The Global Partnership for Education (GPE) Financing Conference that took place in Dakar, Senegal in February 2, 2018 sought US$3.1 billion from world leaders to improve and modernise education on the African continent.  Donors pledged a total of US$2.3 billion for the next years.

Funding, however, is only the first step. A consensus is growing around the idea that to equip the next generation with adequate and relevant skills, we must also reform our education systems.

To compliment this, a proliferation of government and donor-funded projects on entrepreneurship have been set up to teach young people to be job creators instead of job seekers.

One cannot really argue with the current approach, but it falls woefully short of truly addressing the structural aspects of youth unemployment on the continent and disregards the economic structures that exist in most African countries.

In the Gambia, my home country, the ILO estimates that over 75 per cent of total non-agricultural employment is informal.  The World Bank estimates youth unemployment at 43.9 per cent and overall unemployment at almost 30 per cent.

These statistics are due to the formal sector’s inability to absorb enough working age Gambians – a problem that cannot be solved with entrepreneurship and education reform alone.

What The Gambia needs is investment in and promotion of labour-intensive manufacturing. According to the McKinsey Global Institute, sectors such as manufacturing and agriculture could “…speed up job creation [in Africa, and]…boost the number of new wage-paying jobs from 54 million on current trends to 72 million by 2020.” The IMF also noted that efforts to spur industrialisation through labour-intensive light manufacturing is showing positive results in Ethiopia. Despite Ethiopia’s success, the share of manufacturing as a percentage of GDP across the continent has stagnated at around 10 per cent.

For almost two decades, sub-Saharan Africa has seen unprecedented economic growth, but as AfDB President Adesina tweeted, “GDP growth is not enough. Growth must be felt in the lives of people!”

His tweet essentially summarises the need for a different approach, one that is more socially inclusive and improves the livelihoods of the masses. As UNIDO consistently argues, there is a “positive correlation between manufacturing and indicators of social inclusiveness.” As a result, industrial policies that centralise mass job creation, through manufacturing and industrialised agriculture must be pursued in order to avoid the “the real Malthusian crisis”.

Aubrey Hubry postulates that “…the need to generate employment for growing numbers of young people [in Africa] is unprecedented in human history.” Donor organisations, especially the European Union and UNFPA, have identified a link between the crisis Hubry describes in his Financial Times piece and the migration crisis. Both organisations have committed themselves to tackling what they call the economic roots of irregular migration across the Mediterranean.

However, their projects – for instance, the Youth Empowerment Project in The Gambia funded by the EU – do not provide enough capital, technical support or expertise, to address the root causes of poverty and youth unemployment in The Gambia and other African countries.

To conclude, we need to shift the paradigm away from the current status quo, to a tailor-made approach. As eluded to above, efforts to encourage entrepreneurship in The Gambia have had some success and they are essential, but as the founder of Taf Africa Global argues, “entrepreneurship cannot exactly be taught.”

Therefore, efforts to include it in curricula in The Gambia and across the continent are misguided – a move towards re-introducing vocational training in schools would be more suitable.

Funding schemes should be developed for large, scalable business ideas that have tangible potential for mass job creation. Realistically, manufacturing requires certain factors of production that are only available through foreign investment. Consequently, African governments should aim to shrewdly attract investment that secures knowledge and technology transfer, stable and decent employment, and stimulates structural transformation.

A holistic approach is needed though – succeeding with industrial policy requires the prioritisation of STEM (science, technology, engineering and mathematics) subjects in secondary and tertiary educational institutions. It also requires strategic investments in infrastructure, healthcare and as previous highlighted, vocational skills training.

This article is part of the #AfricaAtWork series, looking ahead to the 2018 LSE Africa Summit 20 and 21 April. Follow this link to secure your ticket.

Maudo Jallow (@maudojallow) is the founder of New Nation and former Co-Director of the LSE Africa Summit. He holds an MSc in African Development from the London School of Economics and Political Science.

One of the stamps of approval to this framing of important social and environmental issues has come from the investment world, including major institutional investors such as Dutch pension funds now proclaiming that a major portion of their assets will require investment returns as well as a direct link to specific SDGs.

Mainstreaming ESG and impact investing

This endorsement by major global investors is laudable. In our view it represents another clear example of the mainstreaming of ESG (environmental, social and governance factors) and impact investing. However, it also presents a direct risk for cynicism by the beneficiaries of their assets if investors dilute the SDGs too much in their approach in order to link their investments to specific outcomes.

Therefore, we applaud and at the same time remain cautious as we look across asset classes and how to best link them to the specific goals identified by the UN. The most tangible asset classes to achieve demonstrable social and environmental outcomes thus far have been in alternatives as evidenced by green real assets or social impact investing in private equity.

