Impact investing should (soon) be baked in to all investing
While the numbers show definite pockets of traction, there is still much to be done to attract mainstream capital into impact assets
The financial markets — too often thought of in the abstract, divorced from human decision-making — can be narrow-minded in whom they serve (primarily the already wealthy), suggests Nobel laureate economist Robert Shiller in his book, Finance and the Good Society. But how, then, he asks, can those markets be used to spread the wealth more broadly across society? “How can we democratise finance, so as to make it work better for all of us?”
As the world slowly emerges from the Covid-19 pandemic there’s an urgency to answer this question. The UN’s 17 sustainable development goals had alerted us to long-simmering inequalities and social challenges, but the pandemic has abruptly laid them bare. The remedy is not merely in short-term interventions such as a successful vaccine rollout, but in a sustained reallocation of capital into businesses that can move the needle on a more equitable, long-term recovery.
Glimmers of hope emerge at times like this. The once fledgling world of impact investing has begun to show financial returns at least equal to those of traditional investing hurdles. It is estimated that a third of global transactions already carry impact in their frameworks. Investors globally are shifting their expectations to include not only attractive commercial returns but embedded impact in all allocation of capital.
An investment approach spanning asset classes that has deepened in its sophistication over the past decade, impact investing is, broadly, about investing in businesses that have commercial models to create positive social and environmental returns. According to the Global Impact Investing Network’s 2020 annual survey, the impact investing market now stands at about $715bn globally, and is growing steadily. A number not to be scoffed at, albeit small compared to the $4.5-trillion global private equity assets under management.
Not all financial instruments are created equal, and some lend themselves better to impact outcomes
In SA, the statistics are hotly debated, but as an investment strategy in an emerging economy, desperately in need of capital to see its impact innovation flourish, particularly in the wake of Covid-19, it is certainly gaining traction and growing in sophistication.
Aunnie Patton Power, convenor of the University of Cape Town’s Graduate School of Business’s impact investing in Africa executive education course, remarks that “in the past few years, we’ve seen the conversation shift in SA from why we should consider impact to how we practically implement impact strategies. The participants have also changed from more niche players to the largest commercial financial institutions on the continent”.
With the right access to capital and scalable technology, the first markings of impact can spread like wildfire. A recent McKinsey report estimates that impact investing in India has touched the lives of 60-million to 80-million people. While this is a fraction of the 1.36-billion people living in that country, it is also the entire population of SA — and then some.
If investors start small and support the best-in-class impact businesses; back them with balance sheets and smart measurement tools; seed them to hire top talent; and build tech platforms to broaden their reach to new markets, our portfolio success could be achieved through solving global needs, at scale.
While the numbers indicate definitive pockets of traction, there is still much to be done to attract mainstream capital into impact assets. Technological tools can go a long way to verify impact and forge comfort for fund managers seeking commercial and impact returns, particularly in the context of constrained capital in a Covid-19 environment.
Measurement and analytics, data that promotes comparability and benchmarking, standardising metrics and definitions are all critical. It is unhelpful, for example, if we are not clear as to whether “impact” means “do good” or merely “do no harm”.
Financial structuring is also a tool of impact. Not all financial instruments are created equal, and some lend themselves better to impact outcomes. In time, with a robust track record, we may arrive at a tipping point where the number of investments with embedded impact exceeds those without, and perhaps “impact investing” will be a misnomer as all investing will carry with it some form of impact. And the impetus from Covid-19 may help accelerate that.
As investors we must ask what we imagine the next decade after Covid-19 to look like. And investing with impact cannot reasonably be decoupled from our imaginings.
• Woods Price is an executive at Linea Capital and a graduate of the Impact Investing in Africa course offered by the University of Cape Town Graduate School of Business.
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