Bridging The Gap The Power of Impact Investment
Investment With Purpose
Rising demand for socially responsible and purpose-driven investment has resulted in new ways of putting capital to work globally. In the past decade, what is now known as “impact investing” has challenged the long-held view that social and environmental issues should be funded by philanthropy, and that market investments should focus exclusively on achieving financial returns. The Global Impact Investing Network (GIIN) defines impact investing as investments made into companies, organisations, and funds with the intention of generating social and environmental impact alongside a financial return.
Impact investments seek to create social or environmental benefits, directing capital to enterprises that accomplish impact goals. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, financial inclusion, and affordable and accessible basic services including housing, healthcare, and education.
Investing for impact makes good business sense as industry leaders realise there is a synergy between purpose and profitability. Customers and employees respond favourably to institutions that generate returns to society, thereby unlocking superior returns to capital.
Investing in Growth Markets
“My career aspiration is fuelled by this desire to transform lives, through private enterprise. My aspiration is to create Investment Funds that maximize economic returns and social impact. These Funds will not only provide risk capital, but through a system international partnerships, will foster the transmigration of technology and skills between the West and frontier markets, unlocking value creation across geographic boundaries.” Temi Awogboro, December 2010
This was an extract from my Stanford GSB application essay over 10 years ago, long before ‘impact’ was a thing. Fast forward to over a decade, impact investing has gained prominence as an approach to investment that aims to achieve both financial returns and social or environmental goals. Impact investing has proven to be a critical tool to fund, catalyse, and scale approaches that improve millions of lives in emerging and developed markets.
The size of the impact-investing market, or assets devoted to investing to achieve positive social and environmental impact as well as a financial return, stood at $715 billion in April 2020, according to the Global Impact Investing Network (GIIN). That compares to $502 billion in April of 2019, a 42.4% increase that reflects both asset growth and an increase in the number of organizations that GIIN includes in its annual estimate.
The IFC estimates impact investing in private markets could be as large as $2.1 trillion in assets under management, but only a quarter of that, $505 billion, is clearly measured for its impact, both for development impact and financial returns. Furthermore, IFC estimates that investors’ appetite for impact investing—in which they seek to generate positive impact for society alongside strong financial returns—could total as much as $26 trillion.
I have been privileged to have been a core part of one of the pioneer impact funds from inception. Evercare is wholly owned by the Evercare Health Fund, a US$ 1 billion emerging markets healthcare fund managed by The Rise Fund, the impact investment platform of global alternative asset manager TPG Capital. Evercare was established in 2015 with the mandate to leverage impact capital to transform healthcare ecosystems in key markets in Africa and South Asia.
Today, Evercare is one of the largest integrated healthcare delivery platforms in emerging markets, providing accessible, quality healthcare for millions of people across Africa and South Asia, including India, Pakistan, Bangladesh, Kenya and Nigeria. Evercare is disrupting the traditional healthcare model with its integrated cross-continents platform, its impact driven model and quality driven hospitals, creating a profitable double bottom line.
The Challenge
Despite large investor appetite, the market is far from reaching its potential as several bottlenecks constrain its development:
Impact washing: A lack of clarity about how investments are managed to achieve impact gives rise to concerns about “impact washing,” which dissuades potential investors. The industry lacks a uniform standard covering what it means to manage an investment portfolio for impact.
Returns: Continued uncertainty about whether impact investors can earn commercial financial returns when juxtaposed with non-impact investors limits the desire for impact investment. It is worthy of note that impact investing first gained prominence among philanthropists and other investors willing to accept “sub-commercial returns.” Today, impact investors’ expectations vary, but the largest group of investors—especially the potential growth market—seeks commercial financial returns. Furthermore, there is solid evidence that impact investors can achieve commercial financial returns at scale.
Comparability: Limited comparability of measured impact across projects and investment managers poses a challenge to investors who are trying to allocate capital to impact investments. There needs to be an alignment, as convergence of common elements, metrics, and approaches will build trust in the market and help investors to identify asset managers that pursue impact in a disciplined way.
The Future
For centuries, philanthropy had been the primary source for funding social investments, but today, applying business and investment principles to address pressing global issues is imperative.
As impact investing gains momentum, I believe the following could positively shape the future of the industry:
Market-centred innovations: Embracing a wider set of market mechanisms for investing, broadening participation. New bonds linked to social outcomes—such as the Ford Foundation’s $1 billion offering—are starting to leverage the growing investor demand for impact in listed securities. Collateralized loan obligations, securitizations of development finance risk, and special purpose acquisition vehicles (SPACs) can be structured to finance the SDGs and are better suited to the scale of institutional investors.
Governance and Transparency: The combination of improved standards and increased scrutiny is leading to a new era of accountability. Developing a credible impact thesis, and an impact measurement system that ensures accountability by establishing targets, monitoring performance, and reporting results for impact in the same way that traditional investment managers do is key. Impact measurement remains fragmented, and efforts must be made to align leading sustainability and integrated reporting organizations, alongside ongoing initiatives to harmonize global sustainability reporting standards.
Talent Attraction & Development: Harnessing the attractiveness of the social-environmental impact proposition to promote greater professional participation in funds and portfolio companies. Perhaps introducing professional certification programmes with a social investment focus; supporting social sector CEOs with incubation, coaching and board advisory services; and revisiting compensation and performance incentives to help bridge the gap with comparable alternative investment funds.
Foster industry collaboration: Powerful potential synergies exist between private impact investors, DFIs (Development Finance Institutions) and other participants in scaling impact investing. Potential areas of collaboration include: developing case studies for successful social enterprises, supporting upstream policy reform and project development that creates investment opportunities for private investors sourcing investments, and creating co-investment platforms to mobilize impact investments.
As we look forward, we are facing a $2.5 trillion annual gap in the funds needed to deliver the Sustainable Development Goals (SDGs) by 2030. The COVID-19 pandemic has made it even harder to achieve the SDGs as governments shift resources and take on new levels of debt to survive the threats of the disease, including the exacerbation of inequalities.
It is my strong belief that not only will private impact investment capital be key to funding the SDGs, but will also play an important role in finding solutions to problems conventionally seen as the domain of the public sector as it struggles with new and unprecedented crises.
Overall, I believe there is significant opportunity for impact investors to innovate for scale and success over the next decade. As a younger and more socially conscious generation comes into power globally, the momentum behind impact investing will continue to grow in the foreseeable future .
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