Growing investor demand further driven by the SDGs

While impact investing and SDGs are still new on the horizon, investor demand is quickly growing and moving into larger, more liquid asset classes. For example, green bonds have provided larger tickets and liquidity for the measurement of SDGs such as Clean Water (6), Clean Energy (7) and Climate Action (13). The direction of travel is clear and the next phase of responsible investment evolution is impact investing.

The traditional area for ESG investors has been in public equities. For impact investing, it has been in alternatives. The demand for SDGs in public equities is now starting to emerge and will bridge these two worlds. In order to maintain integrity, products and services should be considered that go beyond a simple analysis of a carbon footprint compared to a benchmark. This will become the standard for client expectations, but will not necessarily meet the needs of sincerity around SDG outcomes.

SDGs create a doorway to impact investing in public equities

Two illustrations come to mind in how to make public equities relevant around SDGs and in line with an impact investing philosophy. If we take quantitative equity, one can imagine a portfolio construction process which focuses on holdings that can demonstrate how they are contributing to a lower carbon future through their products and services and business operations. Metrics such as carbon emissions saved and green share of portfolios can be used for this analysis. These are steps to demonstrate that it’s not just business-as-usual portfolio construction, and not just about following a low carbon index. This is active portfolio management towards an SDG outcome while ensuring financial returns.

Kathryn McDonald, Head of Sustainable Investing at AXA IM Rosenberg Equities, commented:  “We believe that publically traded equity investing can act as complement to traditional impact investing. The breadth of the publically traded market, and the capacity offered by quantitative equity investing in particular, allows asset owners to put significant AUM to work to really move the needle on impact goals.

“Looking carefully at several of the SDGs, we believe that we can build targeted, listed equity portfolios that speak directly to specific investor goals. Importantly, compelling financial returns are a must – without those investors will not stick with ‘listed impact’ approaches for long.”

So too, in a more conviction based approach, we can imagine a portfolio that has high active share and engagement as a key basis. A focus on both environmental and social impact with metrics and information provided by companies around access to improved livelihoods, clean water and improved healthcare allows to build a concentrated portfolio in public equities, particularly with a focus on the underserved and the developing world.

Ian Smith, Portfolio Manager at AXA IM Framlington Equities, added: “At Framlington Equities, we have developed the know-how to be able to adhere to what we believe will be the common requirements of a public equity impact fund in relation to monitoring impact metrics, promoting better disclosures and aligning to the UN SDGs.

“For many companies, there can be a strong symbiotic relationship between generating tangible positive societal change and meaningful long term shareholder value – we are looking to identify the companies that have business models and strategies that extol this. We need to be thoughtful when it comes to the many grey areas in impact investment decision making and this is where our deep understanding of and relationships with businesses are critical. We like to focus on who the end beneficiaries of a company’s impact approach are and how their lives are truly being changed. This framework helps us determine which companies fit into our impact portfolios.”

All of this shows that the arrival of SDGs has created a built-in framework for investors to connect the worlds of responsible investment and traditional investment in a meaningful and measurable way.

In order to ensure SDGs, impact investing and traditional asset management prosper, integrity, care and humility are needed. The ultimate goal is for asset management to bring more colour into the equation of money and done right, SDGs can be a tool across asset classes ranging from illiquid alternatives to highly liquid public equities to truly mainstream impact investing.

By Matt Christensen, Global Head of Responsible Investment at AXA Investment Managers (AXA IM)

The Business Commission’s global report, first launched in January 2017 ahead of the World Economic Forum in Davos, shows how sustainable business models could open economic opportunities across 60 “hot spots” worth up to US$12 trillion and increase employment by up to 380 million jobs by 2030. More than half of the total value of the opportunities are in developing countries. In Africa alone, sustainable business models could open up an economic prize of at least US$1.1 trillion and create over 85 million new jobs by 2030.

“The world is seeing increasingly that African companies are models for what can be achieved with ingenuity and innovation as they solve difficult social challenges. They are not wedded to old solutions, so here in Kenya we see digital innovators delivering banking, energy and health solutions. The speed of innovation and adoption is astonishing,” said Mark Malloch-Brown, chair of the Business and Sustainable Development Commission. “The Better Business, Better World report launch in Nairobi puts the African private sector squarely in the drivers’ seat on the road to achieving sustainable development, and we welcome more African business leaders to join the Business Commission.”

Hosted by Safaricom, the Better Business, Better World conference, held on 23 February, brings together business leaders to build support for the Sustainable Development Goals (or Global Goals)—17 objectives to eliminate poverty, improve education and health outcomes, create better jobs and tackle our key environmental challenges by 2030. The purpose of the conference is to show how the Global Goals provide the private sector with a new growth strategy that opens valuable market opportunities while creating a world that is both sustainable and inclusive. And the potential rewards for doing so are significant.

