Impact investing for a sustainable future
28 May 2015 by Priscilla Sani-Chimwele, Programme Analyst, Private Sector Development and Engagement
In this blog series, our experts share their thoughts on key financing for development issues.
Business does not take place in a vacuum. It takes place in countries, within communities and amongst people.
Some say that the most critical aspect of a successful business is the customer. I would agree: A business that contributes to the wellbeing and affluence of its customers, by giving back, ensures that in the long run those clients are able to afford and continue to consume the goods and services that the business provides. Smart business sense.
While many business people have given back to communities through philanthropic ventures over the years, some investors rather only prefer to ensure that their investments are responsible, wherein they explicitly acknowledge the relevance of environmental, social and governance factors to their investment, without necessarily aiming to have a positive social or environmental return from their investments. Taking responsible investment (PDF) a step further, impact investment is a concept which responds quite strongly to the driving force behind running a private corporation… the need to make a profit, and in addition to a financial return, ensures measurable positive social and environmental impacts from an investment.
Impact investing has been going on for decades, but the Rockefeller Foundation positioned itself as a leader when it coined the term in 2007 and proceeded to incubate what is now the Global Impact Investing Network (GIIN). Through the GIIN, select impact investors have been identified, with collective deal sizes valued at over USD 69 million. In addition, the 2015 GIIN and J.P. Morgan Impact Investor Survey shows 146 respondents managing a total of USD 60bn in impact investments today. These figures shouldn’t be surprising, as the critical role of the private sector in developing economies has been well documented.
A 2011 African Development Bank report (PDF) goes so far as to state that the private sector is the engine of African economies, employing about 90% of the working age population, accounting for over 80% of total production, two-thirds of total investment, and three-fourths of total credit to sub-Saharan African economies over the period 1996-2008. The role that the private sector has to play in advancing development is therefore not to be under-estimated.
In this regard, it is prudent for development institutions such as ours to identify key private sector partners and through impact investment, mobilize targeted resources for the implementation of the Sustainable Development Goals (SDGs) after 2015.
To do this, development institutions need to help address some of the possible challenges of impact investing, such as:
- The initial high cost of impact investing: Social and environmental impact ventures are usually done through small and medium-sized enterprises (SMEs). Often, the risks are high and the profits low, with many of these SMEs in need of seed and growth capital injections. Development institutions like UNDP can support the identification, amplification and where possible, the creation of business cases for ventures which have positive social, environmental and financial returns and respond to SDGs achievement.
- Measuring the social and environmental impacts of investments can be challenging, and development institutions can help modify various impact measurement tools created by the GIIN and other players in the field to measure impact on SDG related investments.
- Investment conditions, regulations and policies: Development partners can promote incentives for the private sector through, for instance, lobbying with governments to create conducive environments and put in place favourable regulations and policies for impact investing e.g. reduced taxes, easier operational requirements etc.
Some big players like Root Capital, the Bill and Melinda Gates Foundation and Acumen Fund are already ahead of the game, engaging heavily in various impact investment ventures in various parts of the globe.
These and other potential big players need to be harnessed for the next phase of financing for development, and the upcoming Addis Ababa Conference provides the perfect platform for governments and development partners to begin the conversation on how to bring the private sector to the table to support financing for the SDGs.