.org, which he co-founded with the American actor Matt Damon. [00:02:28][86.1]

Gary: [00:02:29] What I discovered in talking with women in India is that some of them are going to loan sharks and paying them 125% interest on loans so that they could build a toilet or are going to a loan shark so they could pay to get a water connection. How are they going to get that capital if not through the loan shark? And so that leads to collaboration with local microfinance institutions. [00:02:50][21.1]

Tulaine: [00:02:53] Gary recognized that providing affordable loans could be the most effective way to solve this issue. But he encountered resistance from organizations that didn't understand how this could be a good investment. This is why Gary founded the Asset Manager Water Equity. Today, Water.org and Water Equity have provided access to safe water and sanitation to over 55 million people around the world. Through their story, will learn how system catalysts can collaborate with the financial sector to solve our world's most pressing issues. Gary became involved in the water sector after he traveled to Honduras in his early twenties. There, he witnessed people without access to safe water or a toilet at home. In 1990, he raised money from family and friends to launch the nonprofit Water Partners International. But he soon realized that charity alone could never solve such a big crisis. [00:03:52][59.9]

Gary: [00:03:54] In the 1980s, the model then for a water NGO was like, You kind of raise money and you go out and you drill wells for people. And so pretty soon you recognize you can't do it just for people. You have to do it with people. What we knew was how people living in poverty coped with getting water and sanitation. Because you think about it, right? Today, everybody in the world, when they woke up, got water somewhere and found a place to relieve themselves somewhere. You know, the question really was what coping costs were they incurring? Were they like paying a water vendor 25% of their income for the day to get water? Or were they spending several hours walking to collect water? Were they sick and couldn't work because they didn't have clean water, you know, were they not in school? So all of these things, the coping cost and we understood those because we talked to people and kind of heard their story. I would travel and be in these communities, in these villages and meet with people and talk to them and start to understand what their perception of the problem was and how they were coping with water and sanitation and kind of drawing on those insights. [00:05:05][70.5]

Tulaine: [00:05:09] And listening. Gary noticed that people were already paying great costs to access water and sanitation. Many were forced to take out loans with extremely high interest rates. Others were indirectly losing money. By using time they could spend at work or school walking to a water source. Gary decided that instead of using charity to solve this issue, he would find ways to provide affordable loans for people to access water. [00:05:34][25.2]

Gary: [00:05:36] I knocked on a lot of doors in MFIs around the world. [00:05:38][2.3]

Tulaine: [00:05:39] MFIs are microfinance institutions. They provide financial services to low income people. At the time, they mostly lent money to start or grow small businesses. [00:05:49][10.1]

Gary: [00:05:51] They would just say, No, this isn't what we loan for, it's not income generating, so therefore it's not going to happen. So the problem is the capital markets have a hard time suspending disbelief themselves, like how in the world can this ever work? And that's why we said we're going to prove it by doing it. You know, we had to put our money where our mouth was and basically say, look, we'll give you this grant. You do the market research among your clients. You hire people who understand water and sanitation and you start making these loans and basically, you know, we're subsidizing your startup costs. You're not really taking any risk. And then that's when it started to click, because then they would see that people would take out these loans, they would repay them. A lot of those partners now say they love to do these loans because it makes their clients healthier so that when they take out other loans, there's more probability that they're going to be repaid. And so it just took a lot of kind of, you know, having these organizations suspend disbelief. But it also had to do with us kind of providing some financial incentive for them to go out and do that. [00:06:55][64.2]

Tulaine: [00:06:59] In 2009, Gary met Hollywood superstar Matt Damon at an international summit on global poverty. It turned out Matt also had a water charity. Matt and Gary decided to combine their organizations to form Water.org. They then raised money to support financial institutions and giving out loans. [00:07:19][19.7]

Gary: [00:07:21] And that's why we launched the first fund that we did, the Water Credit Investment Fund, one that was just Matt and I in the back of a Jeep in India, going around talking to all these different financial partners and saying, what's constraining you from growing even faster and doing millions more loans at the household level? Like, we need more consistent access to affordable wholesale capital. And that's when Matt said, we'll find people who want to invest and I'll put in the first million dollars. He did that. We did a Friends and family fund of $11 million to and make that you know, incubated that inside water.org and that was working. So it's like let's do a spin off and create an asset manager that does this very professionally and can do it at scale. And that's when we created water equity. [00:08:08][47.3]

Tulaine: [00:08:10] Water Equity is an asset manager that identifies investment opportunities in the water and sanitation sectors. They invest in financial institutions to help them scale water and sanitation loans. [00:08:20][10.9]

Paul: [00:08:22] In a sense, we're a child of spin out of water, talk and carry very much of its DNA inside of us. [00:08:28][6.7]

Tulaine: [00:08:29] That's Paul O'Connell, president of Water Equity. [00:08:32][2.8]

