Doing well by doing good - placing impact at the heart of investment

In this era of significant social, environmental, and political challenges, we have an opportunity and an imperative to move towards a more inclusive and sustainable economy. This is the time for collaboration between Government, private sector and civil society to find innovative finance solutions to these challenges, says Absa Head of Citizenship, Sazini Mojapelo.

On 1 January 2016, the Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development officially came into force. The SDGs comprise 17 core goals, ranging from ending hunger to stemming climate change, providing a critical roadmap to a sustainable future and more prosperous world.

Governments alone cannot fix these social, environmental and political challenges. The private sector has a critical role to play, too. Now-retired Unilever CEO Paul Polman called the Sustainable Development Goals “the greatest economic opportunity of a lifetime”,and achieving them at home and around the world is going to require new ideas and large-scale investments with impact far beyond the current capacity of governments.  

It has become clear that private sector involvement and private finance, resources and expertise will be required to achieve these SDGs and as the debate about the role of business in society is getting louder, an ‘impact economy’ is on the rise.

Many private sector players have been deepening their impact by supporting business models that actively deliver sustainable and scalable solutions to global issues. Dedicated to achieving both impact objectives and commercial returns, impact investors are uniquely positioned to invest in companies that further SDGs.

Innovative financing is one aspect of the impact investing ecosystem.

The Bertha Centre for Social Innovation and Entrepreneurship defines innovative financing as “an approach to funding enterprises and interventions that optimizes positive social, environmental and financial impact”. In essence, it is an approach whereby the investors’ goal is to create a measurable social or environmental impact whilst generating an attractive financial return.

This simple idea - that you can do well by doing good - has created exciting new opportunities and given businesses competitive advantage. High net worth individuals, foundations, institutional investors (such as pension funds), and even sovereign wealth funds are increasingly seeking to align their investments to their values or those of their stakeholders. In some instances, they are also looking to solve longer-term sustainability related challenges. Likewise, a new generation of entrepreneurs has a growing need for investors who value them not only for their investment potential, but also for their ability to generate positive social or environmental benefits.

Global Impact Investing Network’s (GIINs) “Sizing the Impact Investing Market” report – released earlier this month - estimated the current size of the global impact investing market at $502 billion. However, the industry’s growth potential is hindered by an increasingly polarized debate about whether impact investing requires a trade-off between financial return and social or environmental impact and a consistent, common understanding of how you measure and claim impact.

One perspective claims that there is always a trade-off between financial return and impact, and that all true impact investing therefore involves sub-commercial returns. The other argument is that there is no trade-off between return and impact, so all smart impact investments should achieve fully commercial, market-rate returns.

We need to move beyond the trade-off debate and widen our investment lens. There is room for all funding types and credit models along a continuum of investment returns and impact. Only when we embrace the full investment spectrum will we realise the potential of impact investing to address the world’s biggest challenges.

The South African case

A local study was conducted by academics from the University of Stellenbosch to find out whether South Africans are ready to accept and work with impact investors and identified barriers impact investors currently face.

One such barrier was how new and unknown the idea of impact investing was in South Africa. Another was the shortage of investment-ready deals in South Africa as well as a lack of financial and technical life cycle support for small and medium-sized social enterprises to become mature enough to have a lower risk profile.

Other barriers included the lack of standardised and detailed reporting measures for environmental, social and corporate governance management. It must become an integral part of business strategies to include quantitative measures of how they respond to climate change; qualitative social and governance factors such as workforce training, shareholder protection and board diversity; how they manage their supply chains, and who they select to finance and partner with. Companies need to share not only what they stand for, but what they stand up for in more meaningful and engaging way.

Despite this, more than two thirds of existing impact investments have been made into emerging markets such as South Africa and India. There is a growing call for ethical and socially inclusive investments, and our country is a perfect gateway for impact investors wishing to target the African continent. President Cyril Ramaphosa’s special economic envoy has also recognised impact investing’s potential influence.

A new way of investing

As the number of public and private role players believing in this type of optimisation grows, it is becoming more apparent that our current financial instruments may not be adequate for this significant shift. The traditional funding structures of debt, equity and grants may not always facilitate an efficient flow of capital designed for funders with distinct risk, return and impact requirements.

Existing funding structures need re-imagining: investigating combinations of new and existing funding structures, with different mandates and risk appetites, along with innovative credit models that use local non-traditional proxies for risk and behavior in the absence of, or along with, traditional scorecard inputs.

Disruptive technologies also present impact investors with unprecedented opportunities to innovate and re-imagine how services and products are provided and distributed, how businesses grow and how markets and industries evolve. Impact investors have an opportunity to play an active role by financing businesses that use disruptive technologies to solve global problems on a large scale.

Asset owners and managers need greater clarity on what exactly impact investing is or isn’t. It must offer investors a transparent basis to invest and give them a clear and consistent understanding of the specific environmental, social, and governance impacts that their investment is expected to generate. Now is the time to address the collection, monitoring and evaluation of data and the extensiveness of this across a large impact portfolio.

To attract additional resources, including funding into impact investments, the terminology and measurement needs to be standardised. We hope to see signatories to the International Finance Corporation’s set of draft principles bring clarity and discipline to the world of impact investment later this year.

We recognise the need to play our part in moving the dial from “why” to “why not” as more investors recognise environmental, social, and governance factors as drivers of sustainable value.

As an African financial services provider, Absa employs more than tens of thousands of people on the African continent who live and work in the communities in which we operate. We recognise that we need to play our part in enabling greater socio-economic prosperity and this includes how, and what, we fund – and the role we play in building wider supporting frameworks.