The financial services sector has a crucial role to play, given its core skills and the ability to structure financial products. There are several elements which are important to consider: for one, banks are capable of identifying and understanding emerging demand. Their product development process aims to translate emerging topics of importance to investors into viable solutions. Secondly, their ability to structure a financial product, which requires some upfront cost, allows for individually lower initiation, transaction and reporting costs, lowering barriers to entry.
Furthermore, banks have a client base with different risk and interest preferences and they have sales people who can reach out to clients in a systematic and co-ordinated manner. These structural advantages enable banks and financial services firms to make a profound difference with maximum impact.
According to the CEO Force for Good’s Investing With Purpose report, one-third of companies around the world report being “somewhat” or “highly” active in impact investing. While the financial services industry was one of the most deeply involved in impact investing, active engagement was found to be widespread across the economy, particularly in manufacturing, consumer essentials and technology.
Impact investing unpacked What is in it for corporates?
Often the benefit for the corporate (beyond a positive brand perception, which these investments certainly offer) is access to different markets and distribution channels. A paradigm shift away from “business as usual” offers different insights and disruptive models which, in turn, can find application in other areas of the business.
What is in it for social enterprises?
The obvious financial capital means that social enterprises can scale their impact further and in a more sustainable way. A relationship with a corporate can open access to non-financial resources such as managerial or technical expertise. In addition, having a major corporate in their corner can give credibility to the venture, which in turn leads to further investment.
What does an impact investment “look” like?
A typical example would be a direct investment, in which a corporate acquires or merges with a social enterprise. Corporates can set up internal self-managing funds that invest in social enterprise, along the lines of a venture capital fund. Some corporates use their foundation arm to channel funds. If a company does not wish to develop the internal capability, it can outsource fund management to a third party.
The financial services industry is currently at an inflection point. The sector has the opportunity to design solutions which address societal challenges. These solutions will be larger in scale and smarter in design if they come from the bank’s core business, rather than primarily a corporate social responsibility perspective. The impact would be greater, more measurable and more focused, ensuring that ambition to create an inclusive economy becomes more tangible and realistic.
AN EYE TO THE RISKS
When it comes to impact investing in an emerging market such as Africa, both opportunities and challenges must be considered. The Global Impact Investment Network’s Impact Investing Special Report highlights some of the risks of which investors should be aware:
• Mainstream investors exist in a mature ecosystem, whereas the impact investor ecosystem is still evolving. As a result of this nascent nature, there are comparatively few of the “necessary ingredients” (eg intellectual capital, venture capital, advisors, accelerators and successful companies) available.
• Impact investment portfolios and deal sizes tend to be smaller than traditional investments. While smaller investment size can attract a wider pool of investors, it may represent an obstacle to larger investors with higher fixed costs.
• For impact investing to become a mainstream strategy, investments need to be measurable against the conventional criteria of the asset allocation framework, the central features of which are risk and return, volatility, liquidity, portfolio match and exit timeline. This demand can sometimes be difficult where social issues prevail, as there can be deep systemic influencers beyond the control of the social enterprise.
• Vagueness among investors prevails regarding the category into which impact investing fits. It is true that it has been pioneered by the foundation and philanthropy space. They kick-started and seed-funded it. They provided first-loss capital provisions to help the investment style off the ground. As a side-effect of these jump-start activities, however, impact investing is still perceived as an enhanced form of philanthropy, when in fact it needs to become a business imperative.
54 An Absa Investment publication
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