Early in the new year, I had a conversation with a prominent South African venture capitalist at an event in Johannesburg. As we were discussing my work in the field of impact investing, the venture capitalist asked me: “do you think what we do at my firm is impact investing? We have created jobs.”
As I tried to come up with a polite way of saying “no”, I began to ask myself questions. As impact investing gains traction in Africa, how do we distinguish what is real impact investing and what is not? Do we simply apply global standard or is it somehow different in Africa?
Beyond hype: increasing momentum in impact investing in Africa
Globally, impact investing is becoming a trendy investment strategy. In the most recent Sizing the Impact Investing Market report, the Global Impact Investing Network (“GIIN”), a U.S. based non-profit organisation dedicated to increasing the scale and effectiveness of impact investing, estimated the current size of the global impact investing market to be US$502 billion. The industry has been growing rapidly at 13% annually over the past five years.
The concept of impact investing is spreading in Africa with South Africa, Kenya, and Nigeria being the leaders. South Africa became the first African country to join the Global Steering Group (GSG) for Impact Investing last October. Johannesburg will be the host city for the GSG’s annual Impact Summit in 2020.
“The reason why Africa should not be excluded is that this is the continent that requires the most private investment to achieve the Sustainable Development Goals (“SDGs”),” says Dr. Susan De Witt, Senior Project Manager – Innovative Finance at the Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town Graduate School of Business (GSB).
The Bertha Centre plays a critical secretariat role for the National Task Force for Impact Investing, which was established last year to build the ecosystem to accelerate impact investing in South Africa. Task forces are also being set up in Kenya, Ghana and Zambia.
While capital allocation is still lagging for the continent, the future of impact investing in Africa seems promising. The GIIN’s Annual Impact Investor Survey last year said 12% of the total assets under management was allocated to sub-Saharan Africa. It is encouraging that sub-Saharan Africa was allocated the second largest share (36%) of the total investment capital in 2017 by the GIIN’s survey respondents. The survey respondents plan to increase allocation particularly to sub-Saharan Africa along with South East Asia.
“Impact washing” is a global concern
As the field grows, however, one of the key concerns is how we stay true to the original mission of impact investing. Some fear that fund managers may begin to jump on the impact investing bandwagon as a way to raise capital or to increase their marketability.
Large part of the challenge comes from the fact that the field of impact investing is wide and the definition of impact investing is seen as vague. There are many approaches and thematic areas to impact investing, and ever-evolving innovation in the field may be confusing for some.
One of the widely used definition of impact investing is by the GIIN: “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Being intentional means making commitments to measure and report on social and/or environmental performance.
Different investors and fund managers develop and adopt various impact measurement and management (IMM) techniques – Impact Reporting and Investment Standards (IRIS), Global Impact Investing Rating System (GIIRS), to name a few. Initiatives such as the Impact Management Project aim to build global consensus on how to measure, manage and report impact.
The GIIN’s Annual Impact Investor Survey last year also highlighted the risk of “impact washing” where some misuse impact investing. The survey respondents advocated for transparency around impact investors’ strategy and results. Third-party certification of impact investments, voluntary principles to govern investor behaviour, and a code of conduct for investors were also raised as potential solutions to mitigate the risk of industry mission drift. A special report on impact investing by the Financial Times last year also covered the same topic.
Speaking at the 5th Annual Impact Summit Europe in April, Amit Bouri, CEO and co-founder of the GIIN, shared his concerns about “impact washing.” “If we let this ‘impact washing’ become widespread, the brand will be diluted, and the whole industry will suffer from the ensuing scepticism,” he said.
In response to such challenges, the GIIN in April launched The Core Characteristics of Impact Investing, which defines the baseline expectations of what it means to practice impact investing. International Finance Corporation (IFC),the private sector arm of the World Bank, also officially launched the Operating Principles for Impact Management during this year’s World Bank – IMF Spring Meetings, with 60 first adopters including many of the development finance institutions and large global fund managers such as UBS and Credit Suisse.
Different standards for Africa?
In the midst of more policies and guidelines, there are debates about whether sticking to rigid global definitions suits the impact investing landscape in Africa.
In many parts of the African continent, the line that traditionally separates impact investors from private equity investors and venture capitalists often becomes blurred. Commercial investors on the continent tend to talk more about social and economic impact.
In South Africa, for example, social impact is often associated with job creation and transformation i.e. redressing historical injustices and building an inclusive economy. In a country where official unemployment rate is north of 27% and racial inequality persists, it makes sense that these two issues are the top of any investor’s mind.
If we made an investment in a growing commercial company on the continent, it is probable that the company generates employment. It is also possible for the company to have negative impact such as poor employee conditions and environmental disasters that can outweigh any positive impact.
