It is widely believed that Jed Emerson in the 1990s, advocated the “blended value” approach for business, whereby, he stated that the aim of a business should not be merely to maximize financial returns but also to invest in causes founded on social and environmental causes. However, the term “Impact Investment” emerged around the year 2007, and it is defined as an approach to increase non tangible investments along with other forms of financial investments.
According to Global Impact Investing Network (GIIN), “impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.” Impact investing can be distinguished from philanthropy — as it does not expect financial returns — and from socially responsible investment — as it does not mandate positive returns; however, it emphasizes on evading negative returns. Developing economies tend to gain from impact investing as it targets solving problems of agriculture, affordable housing and healthcare among others.
With time many corporate houses and other organizations started to operate on the principles like corporate social responsibility, pollution prevention and triple bottom line which is used to ensure non-financial effects of a corporation and to ensure that all corporate houses effectively carry out their social and environmental responsibilities.
Impact investments have created a huge market for itself within few years of its coming into existence. According to a report by the UK cabinet office, the impact investments’ market has grown to $36 billion since its foundational year. According to a survey study of JP Morgan conducted in 2010, in emerging markets, the expected returns of many existing impact investments fell largely in the bracket of 8 per cent to 11.9 per cent for debt investments, and for equity it ranges between 20 per cent and 24.9 per cent. This is comparable to the expected returns in developed markets, which ranges between 5 per cent and 7.9 per cent in debt and between 15 per cent and 19.9 per cent in equity.
According to the Consultative Group to Assist the Poor (CGAP), three-fourth of impact investments is done through micro financing vehicles, closely followed by SME finance and agriculture, especially in developing economies. However, main stream financial institutions like J. P. Morgan, UBS and Deutsche Bank have launched various impact investment funds and are actively participating in creating a niche market for impact investments.
Impact investing has made its presence felt all over the world, including regions of Africa. In Nigeria, Lagos Business School (LBS), in consortium with Rockefeller Foundation, has established the basic structure of impact investment. As part of an MBA program at LBS, students are undertaking businesses which help in social and environmental growth. Nigerian philanthropist, Tony Elumelu, has in partnership with Rockefeller Foundation, launched the “Impact Economy Innovation Fund” to promote Africa’s leaders to learn about the concept and practice of impact investing. In Nigeria, impact investing is at nascent stage; however, it has the capability to grow much faster compared to other African countries.
JPMorgan Chase has been instrumental in deploying funds in impact investing sector on the African continent. Its African Agricultural Capital Fund (AACF) seeks to make substantial, long-term improvements in the lives of at least 250,000 smallholder farm households across the agricultural value chain of East Africa. It recently deployed capital to support Wilmar Flowers, a Kenyan exporter of smallholder-supplied flowers. Th00is is expected to help Wilmar engage up to an additional 5,000 farmers by 2016, up from the 3,000 farmers currently. AACF also represents the kind of partnership that is critical to success in this field; J P Morgan Chase has collaborated with USAID, the Bill & Melinda Gates Foundation, the Gatsby Charitable Foundation, and the Rockefeller Foundation to capitalize and support the fund.
Vital Capital, a $350 million private equity fund focused primarily on Sub-Saharan Africa, has been identified as the largest impact investing private equity fund by the World Economic Forum. It has become a pioneer in Impact investing segment due to its solid organizational structure of having separate impact and financial analytical teams.
According to the Forum for Sustainable and Responsible Investment, the number of US mutual funds that use environmental, social, or corporate governance (ESG) criteria, increased to 333 in 2012 from 12 in 1995. While the assets under management upped to $640 billion from $12 billion during the same period.
One of JP Morgan’s reports, ambitiously projects over the next decade, the industry to realize invested capital worth $400 billion to $1 trillion and profits to reach $183 billion to $667 billion. This is just 0.1% of the total financial assets which are expected to increase to $900 trillion by 2020. These figures reflect that impact investing is at a nascent stage. However, this young and growing market, offers the potential to speed up the transformation of the market economy into a sustainable one which would ‘invest for impact’.
Ruchi Gupta