Paul: [00:08:33] We're also a registered investment advisor. You know, it's a different mindset. You're very much thinking about your clients not only being the beneficiaries of your mission, right. The water and sanitation delivery that we do in the market. But we also have an obligation and a fiduciary duty to our clients, the investors. And we're there to look out for them and help them achieve their investment objectives across risk return and impact. How do we work with financial institutions or corporations in the markets to get them switched on and get them comfortable with water and sanitation? Water.org provides that service, so we're able to piggyback on that when we go into a new market or a new region or a new city and think about investing. And we have the reassurance that comes from having a group with the pedigree of Water.org on the ground ahead of us. Smoothing that runway. [00:09:32][58.4]

Tulaine: [00:09:33] Paul believes that beneficiaries of these loans are often saving money while also finding solutions to the global water crisis. [00:09:41][7.4]

Paul: [00:09:42] Let me give you an example. So you might have, let's say, a family in the Philippines paying $60 a month for bottled water in a very urban area. If you can provide them with a loan, let's say, for $240, that allows them to connect to a nearby pipe. Their monthly interest payment of that could be $25 for 18 months, let's say. Now, when you compute what that implies in an interest rate, it's in the 20. And all of a sudden you think, my goodness, you know, especially in the zero interest rate world, which the developed countries have been in for the last 15 years, you think, wow, wow, that's a high interest rate in my country. I pay a couple of percent to borrow. But what you realize very quickly is that that was $60. They were paying for bottled water. If it comes down to 20 or $25 for a month, for 18 months, they're actually saving all that money. And in essence, you're ending up with a free market solution that is both fair and really value additive to all parties. [00:10:50][68.0]

Jeff: [00:10:51] Can you talk about the potential to scale? You know, what are you going to see going forward using the MFIs as your core? I guess, you know, what does that strategy look like for you? [00:11:01][9.3]

Paul: [00:11:02] There is ample, ample capacity to grow in this space. You know, we're in a world where one in ten people don't have access to safe water and one in four don't have access to safely managed sanitation. So if you want to talk in market terms, it's an enormous market. I think on the individual side, providing people with credit is financing to get around the constraints that they face, especially at the base of the economic pyramid. That's a very, very powerful way to do it. And it has a long runway. There's a lot that can be done. But very quickly, as you begin to think about broader access, especially in urban areas, you also realize that infrastructure is a piece of this puzzle. And infrastructure, of course, is capital intensive. You're talking about pipes, you're talking about utilities, you're talking about wastewater treatment plants. All of it capital intensive and again, in need of financing. And so we in our ambition, we'd like to really push out the boat on both of those dimensions, firstly at the household level, but then moving back up from there is the infrastructure there. Is there a pipe there that they can connect to? Is there a water and sanitation facility nearby which can handle the sanitation needs that a community might have? But if I may, I would like to pull back the focus a little bit. So, you know, to me, one of the big areas where the capital markets will need to grow and grow on over the next 30, 50, 100 years is in moving beyond the traditional base that we have of risk and return. [00:12:54][112.0]

Tulaine: [00:12:57] And making a decision to invest. People typically consider the risk associated with the investment as well as what its returns might be. Paul challenges us to also consider the impact. [00:13:08][11.3]

Paul: [00:13:11] Many of your listeners, I think, would be familiar with the risk return approach to investment, where we say, okay, we're going to trade those two things off and we're going to assume that we'd like more return over, less return, and that we'd like less risk over more obvious. That's a two dimensional graph that everybody's been working with. And what's missing is a third dimension, which is impact. And if you add in a third piece, which is impact, then you can create a very nice framework When you have a surface over which investors can choose to locate, which trades off risk return and that impact. And that to me is where when you think about scale, I think if we could shift the conversation away from the basic risk return world into a conversation about all three dimensions, then things can get very interesting. Not many people are aware that water and sanitation, public securities stocks have been the best performing segment of the stock market over the last 22 years on a risk adjusted basis. Not many people are aware that in the private markets, water and sanitation infrastructure investments have been the best performing of all of the infrastructure investments on a risk adjusted basis over the first two decades of this millennium. Now, will that continue? I was no. But I think the important thing is to highlight that water and sanitation is a promising place to be investing if you only care about risk in return. And then when you layer in the impact, it almost becomes hard to refuse. [00:15:03][112.2]

Tulaine: [00:15:05] Besides incorporating impact in the risk and return considerations, Paul believes that we should act urgently when investing to solve pressing issues. [00:15:13][7.9]

