INVESTING in companies that create social, environmental and economic value is a trend that has been increasing worldwide. This type of triple-bottom-line investing is commonly called impact investing and last year, financial services giant JPMorgan estimated that the market was worth $60bn worldwide — and growing.
JPMorgan, Monitor Deloitte and the Calvert Foundation predict that the market will increase to between $400bn and $1-trillion worldwide in the next five years; and with 22% of global-impact enterprises located in Sub-Saharan Africa, much of the opportunity lies on this continent.
The rise in impact investment is attributed in part to the 2008 financial crisis and the growing awareness that making money for the sake of making money alone is harmful to society and business interests. There has been an increased understanding that some of the most pressing global issues — inequality, climate change and unemployment — pose large financial risks if left unaddressed. This has led to numerous initiatives examining how investing in companies with social and environmental agendas can help uplift and improve living conditions for people, while yielding strong financial results.
The rapid rise of the industry has resulted in a host of new investment products and initiatives, yet there is still a considerable lack of understanding about impact investing, and a lack of substantive information advising investors how to implement an effective impact-investment strategy, most particularly in Africa.
One of the most enduring misconceptions about impact investment has been that it is a trade-off, where financial returns are sacrificed in favour of social return. This is rooted less in fact than in fear. The industry is starting to collect quantitative data providing evidence that a company can be for-profit and for-purpose, without making long-term sacrifices to either goal.
A study conducted by the Global Impact Investing Network and JPMorgan shows that of 143 investors, about 27% said the social impact of their investment had outperformed their expectations. Financially, their impact investments had not beaten their expectations but only 9% were disappointed with the returns. The investors indicated they would invest a further $12.2bn this year in impact investments, up 16% from last year. As it points out, the real growth rate is probably even faster, considering that as many financial institutions are only now entering the market.
In the US, a small impact investment company, Domini Funds, has been tracking socially responsible companies’ performance through its Domini 400 Social Index since 1989 and has convincing evidence to show that these companies have been outperforming the S&P 500 for decades. Since 1990, the social index (MSCI KLD 400) has returned an average annual total return of 10.46% compared with the S&P 500’s 9.93%. Another misconception is that impact investment is only for wealthy investors. Even those with very limited funds can make a huge difference, depending on where they put their money.
FOR instance, the Calvert Foundation in the US, a non-profit microfinance fund, has a community investment note that allows people to contribute as little as $20 to promote social enterprises, conservation, job-creation, affordable housing and other development fields and receive a risk-adjusted return on that investment.
Some of these investments will find their way into African enterprises. Foreign direct investment in Africa has continued to surge in recent years. Last year, foreign direct investment was $80bn compared with foreign aid of $55bn. This trend is likely to continue and many foreign investors, foundations and trust managers are keen to tackle the significant challenges Africa faces in terms of poverty, infrastructure development, healthcare, education and transport by making sizeable investments in companies dealing these issues.
This has been coupled with an increase in local investment and experienced investors on the continent. Foreign investors frequently look for partnerships with local companies that have the expertise, the location and the know-how to address these problems. In SA, the obstacles faced by load shedding, for example, have given rise to many businesses offering renewable energy and solar energy solutions. Such organisations are looking for investors to help them launch their business and move their operations to the next level.
Solar energy is becoming a lucrative industry as technology prices have dropped. In Germany and Australia solar energy is cheaper than traditional electricity sources. US company SunEdison has been awarded a contract to build the 86MW Droogfontein plant near Kimberley. Eskom has a 20-year purchase agreement with the project.
In the alternative energy market, measuring the return on investment is becoming relatively straightforward. It is less easy to put a price on investing in human dignity or cognitive development in children, for example. One of the sticking points in the impact investing movement has been how to measure if funds invested in social good are having any measurable impact.
When corporations make decisions on how to allocate capital among business departments, they consult reams of data to understand the returns projected and the impact of that capital invested on the rest of the business. Much of the work in impact investing markets is starting to look at how money invested in social and environmental good could be allocated in a way that uses data to determine the effectiveness of programmes and institutions. One of the innovative financing mechanisms to emerge from this process are social impact bonds.
Social impact bonds first made headlines in the UK in 2010 after they were pioneered by non-profit organisation Social Finance in a pilot project to reduce recidivism among 3,000 short-term prisoners in Peterborough Prison. Three years later, interim figures from Britain’s ministry of justice showed a 6% decrease in recidivism among this group, compared to a 16% national increase for the same period. The world took notice.
The concept is ingeniously simple: social impact bonds don’t operate on a debt and repayment system. They are social investment vehicles with outcomes-based contracts between government, private investors and philanthropic organisations.
Investors provide capital to underwrite social projects usually funded by tax money and philanthropists. If a project is successful measured against pre-agreed benchmarks, the investor gets a return on the economic value created for government. If the project doesn’t work, investors lose their money.
Impact metrics are built into how the funds are distributed, and the concept took off. By late last year, there were more than 100 social impact bonds in operation or in development. In SA, the Bertha Centre for Social Innovation and Entrepreneurship at the UCT Graduate School of Business is working with National Treasury, the Western Cape government and the City of Cape Town to pioneer SA’s first social impact bonds to help develop “outcome-based procurement” options to drive social benefits such as job creation and early childhood development.
SOCIAL impact bonds could play a significant role in addressing the limited understanding of what works and what doesn’t in impact investing, driving future funding to the most effective providers. They are a proven social upliftment tool and a solution that works. For investors looking to leave a legacy, it’s a win-win situation.
There are many investors looking for investments that can make society better as well as generate financial profits. There are many enterprises that can deliver on these mandates and offer investors excellent conduits for investments in education, health and community development. The time is ripe for fund managers, asset managers, financial portfolio managers and foundation management to educate themselves about the impact investment market and how they can participate not only in creating wealth for a few, but creating opportunities for millions of Africans as well.
Credit: Aunnie Patton is the innovative finance lead at UCT GSB’s Bertha Centre for Social Innovation and Entrepreneurship and an Associate Fellow at Saïd Business School, University of Oxford
