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18 BUSINESS DAY C002D5556 Friday 23 March 2018 IMPACT INVESTING In Association With Impact investing is importan What we invest in today will determine the world we live in tomorrow - GIIN INNOCENT UNAH AND SANDRA OKOUGBEGUN Understanding impact investing In a world where government resources and charitable donations can never be sufficient to meet social and environmental needs, it becomes imperative to evolve a plausible alternative for directing capital to meet these needs; impacting investing may be this alternative. The term impact investing was invented in 2007 by the Rockefeller Foundation at the Bellagio Conference held in Italy. According to the Global Impact Investing Network (GIIN), impact investing can be defined as investments aimed at generating positive social and environmental impact alongside financial returns. It has the singular objective of unlocking private investment capital to complement public resources and philanthropy in addressing pressing global challenges. Thus, impact investments are those investments made in companies, organisations and funds with the intention to make various social and environmental impacts, while deriving financial returns in the process. Impact investing can simply be seen as investing to create positive impact. While impact investing might be a new term, it is certainly an old idea. The GIIN and some philanthropic organisations such as the Ford Foundation have been playing vanguard roles in growing the impact investing space. An initiative of the Rockefeller Foundation, and established in 2009, GIIN is a network of impact investing stakeholders around the globe, who aim to change the way the world thinks of using investment capital to create positive social and environmental benefits. These stakeholders are constantly seeking to develop the impact investing space. Impact investing challenges the long held view of social and environmental issues being addressed only by philanthropists and governments. As the impact investing market continues to grow, it has unlocked capital to solve many of the world’s most pressing problems in such sectors as sustainable agriculture, renewable energy, conservation, and microfinance. It has also addressed issues bordering on affordable and accessible basic services such as housing, healthcare, and education, advancing the push towards achieving the sustainable development goals (SDGs). A survey conducted by the GIIN in 2017 revealed that close to USD 114 billion of impact investing assets is currently being managed across the world. For many years, investing for social and financial gains has been seen as two dichotomous disciplines. Philanthropists and those seeking social gains make it their sole focus while traditional investors seek to make financial gains. However, the two ideas can be unified as one, and they complement each other for sustainability – that is what impact investing does. Impact investing versus social responsibility in- For many years, investing for social and financial gains has been seen as two dichotomous disciplines vesting Some people may misconstrue impact investing as Social Responsible Investing (SRI), but these are not concepts to be used interchangeably. They don’t mean the same thing even though they are both mission-driven approaches to generating positive outcomes through investment vehicles. While SRI integrates social and environmental factors within investment analysis to avoid investing in companies that have negative impacts on the environment and/ or society, impact investing deliberately looks for investments that will positively impact the environment and/or society. So positive/negative screening is the key difference between SRI and impact investing as they indicate an investor’s level of activity in pursuing positive impact through investments. The GIIN further defined Impact investing to include four core criteria. These include: • Intentionality: Investors usually have diverse investment objectives. The intention to create positive social or environmental impact is a key element of impact investing. Impact investors should always think of solution-oriented ideas that will create problem-solving approaches in tackling challenges in areas such as poverty, clean energy, health, education, etc. The intention to make such impact is indispensable to impact investing. • Investment with return expectation: Impact investments have financial returns and the level of returns varies from one investor to the other. Investments are expected to generate return on capital either at minimum rate, or at the market rate. • Range of return expectation and asset classes: The rate of returns from impact investment ranges from below market rate to risk-adjusted market rate, and can be made across asset classes such as fixed income, equities, venture capital and cash equivalents. • Impact measurement: The impact created from such investment should be measured. The various social or environmental objectives should be identified and measured against results in order to track performance. The social and environmental performance should be reported together with the progress of the investment, ensuring transparency and accountability. Who are those involved in the impact investing ecosystem? The impact investing ecosystem involves actors from both the supply and demand side. It has attracted a wide variety of investors including high net worth individuals, foundations, asset managers, impact organisations, and non-governmental organisations (NGOs). Banks, pension funds, financial advisors, and wealth managers can provide client investment opportunities to both individuals and institutions with an interest in general or specific social and/or environmental causes. Moreover, institutional and family foundations can leverage significantly greater assets to advance their core social and/or environmental goals, while maintaining or growing their overall endowment. The various government and development finance institutions can provide proof of financial viability for private-sector investors while targeting specific social and environmental goals. The supply side of the impact investing ecosystem provides the impact capital. This comprises the foundations, high net worth individuals, governments, companies, retail investors, and employees, asset managers, etc. On the other hand, the demand side of the impact investing use impact capital and includes the development banks, microfinance banks, consulting firms, government programs, etc. Why do we need impact investing? A number of factors drive the need for impact investing across the globe. According to the United Nations Development Programme (UNDP) report on impact investing in Africa, a number of trends contributed to the initial interest in, and momentum behind impact investing. We discuss a number of these trends in the paragraphs below. • The growing recognition of the need for responsible finance: Impact
Friday 23 March 2018 C002D5556 BUSINESS DAY 19 t to Africa, but what is it? investment aims at generating positive social and environmental impact and such investments are seen as financially responsible. Impact investing can also be viewed as one manifestation of the drive towards the incorporating broader considerations beyond the financial bottom line into investment decisions. • The growing recognition of the need for private capitals potential to supplement philanthropic funding and goals: In solving socioeconomic problems and creating social and environmental impact, government and philanthropic resources can never be sufficient. As a result, the need for private capital flows is inevitable. • Public sector need to more efficiently deliver In solving socioeconomic problems and creating social and environmental impact, government and philanthropic resources can never be sufficient products and services: There is a growing need for the government to deliver efficient products and services and to do so they need to devote time and resources in providing such needs. Impact investment presents an opportunity for governments to save more and deliver quality products and services to the people. • The need to solve the myriad of social, economic and environmental problems: As poverty, terrorism and other social issues ravages the world, the need for capital to tackle them has heightened. Impacting investing has been demonstrated to have the capacity to supply the capital that can be used to combat these challenges and achieve the sustainable development goals.
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