If we unintentionally created social impact alongside our financial return as an investor, should we call ourselves an impact investor or an impact fund manager?
“We can use the global movement to our advantage but it is incumbent on the stakeholders to clearly articulate intention and impact,” says Dr. De Witt from the Bertha Centre. She also suggests that contextualising international standards is key. While it may not be suitable to adopt international standards as a blanket approach for the continent, “the language and practice of multi-laterals is helpful to align markets.”
There are also practical challenges that particularly early stage social enterprises on the continent need to deal with. Carolyne Kirabo, Investment Principal – East Africa for Mercy Corps Ventures, an early-stage impact investor, empathises with the start-ups that have to grapple with several priorities at once. “They cannot invest either time or resources to the measurement of impact,” says Kirabo. Such early-stage social enterprises often have to depend on grant funding to address impact management as they “do not see the immediate case for this [impact measurement and management] towards their bottom line.”
Does it all matter?
Some would argue that any funder that is interested in impact investing is good for the industry and for the African continent, irrespective of whether they are real or not. We have heard the phrase “all investments that you make in Africa are impact investing.”
Sadly, there are countless examples of capital inflows into the continent that did not benefit the local community or worse, had exploited people with a damaging effect. Take a look at the all familiar state of cocoa farmers in Ghana, the world’s second largest cocoa producer. Despite significant investment and the industry accounting for 7% of Ghana’s economy, many cocoa farmers still live in poverty. Cocoa labour’s children, who have never seen or eaten chocolate, are often victims of child labour.
According to Kirabo who leads Mercy Corp Ventures’ work in East Africa out of Kampala, Uganda, over 60% of the impact capital in Africa is sourced from Western countries and is not always customised to fit in the business environments in which they are meant to serve. She uses fintech as an example: “a question still remains on whether all the innovative models are actually creating income opportunities for the poor or perpetuating cycles or debt and poorly informed financial decision making.”
Perhaps it is the nature of a nascent and rapid growing industry that we have to deal with some level of discomfort and conflicts at times. Dr. De Witt prefers an inclusive approach by embracing impact investors that have a broader view on key characteristics such as intentionality. “We think that the market will evolve to a point of understanding where investors are classified according to measurability and intentionality of investment decisions but I’m not sure we are there yet.”
Impact investing in Africa is going through a teething phase. As the industry evolves further, however, impact investors should hold ourselves more accountable in Africa – the continent that has been a victim of exploitation and injustice by both foreign and local powers. It matters that the intention of creating impact is documented and properly monitored, evaluated, and disclosed.
We should raise the bar for impact investing in Africa. We must scrutinise the investment strategy and methodologies used for impact measurement and management. We need to make sure that capital is delivering real impact to the people on the continent as intended, rather than all of the financial returns going back to foreign investors with limited social returns achieved for the local communities.
Looking ahead
Back in Johannesburg, the venture capitalist at the end did not pretend to be an impact investor. We agreed that the firm is a venture capital that created jobs, which is still positive news.
If a commercial minded venture capitalist can create jobs, impact investors should be able to generate even more significant and deeper social impact – beyond just number of jobs. Salary level, benefits, and work conditions are some of the indicators that should be tracked and evaluated.
In the wake of the recent The Rise Fund scandal in the U.S., Jed Emerson, author of The Purpose of Capital, wrote a piece called Failing to Rise on Medium. In the article, he reminded us all that impact investing has “always been about reframing economics, the pursuit of justice and the promotion of sustainable organisational practices.”
In many parts of the African continent, societal and economic challenges that exist at our door steps represent an opportunity to support and invest in innovative and scalable solutions.
Local investors such as pension funds can play a critical role in driving local capital into impact investing in Africa. “Local stakeholders are very well placed to find the market opportunities in some of the fastest growing economies in the world. Don’t wait for hard currency investors to come in and snap up the deals,” says Dr. De Witt.
In order to seize the opportunity and scale impact, it is also critical for the custodians of assets to understand and align investment strategy with the interest of local asset holders. “It’s time we listen to what the pension fund members are saying,” says Mabatho Seeiso, who serves as independent trustee on a number of South African pensions funds. “They are asking: how do I make my money worthwhile to improve the quality of life for me and for my children?’”
We have a unique opportunity to create a home-grown impact investing industry in Africa – for people to save and invest long-term to benefit themselves financially while contributing to the improvement and sustainability of their community where they retire. That is real impact.
Sawa Nakagawa is the Founder & Partner of ThreeArrows Impact Partner, a specialized advisory firm focused on impact investing and social innovation. She has over 15 years of financial services experience across impact investing, general management, investment banking, and strategy. Originally from Japan, she has worked in Asia, Europe, Africa, U.S., and Latin America.
*This article was originally published in PensionsAfrica‘s May-June 2019 edition
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