Kenya’s top mobile network operator, Safaricom has also been a leader in creating innovations that remove obstacles to financial inclusion through its mobile banking platform M-PESA, and increases sustainable energy access through M-KOPA. “Africa has a real opportunity to lead the way in doing better business for a better world. As a commission we have found that across the continent, there is potential for inclusive, green growth and development which remains untapped,” said Bob Collymore, CEO of Safaricom and member of the Business Commission. “We stand on the cusp of possibilities and we must seize the opportunity now. As the report shows, there have been in the last few years a demonstration of the possibility of leapfrogging development through new technologies and the Internet to bring development in transformative ways that also promote purpose.”

A key message of the report is that digital solutions and entrepreneurs will be critical to unlocking many of these new opportunities. Research from the report has identified 32 ‘development’ unicorns with market caps of more than US$1 billion. In Africa entrepreneurs are bringing new solutions to social and environmental problems in remarkable ways, and the opportunities to do so are compelling. One market hot spot, affordable housing, could create over 13 million of these jobs, while risk pooling, the single largest monetary opportunity in Africa, is valued at US$150 billion.

“We need young entrepreneurs to reimagine solutions that would allow business to participate in joining government to solve issues of poverty and hunger that the SDGs seek to address,” said Vineet Rai, founder, Aavishkaar-Intellecap Group and a member of the Business Commission. “Sankalp Forum and Intellecap are bringing together the best young entrepreneurs from Africa and Asia to find new ideas and solutions that aim to deliver on the ambitious opportunity that the Better Business Better World report outlines as US$12 trillion.”

At the same time, the Commission believes a “new social contract” between business, government and society is essential to defining the role of business in a new, fairer economy. The 2017 Edelman Trust Barometer reinforces this idea. It shows that while CEO credibility is sharply down, 75% of general population respondents agree that “a company can take specific actions that both increase profits and improve the economic and social conditions in the community where it operates.” And they can do so in ways that align with recommendations and actions outlined in Better Business, Better World: rebuilding trust by creating decent jobs, rewarding workers fairly, investing in the local community and paying a fair share of taxes.

Throughout 2017, the Commission will focus on working with companies to strengthen corporate alignment with the Global Goals, including: mentoring the next generation of sustainable development leaders; creating sectorial roadmaps and league tables that rank corporate performance against the Global Goals; and supporting measures to unlock blended finance for sustainable infrastructure investment. “We need to show these ideas work not just in a report but on the business frontline,” said Dr. Amy Jadesimi, CEO of LADOL, a Nigerian logistics and infrastructure development company, and a member of the Commission.

Culled from Business & Sustainable Development Commission.

These foreign investors, foundations and trust managers are through their investment addressing significant challenges that Africa faces in respect of poverty, infrastructure development, healthcare, education and transport by supporting companies dealing with these issues on the continent. Initiatives in these sectors are considered to be viable impact investment opportunities, and investors are seeking them out. Impact investments are those investments that provide a measurable social or environmental impact, as well as a financial return.

Much of the work in impact investing markets is starting to look at how money invested in social and environmental good could be allocated in a way that uses data to determine the effectiveness of programmes and institutions. One of the innovative financing mechanisms to emerge from this process is the Social Impact Bond.

A Social Impact Bond (SIB) is a financing contract designed to drive commercially sustainable social outcomes. The bonds work by attracting socially motivated investors to fund social services up front. Repayments to investors are then made by government and/or private funders if pre-agreed outcome targets are achieved. SIBs enable governments and donors to allocate resources more effectively to address societal challenges particularly in the face of fiscal austerity, by way of public-private collaboration.

The use of SIBs stands poised for considerable growth in Africa. The magnitude and speed of this growth depends on the extent to which African governments create an enabling environment through policy. In this regard, South Africa has a relatively established social investment market, albeit small by international standards, facilitated to some extent by Regulation 28 of the Pension Funds Act, an example of how policy can be used to leverage institutional investment towards social outcomes.

Regulation 28 is the prudential investment regulation that governs how and where South African pension funds can invest, and it obliges pension fund trustees to consider environmental, social and governance factors in pursuit of a sustainable returns policy. It expressly incentivises institutional investment into the rest of Africa. Similarly, there are regulations in several African jurisdictions that allow, even compel, domestic pension funds to invest in other African countries.

