Are we entering a new era of corporate social responsibility and ethical investors? Oskar Haq our financial sector adviser in Asia explains why impact investment is becoming ever more popular.
Not a week goes by where I don’t come across another article touting “impact investment” as the best thing since sliced bread for solving problems not just in cities like New York and London but also in developing countries. Obviously, that sounds almost too good to be true. So let’s take a closer look at what this instrument really is. First, let’s start off with what does impact investment mean?
What is impact investment?
According to the Global Impact Investing Network, which is financially supported by the Rockefeller Philanthropy Advisors the definition of impact investment is the following: investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. In comparison, investments in
general are where investors have a clear goal of maximum financial return with a digestible level of risk to their principal.
Impact Investors are looking for returns that are social, environmental as well as financialImpact investors are looking for returns that are social, environmental as well as financial. As there are three types of returns to look at the industry has coined the term triple bottom return or ‘People, Planet and Profit’. Something that makes impact investing more interesting is that investors are even willing to accept below market or market rate financial returns for greater social and environmental good. The idea is not
completely new. Socially responsible investing has been around for a while. Mostly, it has been about not investing in certain kinds of companies, for example, tobacco, arms, fossil fuels etc, but still seeking market rates of return.
To have a clear idea, it’s always good to look at examples, such as the fund that invests in Fair Trade and organic-certified coffee cooperative located in Ecuador. The cooperative’s 300 active members are smallholder farmers who cultivate shade-grown coffee. The trade finance loan allowed the cooperative to cover operating costs and invest in new processing equipment. Additional revenue gained from Fair Trade coffee sales are used to sponsor projects in reforestation, education, and community-based health
clinics in the community where smallholder farmers live.
The African Agriculture Capital Fund (AACF) is another example. This is a $25 million USD fund set up to improve the lives of 250,000 people in East Africa by investing in small and medium enterprises (SMEs) that provide farmers with increased access to good services and markets. This fund was put together by Gatsby Foundation, Bill and Melinda Gates Foundation and The Rockefeller Foundation along with the help of JP Morgan and USAID.
Finally, The Deutsche Bank Eye Fund was established to provide funding for eye care organisations in developing countries to restore the eyesight of people who are unable to afford the treatment. This fund has made three investments so far ranging from
$250,000 to $7 million in China, Paraguay and Nigeria. This fund has helped perform 10,000 surgeries and 100,000 eye treatments so far.
A recent study… in 18 different countries concluded that “to improve society” should be the number one goal of corporationsThis new sector of impact investment is being driven in some parts by a new generation of investors who experienced the 2008 global financial crisis and have questioned the authorities by voicing their anger through social media and movements such as Occupy Wall Street. A combination of generation x and y (also known as millennials), this group demands more from their investments and their financial
As presented at the World Economic Forum, a recent study of 5,000 millennials in 18 different countries concluded that “to improve society” should be the number one goal of corporations. The report by Deloitte stated that over the next 40 years $41 trillion USD will be transferred to millennials from their parents making them a very powerful group of people who demand more transparency and responsibility
from their investments. One of the key areas of focus for them is “Investments that positively impact the lives of people and society.”
There are not enough investment prospects out there to satisfy impact investors
This brings me to the issue of supply. Funds and good intentions are not the main problem. There clearly is a demand but unfortunately there are not enough investment prospects out there to satisfy impact investors. One way we at Oxfam are trying to solve the supply problem and build capacity to reduce poverty is by creating social enterprise (business) incubators in developing economies like Sri Lanka and Vietnam to name just two. These incubators will provide social enterprises with the necessary management and financial help
and mentoring support for them to scale up their viable businesses. We will also provide them with access to markets and to capital continuing our strong support of men and women and their right to a livelihood.
With all this optimism there should be a note of caution. Impact investment is a great tool that can help the poor and the vulnerable. Most enterprises and finance institutions have the best interest of their clients at heart. However, we still need to be vigilant of SMEs claiming to be social enterprises just to raise capital and banks and financial institutions using this space to exploit the market and investors.
Finally, I do want to end on a more upbeat note and simply say that impact investment is a wonderful idea, which can help us in our fight against poverty around the world and improve millions of lives.
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Author: Oskar Haq
Archive blog. Originally posted on Oxfam Policy & Practice.