Paul: [00:15:14] There are others who sort of believe that the way they can best help the world is by making as much money as they can using traditional investments, the highest return they can get on a risk adjusted basis, and later donating money to systems change or to causes. And I want to break that up. Suppose I was down for you two investments, one of which pays 10% market returns and another one of which pays only 8%, but help solve some very important problem. We have climate change, food security, water and sanitation. What people do right now is they say, well, I have to take the ten and then I will donate later because that's what my trustees say or that's what my investment policy says or that's what my board of overseers says. The problem with that is by the time the money arrives, it's too late. It's the discount rate on the causes of the problems we have. It's very, very high. [00:16:10][56.5]

Jeff: [00:16:18] To tangibly address society's toughest challenges. Do not underestimate the power of strategic connections in a trusted community of like minded peers. That's what I experienced when I joined the Philanthropy Workshop, where DPW for short. DPW is a leader in strategic philanthropy, education and community curation. DPW connects over 400 philanthropists and social investors who seek to leverage their time, talent and resources for sustainable impact. They offer its members year round strategic partnership and best in class global programs. To learn more about DPW and how you can be part of the community, visit TBWA Talk. [00:16:55][36.9]

Tulaine: [00:16:59] Today, Water.org and water equity partner with around 150 MFIs around the world, providing access to water and sanitation to around 53 million people. [00:17:10][10.9]

Gary: [00:17:11] The story of Water.org is really one of innovation and efficiency and scale. [00:17:19][7.7]

Tulaine: [00:17:20] That's scary again. [00:17:21][0.7]

Gary: [00:17:22] So what we're able to do is take a dollar of philanthropy and turn it into many more dollars, right? Because once you jumpstart these systems with some philanthropic capital, then they keep going and they tap into the capital markets. And so you're leveraging your philanthropy to get more money from the capital markets. And I mean, you think about $4 billion in loans that have circulated right now. If we had had to raise all that in philanthropy, we would have never gotten there. Right. And I even, you know, did some some calculations the other day. I looked at our old model before we had this water credit model. And if we had just kept going with that, to have the same level of impact of reaching 53 million people, it would have taken us over 500 years using that kind of traditional model to reach the same number of people that we're now reaching. Right. So the point is that it's kind of a smarter way to save water. It's a smarter way to use philanthropy and it's efficient and it's innovative. [00:18:23][61.5]

Tulaine: [00:18:24] Their model has been proven so effective partly because their loan repayment rates are 99% globally. [00:18:30][6.0]

Gary: [00:18:32] It turns out poor people are really good credit risk, you know, and that says a lot for them and their integrity. [00:18:38][5.4]

Jeff: [00:18:39] Well, and it's mostly women, right? So there's an equity issue as well. Can you talk a little bit about what you've seen there? [00:18:44][5.6]

Gary: [00:18:45] Yeah. So it is, you know, over 80% of the borrowers with our partners are women. And it just makes sense, right, when you see one the time savings impact of this. So, you know, today women will spend 200000000 hours walking to collect water. And so they are obviously very directly affected by this. And to the extent that they can free up that time by getting one of these micro loans and then turn that to more productive activities or even having more time to care for their family and the health of their family, that's real value to them. A longer term payoff is that, you know, it's the girls in the family are spending hours every day walking to collect water. They're not in school. And if they can have that time freed up, it could be in school. That's a long term value creation for them as well. And then, you know, the health of the family is usually in the hands of the women, the mothers as well. And this is kind of, you know, part of what happens with our financial partners in terms of, you know, marketing these loans, trying to impart, you know, how the health benefits can flow from this for them and their families as well. And it's these things that kind of in addition to the time and the cost savings, the health impact that it can have. These are all things that people start to take on board when they decide, yes, I do want to go take out that loan. I do want that that water connection or I want that security and privacy of the toilet for myself and my daughters. Right. It's incredible how many women and girls are impacted by lack of hygienic toilet at home and having to wait to the middle of the night to go out to defecate. And the risk that they suffer because of that are enormous. So we see a lot of people, in fact, you know, in some of our countries, the financial partners do more sanitation loans than they do water loans. So it's what do people want and what do they value? And I think that's one of the big things about this versus going and drilling wells and, you know, doing the projects for people. There's a pretty high project failure rate depending on where you look for the data. You know, up to half of these kind of top down supply driven water projects will fail over the course of ten years or so. But nobody is going to take out a loan for a water or sanitation solution that they won't use. It would be counterintuitive. So this demand driven approach also tends to build in a little bit more sustainability. [00:21:14][148.6]

Tulaine: [00:21:18] However, Gary acknowledges that not everyone in the world is able to get a loan, and this is where he believes the government should come in. [00:21:26][7.2]

Gary: [00:21:27] This isn't a panacea for everybody everywhere who needs water and sanitation. There's going to be some people who are so rural, so poor that they can't even take out a loan for a rainwater system or rainwater is not appropriate for them. That's where the collaboration with government and urging governments to provide the level of subsidy that's needed so everybody can get water. And I think that's really important to acknowledge for a holistic solution. Government is still going to have a role to play, but our theory is that if we can serve hundreds of millions of people with access to finance and the utilities, then that leaves a lot fewer people for governments to be able to address through subsidies. [00:22:12][44.8]