Larger African institutional investors are quite familiar with other initiatives to strengthen awareness and implementation around ESG and responsible investing, for example, the UN Principles for Responsible Investment (UNPRI), the closely aligned Code for Responsible Investment in South Africa (CRISA) the Responsible Investment Ownership Guide for Pension Funds in Southern Africa published by the Sustainable Returns for Pensions and Society initiative in 2013. Zimbabwe also introduced responsible investment codes recently and Kenya implemented its stewardship codes last year.  The King Code IV has also placed emphasis on corporate social responsibility and has referred to CRISA.

The regulatory environment in South Africa has arguably led to the increased interest from foreign foundations, looking to invest or create investment opportunities in projects in South Africa and to expand them into Africa. These projects involve many industries, (although we have seen particular enthusiasm in the healthcare and agriculture sectors), with the need for legal advice on all levels.  Exchange control rules often have to be adhered to, when the funding initially enters South Africa, and for any subsequent investment abroad. These constraints dictate the structure of the deal and the flow of funds and make legislative advice a pre-requisite.

Foreign investors also frequently look for partnerships with local companies that have the expertise, the location and the know-how to address socioeconomic issues. In South Africa, the obstacles faced by load shedding as a result of energy capacity issues, for example, have given rise to many businesses offering renewable energy and solar energy solutions – which in turn offers more ESG friendly investment opportunities for local institutional investors.

In the alternative energy market, measuring the return on investment is becoming relatively straightforward. However, it is less easy to put a price on investing in human dignity or cognitive development in children, for example. One of the sticking points in the impact investing movement has been how to gauge if funds invested in social good are having any measurable impact.

Earlier this year the Western Cape Departments of Health and Social Development in South Africa allocated up to R 24 million to trial three Social Impact Bonds (SIBs) aimed at improving the health, nutrition and developmental status of pregnant women and children, up to five years who live in low income communities. Two corporate donors have committed another R 24 million rand to bring the total amount of the bonds to R48 million.  The Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town’s (UCT) Graduate School of Business, facilitated their development and Bowmans advised on the legal and tax structuring of these SIBSs.

These SIBs are the first to be initiated in an emerging market, and they will provide useful guidance and lessons on how these bonds can be implemented in other countries in Africa going forward. This innovative financing mechanism could be a powerful tool providing a practical and workable solution for Africa’s most pressing challenges, while at the same time offering worthwhile returns for socially motivated investors.

By David Geral and Kim Goss, of Bowmans South Africa, and Aunnie Patton of Bertha Centre

However, if your focus is emerging markets enterprises that can have an impact on people living in poverty, a recent blog by Ceniarth Capital said it best: “Those of us actively allocating capital to fragile enterprises in developing markets recognize that those people who promise comfortable market rate returns while solving global poverty are the equivalent of diet gurus promising that one can lose weight while eating limitless amounts of chocolate cake.”

In a report launched by Oxfam and Sumerian Partners today, we argue that it’s time to look at impact investing differently; to start with a focus on the needs of the businesses working to make a meaningful impact on poverty reduction, rather than on the investors who stand to benefit from their work. Enterprises working in this space are in new territory – continually adapting their business models, earning low and slow returns and operating in markets that are subject to considerable exogenous shocks (e.g., economic instability, weak infrastructure, extreme weather events and poorly developed value chains). These firms will make decisions that can seem irrational if your focus is market return. They may seek out “at risk” populations, such as single moms balancing the demands of work and family, as employees. They may share ownership and decision-making with their workers. They may pay their suppliers not the price that is commonly expected in the market, but a higher price the firm sees as “fair.” The businesses themselves, and the funds that put their money into these firms, organize around the intention to generate a measurable, beneficial social or environmental impact alongside a financial return – and that prioritization is reflected in their structures, processes and activities.

However, to meet the return expectations that have been established by the sector’s push toward the larger mainstream market, we increasingly see conventional emerging markets investments being reclassified as “impact investing.” Arguably, it’s this trend that has transformed TPG’s investment in Apollo Tower, a cellphone tower company in Myanmar, from a standard emerging market foreign direct investment into an impact investment. The impact statement claimed by supporters is that cellphone access has “helped to increase transparency in a country known for tight control of its information, helping the nation take steps toward democracy.” Hmmm. Really? A cell phone company is actually a democracy and governance project in disguise? Seems a bit of a stretch.

As we write in our report, it should not be assumed that an investment in a cell tower, or a wind farm, or any other enterprise in the global south, is inherently socially positive. Rather, it should be incumbent upon the fund to demonstrate how these enterprises are intentionally structured to optimize impact and benefit poor and marginalized groups – rather than only providing implied, incidental or indirect benefits. They should be able to show what difference the fund’s provision of capital and support and engagement has made. Any self-identifying impact investor should be able to demonstrate a clear intentionality to achieve impact.

