Rethinking New Paradigms for Investing…
Within the business community, the concept of sustainability has evolved beyond creating long-lasting and enduring businesses to making strategic, longer-term results and resource conserving decisions. By adopting sustainable practices, forward-thinking companies are gaining competitive edge, increasing their market share and boosting shareholder value. More businesses are not only fixated on making financial returns but have also incorporated environmental and social concerns into their decisions, strategies, and operations.
Whilst garnering momentum in Europe, North America, Asia, India, Africa and the Middle East in its early years; investing for impact has gained more traction in recent years with the popularity of global agreements such as the Paris Agreement and the Sustainable Development Goals (SDGs). Further commitments from the global community, visible risks of climate change and deeper consciousness towards the high levels of poverty across the world; and the rise of globalisation, migration and nationalism are projected to arouse higher interests in impact investing this year. With these trends, clients will be seeking more responsible investors while international investors will most definitely collaborate only with responsible businesses.
Impact investing seeks to generate competitive financial return while addressing environmental, social and governance needs. It aims at solving social and environmental challenges while generating profit and reinforces governments’ efforts in providing social services and basic amenities to the society. It however goes beyond donating a percentage of business profits to a social cause rather, it incorporates social impact as part of core business strategies.
Although the concepts of maximising return over time and philanthropy are not wrong, returns at the expense of environment, employees, and supply chain for instance suggests faulty business operations. Responsible investing takes a longer-term view. Businesses, over time, are expected not only to produce profits but, on the other hand, should produce jobs, positive environmental outcomes, as well as contribute to a better society — markets working together for the good of all. Hence, businesses are beginning to consider sustainability challenges of this age, be it climate change, water or pollution control or gender equality, in their operations.
Contrary to popular perception, impact investments can be made in both emerging and developed markets. During its early years, impact investing garnered its highest momentum in North America and in parts of Europe, notably the United Kingdom. In recent times, it has gained traction in other parts of the world, where it plays a critical role in continuous economic and social development. In Africa however, its evolution is inhibited by several challenges that limit its potential for mitigating environmental and social risks as well as increasing business growth.
There is still a huge gap in the undertaking of impact investment beyond philanthropic activities or a tradeoff between financial gain and social impact. Impact investing involves profitable businesses around social problems-when for-profit investment capital supplements philanthropy in addressing social and economic challenges. The business makes money from creating a positive impact for example, through skill acquisition, youth empowerment. It allows room for businesses to achieve the triple bottom line of social, environmental and economic goals by bridging the gap between aggressive economic growths and lagging social development. For instance, several years ago, the Rockefeller Foundation embarked on an ambitious initiative to expand opportunities for more broadly shared prosperity by catalyzing the potential for impact investing. There are peculiarities that define impact investment such as profit (Return on Investment (ROI) which is an important objective with a predetermined and intended social impact. Impact must be visible and measurable to produce a net positive change to the society even as business leaders targeting profitability with a long-term horizon make investments that generate social benefits.
Impact Investing & National Development Dynamics
Africa is one of the world’s fastest growing continents, with abundant human and natural resources together with economic and political complexities, high poverty and unemployment rates. The growing impact investment market provides the avenue to channel capital to support solutions to the continent’s most pressing challenges in sectors such as agriculture, affordable and accessible housing and healthcare, clean technology and financial services.
Nevertheless, for impact to be sustained, attract investors and yield commensurate ROI, entrepreneurs require empowerment through education on ways to transform their businesses through corporate structures that are appropriate for investments. Moreover, in most African countries, there is no provision of incentives for MSMEs to convert from informal to formal business structures. Across the continent, the growth of impact investors is hindered by a lack of transparency on how impact enterprises can define, monitor and report performance of all their activities. Inconsistent metrics make it is challenging for investors to compare social outcomes spawned across alternative investments and at the same time communicate positive results to stakeholders.
Governments can either remain complacent or hard based on the type of environment they create for impact investing. There are ways that empower impact investing such as: setting up of benefit corporations legislation, lowering of corporate income taxes for high impact businesses, funding incubators, and creating equity investments. In creating an enabling environment for investing, it is important that governments of African countries ensure that domestic policies do not conflict with one another. For instance, tax incentives for oil production can effectively draw capital away from investment in renewable energy. Also, short term fiscal measures can create negative consequences for impact enterprises in the long term if they are not entirely considered.
Whilst new paradigms of investment have not gained full knowledge amongst the most impactful sectors in Africa, a taskforce set up for this purpose can help contextualize it in order to make it relevant for investors and other stakeholders and to address the lack of awareness. In Senegal for example, the Presidential Investment Council initiated a conversation that led to the establishment of the Impact Investing Working Group, tasked with the responsibility of proposing reforms to increase opportunities for impact investment and social entrepreneurship.
While all forms of impact investing have the dual motive of generating both financial and social gains, investors can approach it through: impact only, impact first and finance first paradigms in order as long as they ensure the creation of jobs, provision of critical goods and services as well as social and environmental benefits. For instance, an impact investor who wants to improve sanitation in Africa could do such by developing waterless toilets maintained through modest fees. With this, the investor is impacting on the society; providing basic and environmental-friendly amenities, while making financial and positive reputational returns.
Clearly, impact investing will be a major recurring theme in 2018 for sustainability-conscious businesses as climate issues unrelentingly gain importance and as international investors and funders continue to look inwards for opportunities in Africa. This would create additional funding opportunities accessible to Africa but, only businesses that invest in impact sectors will trend.
According to Acumen, the future of impact investing depends on our ability to embrace what we have learned over the course of economic history. Solving social issues require both private and public capital; a combination of risk-seeking investors and incentives and subsidies from public actors to make it easier and more attractive to reach underserved segments of the population. Globally, risk-seeking investors build these solutions in partnership with the public sector, which plays its part to adjust incentives, act as a major customer, and provide subsidy where needed.
In a few years from now, impact investing is projected to be the norm for every business and society; channeling up to hundreds of billions towards solutions that can address some of our biggest problems; from poverty, hunger, poor health to climate change.
The question is: will this be the case in Africa as well?
References available on www.sustainableconvos.com