Tulaine: [00:22:14] Luckily, governments and non-profits around the world are beginning to recognize the need to collaborate with the private sector. [00:22:20][6.1]

Gary: [00:22:23] I never heard about finance being talked about more than I did at this U.N. conference when I was doing this back in the eighties. The only discussion of finance was how do we get governments to spend more money on this? How do we get USAID to put more money into this? So right now, you know, bringing finance into the picture and saying, you know, it's not all going to be about government providing the money from the top down or the multilateral and bilateral. That's still important and it has a role to play. But we need to blend this with more private capital. And that, I think, is going to be key to this, bringing in capital that, you know, is drawing on the capital markets funds like we're doing it, water equity and other impact investors. So there will be more financing available and I think smarter finance, we have to bring a deal pipeline of investments that are rigorous enough to pass the investment committees of these funds. So we have to really think hard about what we invest in and that's going to lift the bar. I think of those enterprises, those partnerships, those companies that are out there hunting for investment capital. And then I think the final thing is corporates, right? Back in the eighties, not only did people not talk about finance, the concept of us partnering with a corporation or expecting an NGO that was like that was like almost unheard of because those were just the bad guys. Right. The companies were the bad guys and they just they go out and just kind of take. And then we as NGOs tried to, like, make it a little more fair. Now, with with CSR, with ESG. [00:24:02][99.8]

Tulaine: [00:24:06] In case you aren't familiar with these terms, CSR stands for Corporate Social Responsibility and ESG for environmental, social and corporate governance. In the past decades, investors have become increasingly interested in companies that not only make profit but also look after social issues and the environment. [00:24:24][18.2]

Gary: [00:24:25] With now investors in these public corporations saying, We want to see what your ESG score is holding their feet to the fire. They do have to look at things more than just kind of, you know, writing a check to the local symphony or, you know, writing another check to diversity. They have to really look at this. And then as these folks look at this, they're going to the SDGs, many of them for their frameworks. And because we have an SDG six, that is an important hook for them. [00:24:54][28.7]

Tulaine: [00:24:55] The Sustainable Development Goals six is about clean water and sanitation for All is one of 17 sustainable development goals established by the United Nations. [00:25:05][9.4]

Gary: [00:25:06] So we're now able to work even more with corporate partners to be able to bring this together. So those are the reasons I'm optimistic that the stage set. But extending the metaphor, how will the play play out and will this result in real impact? And how are we going to measure, you know, helping people living on a few dollars a day, conserve water resources and get access to water? That's pretty pure ESG for them. [00:25:32][25.8]

Tulaine: [00:25:36] And now our Rapid Fire segment. [00:25:38][1.8]

Jeff: [00:25:42] What's one word to describe your journey as a system catalyst, somebody unifying action? [00:25:45][3.9]

Gary: [00:25:47] Wow. Curiosity. [00:25:48][1.0]

Jeff: [00:25:49] What's been one of the most gratifying moments along this journey? [00:25:52][2.5]

Gary: [00:25:53] It's the moment when I meet with someone who gets water for the first time. And to me, you know, knowing that that was replicated 53 million times over because of our partners that we have that make these loans and the work that our team did, I think that probably is a good moment for me. [00:26:11][18.6]

Jeff: [00:26:13] What about your organization keeps you up at night? [00:26:14][1.7]

Gary: [00:26:15] Stop optimizing. I think making sure that we don't miss the next opportunity and being open to it. It's a fine line. You know, we can get stretched too thin or, you know, you can chase things down rabbit holes if you get too far in that direction of chasing opportunities. One of my mantras is that our success has always been determined much more by what we've said no to than what we've said yes to. [00:26:41][25.6]

Jeff: [00:26:42] So for listeners who aspire to be a system catalyst, where should they start? Where would you guide them to? [00:26:47][4.8]

Gary: [00:26:48] I would guide them to like what is the essence of the problem that they're trying to solve and who is experiencing that problem. Right. All of us who aspire to do this have probably gotten pretty far up Maslow's hierarchy. Most people who, you know, we seek to assist or to partner with are ones that are pretty far down that hierarchy. So I think it is just getting into their skin and understanding how is our problem really affecting them, How is it preventing them from creating value in their lives? And now that value doesn't have to be monetary necessarily, but things that they value and helping them achieve that in whatever way it is possible. Trying to discover what the underlying challenge is for that woman, it wasn't that she didn't have water is that she didn't have access to affordable finance. But it all starts with like, how do you help people create the value that they want and value in their lives? And then you work out from there removing the barriers. [00:27:53][64.3]

If you want to learn more about Water.org and water equity, head on over to water.org.