Furthermore, the research that has set the prevailing “have your cake and eat it too”-sized return expectations has its limitations. Take, for example, the very same GIIN/Cambridge associates “benchmark” report, which included no commentary on the associated impacts achieved and instead used a self-reported intention to generate social impact as the only impact-related criteria for inclusion in the benchmark. The data included a high proportion of funds focused on the theme of financial inclusion, an industry that has depended on decades of subsidies. Finally, the “benchmark” setting was drawn from a small pool of funds, all of which were targeting market rate returns.

Why does any of this matter anyway? Big tent, right? It matters because the rush to the mainstream can pull impact investing away from its original intent and undermine the meaningful role it can and should play in poverty reduction. It matters because high-profile investments such as Apollo Towers shift the goal posts for everyone. It makes philanthropists doing the critical work of providing smart subsidy to funds and enterprises operating in the toughest places ask, as they have of Root Capital, “Am I the dumbest money in the room?” – If everyone else is making tons of money, am I a sucker if I’m giving it away? And it can divert social entrepreneurs from their mission when they are challenged with the trade-off between purpose and profit. As one social entrepreneur told me recently, “Do we really need this money? Is it going to disorganize us from our original idea? The motivating factor will be to meet the profit targets, not looking at the social part. … Maybe the pressure we will feel from the investors will move us to abandon our women’s empowerment mission. We don’t want that to happen.”

We propose six recommendations that we think can provide a more balanced understanding of what is possible in impact investing, letting the sector begin to use money more creatively:

1. We call for a shift of approach in the market; from one in which we tailor funds around the needs of investors to one focused on developing products that serve the needs of enterprises seeking to combat poverty. Specifically, we need wider adoption of alternative fund structures – such as permanent capital vehicles and evergreen funds – and new financial tools that reflect the predominantly “low and slow returns” of most enterprises prioritizing social impact.
2. The sector needs greater transparency around reporting both the impact and financial returns(gross and net) achieved by impact investors.
3. Donors and philanthropists need to deploy smart subsidy and patient capital (return of capital, rather than return on capital) to support enterprises capable of making a meaningful contribution to poverty reduction, and to support hybrid financing models alongside impact investors seeking a net return on capital. Grants, philanthropy and smart subsidy should be seen as part of the impact investing continuum, not its enemy.
4. The industry needs more independent research to understand the enterprise-level experience, and to analyze which structures, approaches and incentives best help businesses to maintain an intentionality to optimize impact.
5. We call on impact investors to agree to a voluntary code of practice that enshrines the intentionality to behave and take decisions in ways that have a primary focus on achieving impact.
6. Impact investors should adopt incentives for optimizing, measuring and reporting impact as well as achieving financial return targets.

We have no problem with financial returns, but let’s not pretend that investors seeking a pure market return can tackle the most complex global challenges in high-risk markets. They cannot. Not in education. Not in health. Not in reducing child labor and forced marriage. Not in water and sanitation. Not even in banking for small enterprises, which continue to be significantly underserved today by markets everywhere, despite SMEs being the biggest generators of jobs and incomes globally. One just needs to look at the history of Silicon Valley or the microfinance industry ­– both completely commercial today – to justify smart subsidy and venture philanthropy. Our memories are simply too short. It’s not about distorting the market – often, there is not much there to distort – it is about catalyzing it.

By Mara Bolis, Oxfam

The importance of supporting women was one of the main leitmotivs of the Africa Impact Investing Leaders Forum, held in London on 27 Oct, 2016. Delegates asserted that this historically disempowered group plays a pivotal and well-documented role in augmenting positive social, economic and environmental outcomes – particularly when impact investments find their way into microfinance, agriculture, renewable energy and infrastructure sectors.

Women are integral to social impact investing

Speaking from the podium, Suzanne Biegel, founder of Women Effect, urged all investors to use a “gender lens” when considering impact ventures. And to ask some salient, due diligence questions, such as: “Where are the women in this investment? Are they on the product design team if the product concept is for women? Do they have a formal leadership or decision-making role where the project in question is targeting women”?

Caroline Mulwa, Kenya country manager of social impact investor, Oikocredit, agrees wholeheartedly with this view. Referencing the smallholder agriculture sector, she says: “88% of Africa’s female population live in rural areas; 70% of agricultural labour is provided by women; 90% of all food is produced by women, but women own less than 2% of the land. Yet women have a significant, measurable, positive impact on small business ventures, local communities and families. And they have been proven to reduce investment risks”.

Mulwa highlights one of Oikocredit’s microfinance partners as “exemplary when it comes to considering the roles and needs of Kenyan women from every angle”. She continues: “KWFT – Banking on Women focus single-mindedly on the unapologetic financial support of women” – a phrase which Caroline says inspires her.

