Thorts - Impact Investment in Africa: What it is and what it isn’t

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Thorts - Impact Investment in Africa: What it is and what it isn’t

Published Date: 2019-09-20 | Source: DealMakers | Author: Gianluca Storchi

Thorts - Impact Investment in Africa: What it is and what it isn’t

Impact investing, a term formally coined in 2007, can be defined as investments that intentionally pursue a positive and measurable combination of social and environmental impact as well as financial returns. The scope of investments encompass various asset classes, sectors, and regions with the targeted financial returns ranging from below the market, including concessionary, to risk-adjusted market rates.

Impact investing arose as an evolution of concerns about the harmful effects business operations can have on society and the environment. In the past, the government was at the forefront of efforts to limit the negative consequences and externalities, such as pollution, generated by profit-seeking enterprises through corrective tax measures and legislation. From an investor's perspective, directing funds away from companies engaging in harmful activities was their way of expressing their socially and environmentally conscious values. While for the firm, ethical behaviour began to gain momentum when consumer preferences tilted towards ethically-produced goods and services, even as government pressure and shifting perspectives of industry leaders pushed companies toward more socio-economically responsible practices. This led to the adoption of principles designed to address Environmental, Social and Governance (ESG) risks including more effective waste management strategies, internal Corporate Social Responsibility (CSR) policies and triple bottom line accounting frameworks. However, impact investing goes beyond risk management and harm avoidance by carefully selecting and managing investments that generate positive impact to the environment and society with a focus on being able to quantify these effects.

At the macro level, impact investing acts as an alternative mechanism to Foreign Direct Investment (FDI) and Official Development Assistance (ODA) in the promotion of international economic development. On one hand, ODA is associated with government aid and aims to tackle poverty in poor and emerging countries by funding basic needs such as education, health and security with a significant grant element. On the other hand, FDI is carried out by profit-driven private companies from the developed world seeking investment opportunities in emerging markets that will generate high financial returns. Each proposition has its own drawback. It can be argued that the official aid model targeting poor countries that began in the 1960s after decolonisation did not create productive incentives at the national level and may not have been effective in generating sustainable growth, whereas FDI that does not value the social and environmental impacts of business at par with financial returns may result in unwanted outcomes. Impact investing hovers along the middle ground in that it promotes market-driven solutions that seek both financial and non-financial returns.

Impact-driven investment was spearheaded by philanthropic organisations, foundations, development finance institutions and specialist impact fund managers but now appeals to a much larger, more diverse group. The traction this approach to investing has gained globally is a clear reflection of the commitment world leaders have made to address poverty, inequality, climate change, environmental degradation, prosperity, peace and justice through the 2030 agenda for sustainable development and its 17 Sustainable Development Goals (SDGs). UNCTAD estimates that developing economies alone will require investments of US$3.3trn to US$4.5trn per year in key sectors to achieve the SDGs across their delivery period, which implies an investment gap of between US$1.9trn and US$3.1trn. A significant, coordinated effort by stakeholders will be necessary to achieve this target and impact investing plays a key role in this strategy.

According to the Global Impact Investing Network (GIIN), a nonprofit organisation that aims to increase the scale and effectiveness of impact investing around the world, the aggregate Assets Under Management (AUM) for the impact investing industry stood at US$502bn at the end of 2018. While that figure is dwarfed by global AUM of over US$70trn, the industry's growth is promising. The average impact investor's AUM in 2018 was US$452m while the median value was a much lower US$29m, suggesting that the investor landscape is characterised by a large proportion of organisations that manage small portfolios and a smaller proportion that manage very large ones. Over half of the AUM in impact investing are held by asset managers, just over a quarter are held by DFIs and the rest are borne by banks, pension funds, insurance companies, foundations, and family offices. With regard to the location of these investors, the vast majority are headquartered in developed economies - 58% in the US and Canada, 21% in Western, Northern and Southern Europe, and only 6% in sub-Saharan Africa. Despite this, sub-Saharan Africa is tied in second place with Latin America and the Caribbean for AUM allocation for impact investing, at 14%, behind the USA and Canada .

Why Africa?

The African continent has been a focal point of impact investing because it continues to battle with persistent socio-economic issues and has a high incidence of maturing frontier markets that offer high potential returns for those willing to bear with the political, economic and security risks present. Suffice it to say that Africa has a wealth of problems to tackle and so it follows that there are ample opportunities for development, where a dollar spent can generate significant financial, as well as socio-economic and environmental returns.

Within the industry, it is widely felt that impact investing is the silver bullet to most of the developing world's problems, but therein lies the problem.

What Impact Investment is not

Impact investment, despite its promising future, will not cure all of the world's ills. No singular solution or approach will be able to achieve all the SDGs and raise millions of people out of abject suffering. The elusive perfect recipe for lifting countries out of poverty is still very much under debate and investing purposefully for impact is just one, albeit critical, of the necessary ingredients.

1 UNCTAD: World Investment Report 2014

2 GIIN: 2019 Annual Impact Investor Survey

Gianluca Storchi, Senior Research Analyst, StratLink Africa.

This article first appeared in DealMakers AFRICA, Africa's quarterly M&A publication


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