Impact investing for social or environmental good is growing, and growing fast, but has its time come? And is it a replacement for international aid?
Despite international aid maintaining record levels among international donor governments ($146bn in 2016), there is talk of its demise, particularly if efforts to alleviate extreme poverty by 2030 are judged successful. The UK’s DFID is already putting a greater proportion of funds into its wholly owned international financial institution, the CDC . Perhaps a more constructive debate than whether or not ‘aid is over’, is about how to enhance these private investments, so the work runs in parallel to aid and delivers genuine social and environmental impact. As someone interested in the social impact of investments in African agriculture and the effectiveness of the development sector, I attended the recent Social Impact World Conference in London to gain an initial glimpse into the present and future state of the social impact sector; so, what are some of the fundamental features and issues within investing for social impact?
Undoubtedly, the sector has serious, and fast growing, money to invest. A review in 2016 revealed 205 entities invested USD 22.1 billion into nearly 8,000 impact investments. In 2017 these entities plan to increase capital invested by 17% to USD 25.9 billion. In total, 208 entities currently manage USD 114 billion in impact investing assets. Most of this growth has taken place over the last ten years.
The sector is shifting from niche towards mainstream in the investment world, aided by a broad definition. When surveyed, 51% of the UK investment respondents said they’d like their invested funds to contribute to social good. It is no surprise that major players in investment, such as Blackrock, seem keen to establish funds for social impact investment. Finally, whilst current impact investment efforts are western led and mostly invested in the developed world, the developing world is catching up. In 2016, 7% of investments originated from Sub-Saharan Africa.
Interestingly, the volume of money invested may not be the only means to judge the value of these efforts. Discussions at the conference provided a glimpse of a further measure of success: the number of investors. This reflects the desire from some (including from Ethex and Big Society Capital) for an international movement of investors from all across the world to catalyse change to improve lives and the environment. Clarifying the depth of purpose of investment with investors at the outset is key.
There appears to be emerging alignment between development and financial sectors, although the overall sense was that each sector had much to learn from the other. Some of the more progressive wealth actors, such as Tribe Impact Capital, are building their investment lens around the Sustainable Development Goal objectives. Whilst others, for example Global Impact Initiative in Australia, are creating specific purpose investment funds such as their ‘women and girls’ fund which invests in other funds that have grouped companies with strong female leadership, amongst other criteria for boosting gender equity.
Undoubtedly, there is a big challenge on design, support for, and potential management of the social impact ecosystem. Facilitating learning, developing knowledge of the ecosystem and establishing norms / standards are among the aims of different actors as they support a fast-growing ecosystem for social impact investing. But huge variation exists in the culture and approach of the myriad investment actors, (and many kinds of) wealth management funds, philanthropic foundations and other intermediary / advisory actors, and this makes improving and policing the sector hard. There is a difficult balance to find between inclusiveness of new investor organisations and vehicles in an immature but growing sector; and a defined (or perhaps certified) approach that enables investors, and the wider world, to understand and value the social impact being made. This balance is a tough one to strike. Nurturing a largely self-managed ecosystem with mutual obligation / responsibility from social impact capital is important. Though anticipating some abuse is sensible too, and avoiding unfavourable analyst and media reports is vital for sustained interest from investors. Key questions I see include: Who has genuine intent, and who is, or will, ride on the coattails of others? How can an investor tell the difference between a genuine and an opportunistic impact investment? And do we need to find mechanisms that improve accountability which is external to the investment actors?
A key recurring question in the field is: “Should investors automatically expect a reduced financial return from investments in the social impact arena relative to traditional investments?” The conference demonstrated disagreement among panellists and presenters on this topic. Most felt that, yes, a slightly reduced financial return should be expected; balanced with a broader sense of investment return being accrued through other social / environmental means. Others, such as Leapfrog, were adamant that their social impact business model is demonstrating an elevated financial return, given the opportunities of providing services / products to millions of underserved ‘bottom of the pyramid’ customers. However, it appears the dominant perspective is the former, financial returns are likely to be lower in most instances, but much depends on the target group and the business model.
One of the major challenges that several presenters / panels / coffee discussions elaborated on, was a gap in the pipeline of potential development impact businesses in which to to invest. For businesses identified, absorptive capacity was also a challenge. From my own experience, a recent annual review of DFID’s investment impact, by Wasafiri Consulting, adds further weight to the ‘pipeline challenge’ facing investors in SMEs in the food and agriculture sector in Africa. However, this view at the conference was not universal. Within the development sector (e.g. Christian Aid ), there is investment in supporting businesses during infancy / early stages with a package of support, thereby enabling firms to move up the pipeline towards being a recipient for larger financial investment.
Lastly, genuine patient capital is essential, as social impact investments are likely to need to run for more than ten years to secure meaningful growth and financial return, alongside measurable social impact.
So, what can we conclude?
If managed well, it is possible to see how 100s of billions of dollars invested using a social impact lens, with intent to deliver social good through firms that deliver services and products to poor families (the bottom of the pyramid), could be an important factor between achieving, or not achieving, several SDG targets. Much will depend on whether the investments ‘appear good’ or are ‘actually doing good’, and how this is managed within the ecosystem.
Achieving progress will also depend on strengthening active collaboration between the development sector and investment sector on a broad range of topics, including how to use different types of capital effectively to bolster a pipeline of businesses from a start-up phase, right up to those able to absorb $5m+ investments from development banks and formal institutions. It is more expensive and higher risk to invest in smaller businesses, but actively managing this pipeline can ensure supply is met with demand. Linked to this, a gap appears to exist between helping investment funds new to the area to understand their potential impact (and the choices they have), in measuring investment effectively and building in some transparency and accountability.
Myriad investments can add up to something more substantial if there are some guiding frameworks. Collaboration across the public and private arenas will be essential to achieve a broad overview of investments . Taking the agriculture sector in developing countries as an example, the $200bn financial gap required for agricultural transformation of smallholder farmers will only be met, in very large part, by private sector flows including from impact investment. Continental and national investment policies exist as frameworks to guide partnerships and investment decisions that can improve outcomes for people and the environment.
Social impact investment is coming of age; it won’t replace aid in the near term, but after 2030 it may become a dominant means of catalysing international development that, in turn, brings social and financial returns. Every indication suggests impact investment will be important for the economic development of developing countries and, therefore, for reducing poverty for millions of people. However, investing in businesses is unlikely to directly transform the lives of the very poorest in Africa and Asia. Finally, if the development gains of impact investing are to be realised, it is essential to create incentives for investments to contribute towards policy objectives, and find ways for it to work alongside aid in pursuit of national policy objectives, as well as ways to measure its contribution to social impact.
 See GIIN website: https://thegiin.org/assets/GIIN_AnnualImpactInvestorSurvey_2017_Web_Final.pdf
 The Global Impact Investing Network (GIIN) defines it as ‘Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return’. Further, there is a difference between social impact investment (also termed ‘Positive investment’ or ‘profit with purpose’) and ethical investment (avoiding investments in companies deemed to provide harmful products/services).
 See Ethex.com
  See GIIN website: https://thegiin.org/assets/GIIN_AnnualImpactInvestorSurvey_2017_Web_Final.pdf
 Macarthur Foundation, Acumen, Big Society Capital GIIN, and Toniic, (ice and lemon?)