Led by women for women, KWFT has provided financial services to unbanked women in Kenya for over 30 years. With 800,000 clients now on their books, KWFT offer a unique product range spanning microloans, savings accounts, insurance loans and financial literacy training. Products are designed around the specific needs of women, such as planning for healthcare during pregnancy and childbirth; saving to ensure their own financial independence, and setting up small businesses. In-branch, KWFT provide footstools for teenage girls so that they can be on an “equal level” with bank tellers, as well as baby-changing and breast-feeding facilities for young mothers.

Across Africa, Asia, Latin America and central and eastern Europe, 86% of the end customers of Oikocredit’s microfinance partners are women, meaning that vital access to finance and other support is offered to around 39.5 million women worldwide. Scott Brown, president & CEO of VisionFund International likewise emphasises the importance of women in the impact investing space, highlighting that over 70% of the end clients of VisionFund’s microfinance partners are women.

Client Protection Principles (CPP) are critical to the due diligence strategies of both Oikocredit and VisionFund, and partners are required to demonstrate an ongoing commitment to eliminating any potential exploitation of end clients.

The impact investing potential within African agriculture

Agriculture, a sector in Africa which some say may be worth $1tn (£816m) by 2020, was also a lively theme during the forum. A panel, comprising leaders from Africa Agricultural Development Company, Alpha Mundi Group, ScopeInsight and Oikocredit, all highlighted how impact investing in smallholder supply chains can create one of the biggest impacts on reducing poverty – the UN’s sustainable development goal one.

Agriculture, however, is often characterised by extraneous economic, financial and other challenges such as the impact of extreme weather; changes in global commodity markets, particularly price and currency volatility; shifts in government policies and weaknesses in local infrastructure. In order for the sector to mature, panellists discussed the need for higher levels of professionalism (including stronger due diligence and governance) and more innovative, public-private partnerships for impact investments.

Applying her own experience of managing risks, Mulwa says, “It takes experience: taking risks, making mistakes, but learning from those mistakes”. She adds: “It also requires us to look beyond the obvious and take a long-term view. So, we first consider the social mission within our investment decision-making, thereafter weighing up the risks in the context of the longer-term potential. I’m referring here to “patient capital” and a willingness to consider a project that may not look promising in the short term, but might bear significant financial and social returns in the longer term”. Patient capital is an investing attitude which all panellists agreed is vital for successful impact investing.

Showcasing this approach in the context of Oikocredit partner, Githunguri Dairy Farmers’ Co-operative in Kenya, Mulwa explains how, at first glance, their request for €1.5m (£1.3m) investment – to set up a processing plant for 31 dairy farmers and 200 employees; producing 15,000 litres of milk and generating a €0 return – looked risky. Other investors backed off, but Oikocredit saw the long-term financial and social potential and went ahead. As with many so-called risky ventures which Oikocredit supports, Githunguri paid off. Today, the co-operative has 15,000 members and employs 8,000 people across their entire value chain. They produce 220,000 litres of milk each year and, in 2015, reported a turnover of €52m (£46m).

If you are interested in investing in the Oikocredit International Share Foundation*, please contact our UK office. Alternatively, if you are a mid-stage inclusive finance, agriculture, renewable energy or infrastructure venture looking for equity or debt financing in Africa, please contact our east Africa or west Africa teams.

*Capital at risk. Terms and conditions apply. 

By

Monica Middleton

national director, Oikocredit UK & Ireland

Join these organisations to scale impact and discover new opportunities at the next edition of the Africa Impact Investing Leaders Forum in 2017 by Registering your interest as a partner, delegate or speaker. >> http://aiilf.com/register-your-interest/ 

Trickle-down has no effect

There was a time when ‘trickle down’ was the favourite word in the lexicon of economists worldwide. According to this theory, as long as an economy is growing, the benefits will eventually make their way through the system.

For the proponents of trickle-down economics, the belief was that rising incomes at the top end of the spectrum would lead to more jobs, less poverty and higher incomes at the lower end – much like a rising tide lifts all boats. However, over time, it has proven to be a fallacy, just like any other belief in equitable wealth distribution as a natural course of events.

The Global Experience: The Rich get Richer

Indeed, a research study published by the IMF in June 2015 has decisively debunked the theory at a global level. The report titled ‘Causes and Consequences of Income Inequality’ in fact goes on to prove that a rise in incomes at the top can actually adversely impact overall growth, poverty and employment.

Looking at data from 159 countries from 1980 to 2012, researchers found that when the wealthiest 20% see their share of income rise by one per cent, the economy grows 0.1 percentage points slower over the next five years. Conversely, raising the income of the poorest 20% by a single percentage point raises annual growth by 0.4% over the same period.

