What is impact investing?
Over the last decade, impact investing has been seen more regularly, by both business and public sectors, as a new asset class, capable of providing market related returns on investments. In fact, it’s recently become a megatrend in the investment world as impact investors seek financial returns while making a positive social and environmental impact. This seems to make ‘giving back’ not just charity, but financially viable for investors and is a trend we hope to see soar over the next decade.
But what is impact investing exactly? And what role can it play in advancing human wellbeing in sub-Saharan Africa? Let’s take a look.
The rise of impact investing
The term ‘impact investing’, coined by the Rockefeller Foundation in 2007, is defined by the Global Impact Investing Network (GIIN) as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”
After the 2008 financial crisis, interest in social and environmental impact investing began to rise. And this interest expanded with the introduction of the United Nation’s Sustainable Development Goals (SDGs) in 2015.
In 2014, the global investment needed to achieve the UN’s SDGs was between USD 5 trillion and 7 trillion per year – with developing countries alone needing between USD 3.3 trillion and 4.5 trillion.
A solution for the investment gap in developing countries?
Today, the total annual investment need in developing countries is at USD 3.9 trillion, and current annual investments account for about USD 1.4 trillion. While this is an achievement, it leaves an annual investment gap in developing countries at USD 2.5 trillion.
Figure 1: Estimated annual SDG investment needs in developing countries (UNCTAD, 2014)
In addition, the pandemic has worsened the investment gap, with SDG-related greenfield investments down by 33% and international project finance 42% lower than before the pandemic.
By filling the investment gap and achieving the SDGs faster, impact investing could play a critical role in advancing wellbeing in developing countries.
An upward trend
Ten years ago, it was estimated that the impact investing industry would reach between USD 400 billion and USD 1 trillion. Many doubted it would get there, but GIIN’s latest Annual Impact Investor Survey tells us that the industry’s market size is at USD 715 billion, with the estimated number of global impact investors at over 1,720. Considering the pandemic, this is extremely hopeful.
If the positive trend continues, the industry could soon help to fill the SDG finance gap. But it’s critical that the impact investing ecosystem be optimised to mobilise more funds and channel investments into the sectors that can maximise positive impact.
Doing good while doing well
Impact investing has its roots in a wider spectrum of investment approaches and goes beyond the traditional investment value chain (seen in figures 2 and 3 below). Unlike ESG (Environmental, Social, and Governance) investing, which focuses on “doing no harm”, impact investing focuses on “doing good while doing well.” Investors seek a financial return while addressing the social and environmental challenges the world faces. And the outcomes of impact investing are actively measured to determine whether an investment can be considered an impact investment.
Figure 2: The impact investment value chain (Barby & Pedersen, 2014)
Figure 3: A spectrum of capital (Barby & Pedersen, 2014)
Impact investing is a bridge between private sector capital and traditional philanthropy – mobilising massive capital resources to advance human wellbeing. Initially, the most popular investment areas were microfinance and affordable housing, but the landscape is now broadening fast. Trends for 2021 have included climate solutions (replacing ESG with intentional impact), the biodiversity crisis, and social inequalities.
The industry has also developed several measuring tools, such as the Impact Reporting and Investment Standards and Global Impact Investing Rating System. And an expanding number of measurements are being customised for institutions and organisations that are considered “metric-rich, but data-poor”. This means that those who need the industry most, are becoming viable candidates for investment projects, where they may not have been before.
Challenges and hope
There’s a lot of excitement around impact investing, but there’s still some uncertainty and thus scepticism from potential investors around what it is, exactly. The lack of consensus around main asset classes, the structuring of the ecosystem, and the industry’s constraints has caused some confusion around expectations versus outcomes. And for the industry to reach its full potential, it needs to become better understood and supported by mainstream investors. There are so many potential offshoots here, and we hope that the more we speak about it, the more we’re putting this vital investment option on potential investors’ radars.
If anyone needs assistance or perhaps a little information, Lithon’s Investment arm is focusing on Impact Investments and would be honoured to assist you on your journey of simultaneous ROI and global upliftment.
REFERENCES
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