Understanding risk in development
There is some degree of risk inherent in everything we do. Every time we drive to work, for example, we accept some degree of risk, reasoning that these are risks worth taking to get to our destination. But we try to minimise the impact these risks could have on our lives. We fasten our seatbelts, stop at red lights and turn on our windshield wipers in the rain.
Risk management is well understood in business, with established standards and tools for identifying and assessing risks. In the financial world, there are clear links drawn between risk and return, with investors accepting larger risks for the promise of larger returns. But for development organisations and social investors it is often overlooked. For 10 years, GreaterGood SA and GreaterCapital have been looking at risk in social development interventions and have developed tools to identify and assess risks, as well as quantify the related returns.
Identifying and understanding a risk is the first step to managing that risk. In the context of developmental projects, a risk can be defined as anything that might happen that, if it did happen, would have an impact on the ability of a project or organisation to achieve its goals. These risks could be internal (for instance, key staff could resign) or external (an important funder may withdraw their support). By taking proactive steps to guard against risks, organisations can protect themselves against the uncertainty that the future might bring.
A risky project is not necessarily a bad project. Individual donors and investors will be comfortable with different levels of risk; those who are risk-averse prefer to back more established organisations to make an incremental difference, while those with a bigger risk appetite will seek out innovative interventions that could be game-changers if they prove to be successful. But all donors will favour organisations that have put measures in place to manage whatever risks they face. Understanding risk in development interventions helps donors or social investors to understand risk relative to impact (risk vs return) and to ascertain the effectiveness and sustainability of implementing organisations.
BIGGER IS NOT ALWAYS RISKIER
The assumption is often that the bigger an organisation and the more donor money it is spending, the greater the risk (the Draft Framework on the NPO Act states: “The larger the size and the higher the income levels of the organisation… the more vulnerable and at risk the organisations can be.”). But our experience has been that many factors are at play. Just like in the financial sector, there are different types of risk in development and these must be weighed against the potential for positive social change.
When GreaterCapital assesses the risk of an organisation or intervention, we look at five key areas:
Does the idea (or concept) behind the intervention respond to an identified and demonstrable need in the community? We assess whether the concept is aligned to the latest good practice in development and whether it has clearly defined (and measurable!) developmental objectives and outcomes. Innovative, untested approaches might have a high potential for achieving positive outcomes, but would be considered more risky than tried-and-tested approaches with a track record of delivering positive outcomes.
Here we look at the design of the intervention. What is the evidence that this approach will work to address the need or problem? And how will progress be measured? A project design is considered high-risk if there are no, or poorly defined, measurement indicators.
You might have a brilliantly designed project that addresses a clearly defined need, but is your organisation able to implement it effectively? What is the capacity and experience of the leadership and implementing staff in the organisation? We look at an organisation’s track record and the qualifications and experience of their key staff members – from the board chair through to project managers.
Financial and other governance controls are critical to reducing the risk of mismanagement and fraud so we look at this closely and pay careful attention to annual financial statements when assessing organisations. This is traditionally what grant-makers look for and expect: a high level of reporting, good governance and adequate control systems. Bigger organisations normally have the means to put good systems in place which is why large, well-funded organisations are often low-risk in this area.
It’s a much-abused buzz word in development but unless you look at long-term impact and sustainability, your investment will be wasted. We look at an organisation’s funding and income sources – how secure and diversified are they? How well has the organisation planned for the future? Do they have the reserves to keep delivering services if a major income source disappears? And, critically, do they understand their own risks (internal and external) and what are they doing to mitigate the risks?
Acknowledging the multiple factors at play in assessing risk, GreaterCapital’s risk rating tool assigns a score to each of these risk areas, which gives us an overall risk rating. While this is by no means the only way we assess organisations (we also use an organisational capacity diagnostic tool), it provides a good understanding of the potential impact of a development intervention as well as giving assurance to donors that their investment is well-placed.