While it lasted, the misplaced faith in the trickle-down theory appears to have exacerbated inequalities globally. A 2016 report by Oxfam has revealed that the richest 1% have now accumulated more wealth than the rest of the world put together. Meanwhile, the World Economic Forum notes in a 2016 article that the wealth owned by the bottom half of humanity has fallen by a trillion dollars in the past five years.

The African Experience: The Poor stay Poor

In Africa, this woeful absence of a trickle-down effect is borne out by the successive experiences of individual economies that have experienced stellar economic growth, such as Nigeria and Kenya.

Even as Nigeria recently became Africa’s largest economy with growth averaging over 6% each year from 2005 to 2014, the reality remains that most Nigerians still live on less than US$ 2 a day, while the country lags behind in key development indicators such as health.

On the eve of the country rebasing its GDP to factor in the contribution of new sectors to the economy, the then Finance Minister Ngozi Okonjo-Iweala, a former World Bank managing director, confirmed to the country’s business leaders that:

“It is clear that the top five to 10% is capturing most of whatever growth there is and people at the bottom are being left behind.”

Similarly, Kenya woke up to economic disparities with the government publishing a ‘Socio-Economic Atlas of Kenya’ at the close of 2014. The report exposed significant disparities in poverty levels across the country. Just before the government survey of income inequalities was released in November 2014, in autumn came news from theWorld Bank that Kenya had seen its economy grow 25% after statistical revision and is now officially a “middle-income country”.

As Nigeria and Kenya, the pin-up economies for Western and Eastern Africa respectively, wake up to trickle down woes, it is clear that the experiences of other African economies that are emulating their wealthier neighbours is likely to be no different.

Development Infrastructure to bridge the divide

Lately, a survey by Afrobarometer of 35 African countries released in January 2016, struggled to find any correlation between the reduction in poverty seen in 22 countries in the survey and the recent rates of economic growth.

Instead, it found that there was a high correlation between creation of development infrastructure and improvement in the lives of the people at large.

“ While growing economies are undoubtedly important, what appears to be more important in improving the lives of ordinary people is the extent to which national governments and their donor partners put in place the type of development infrastructure that enables people to build better lives,” the report noted.

Then, rather than pushing ahead with a blinkered focus on high GDP growth that is clearly not translating into employment security, poverty reduction or inclusive growth, the solution lies in concertedly creating a conducive environment for businesses that create jobs and empower persons at the base-of-the-pyramid.

Impact Investing to build the infrastructure

It is here that impact investing, with a focussed agenda to grow businesses that have significant socio-economic impact, can make a real difference to the lives of those at the base-of-the-pyramid, instead of trusting to trickle-down economics that has so far only seen the top 5-10% push their economic agendas through at the expense of the majority.

Impact investors seek to start at the roots and build a strong foundation for those pioneering entrepreneurs that are seeking to provide basic amenities such as shelter, food, water and education in a sustainable and viable manner, rather than simply choosing an investment that boosts their financial returns and is regarded as a conventionally ‘bankable’ business.

As a specialist SME financier in Sub-Saharan Africa and MENA, GroFin is one such impact investor that is making a difference to the lives of entire communities in its locations of operation. With a concerted focus on investing in small and growing businesses in priority sectors such as Education, Health, Food Security, Energy, Manufacturing and Water/ Sanitation, GroFin is helping local entrepreneurs tackle key community issues such as health, nutrition, education, electricity, water and sanitation.

So far, over 16 years of applying its SME finance and business support solution, GroFin has made a difference to 7,000 entrepreneurs, sustained over 62,450 jobs and changed the lives of more than 312,270 family beneficiaries through its investments.

Support impact investors such as GroFin and others in Africa with your efforts as an entrepreneur or funding partner. Remember, the fate of an entire continent could rest in your hands.

 This article was originally published by GroFin. 

Social Entrepreneurship
The essence of entrepreneurship is the burning desire to create an organization that focuses in helping humanity by solving societal problems, providing needs, and in the process, the entrepreneur can make money. Social entrepreneurship is about applying practical, innovative and sustainable approaches to benefit society in general, with an emphasis on those who are marginalized and poor.

Characteristics of Social Entrepreneurs
1.Social entrepreneurs don’t do well in bureaucracies. They cannot sit back and wait for change to happen – they are the drivers of change.

2.A social entrepreneur is a pragmatic visionary who achieves large scale, systemic and sustainable social change through a new invention, a different approach, a more rigorous application of known technologies or strategies, or a combination of these.

3.A social entrepreneur has a practical but innovative stance to a social problem, often using market principles and forces, coupled with dogged determination, that allows them to break away from constraints imposed by ideology or field of discipline, and pushes them to take risks that others wouldn’t dare.

4.Social entrepreneurs are innovative, resourceful, and results oriented. They draw upon the best thinking in both the business and nonprofit worlds to develop strategies that maximize their social impact. These entrepreneurial leaders operate in all kinds of organizations: large and small; new and old; religious and secular; nonprofit, for-profit, and hybrid.

5.What business entrepreneurs are to the economy, social entrepreneurs are to social change. They are the driven, creative individuals who question the status quo, exploit new opportunities, refuse to give up, and remake the world for the better.

Key To Success
For every entrepreneur or hopefuls, the key to success is to first think of the social benefits of your venture, even if yours in for profit, then go ahead to satisfy those needs, and the money will sure come. If the goal is money, one may sure make the money, but may lack in fulfillment. Entrepreneurs must have eyes that are more than profits to be fulfilled and retire happily.

Social Objective
Earned income ventures are socially entrepreneurial only when they have a social purpose beyond simply making money. If social entrepreneurship is to be distinctive in any way, it must be because social objectives matter in how the venture is organized and managed. If the only way a venture serves your mission is by generating funds, it may be business entrepreneurship, but it is not social entrepreneurship.

Benefits
Running a socially responsible business can be good for the bottom line.Businesses cannot exist in isolation with the community, hence every business, whether non-profits or for profits must be socially conscious of its environment.

In the developed worlds, citizens start or increase their business with a company that is dedicated to the social good. According to a survey by Golin/Harris International, researchers found that about 70% of Americans would start or increase their business with a company that is dedicated to the social good. There’s some value one can place on good will and the relationship with the community.

Improving Society
Any form of social entrepreneurship that is worth promoting broadly must be about establishing new and better ways to improve a society. Social entrepreneurs implement innovative programs, organizational structures, or resource strategies that increase their chances of achieving deep, broad, lasting, and cost-effective social impact.

New Social Enterprises
A new breed of social enterprises which crosses all boundaries and cultural divide has now emerged. Young and innovative Internet companies such as Early Planet, Trade Planets, Paul Hata and World Christian Pages which has banded together to provide online jobs for anyone on the planet with a broadband access.Job opportunities available includes affiliate marketers,article writers,editors, designers and programmers.

1. Trust: Rentier economics in our countries is well-documented and as such, investors are likely to touch down in Accra and drive to the project site accompanied by concerns about self-interested officialdom. However, local stakeholders will often have a similarly low opinion of the ‘outsiders’ – informed by their experience of programmes or investments quoted in the millions, high living standards of expatriate staff and the slow pace of progress. ‘Out of the total committed, more is going to personnel pretending to work than anything else’ is a typical refrain. The result is a ‘them and us’ culture which, if not addressed properly, can harm the quality of communication, warp relations and working practices.
2. Expectations: And yet, and yet. Prevailing incentives in major impact-oriented sectors such as agriculture, healthcare and social housing can be an impediment to productivity. For example, as stated by a policy adviser at a recent Savannah Development Authority (SADA) dialogue, business pipelines are distorted by government waivers. There can also be an expectation of ‘handouts’, which, if denied, might create a constituency that will work to frustrate the proposed intervention or at the very least, not assist.
3. Disjointed Strategies: There is no shortage of individuals launching businesses in Ghana with an implicit and real commitment to creating social goods such as healthcare or jobs for communities that need them. They are motivated by profit certainly but alongside that are goals for society at large. However, at times, fear of alienating categories of investor or customer will create distortions or contradictions in business plans or marketing strategies.
4. How to Say No: Generally-speaking, there is an aversion in our community to delivering the word, ‘no’. Points one, two and three above notwithstanding, local partners are often reluctant to display their disagreement directly. With everyone bending over backward to be polite, clients may miss opportunities to get on the same page as their stakeholders. Instead, things just will not happen as expected or seemingly agreed.

In this context, it is important that clients prioritise culture and that they adopt a listening posture concerning internal and external stakeholders. Learning how others have made it work, or failed, taking time to build trust and understand the terrain – in other words ‘local intelligence’ – are equally key. Finally, in deciding how to engage, bear a Songhai maxim in mind, ‘you will spend money or you will spend time’. In setting strategy, it is safer to keep that expectation in mind than to seek short-cuts to making a profit and doing good.

By Songhai Managing Partner Nana Adu Ampofo (London) and Lord-Gustav Togobo Director of Healthcare and Social Impact (Accra)

“A lawyer sponsored us,” Yohannes says, through a refugee resettlement program of the Third Presbyterian Church in Rochester. Yohannes’ father, whose vision is mostly impaired due to stepping on a land mine in 1978, is now a board member of the church. “Being able to come to America and start over on humble beginnings even after stepping on a land mine is one of the reasons why our founders fought bloody battles,” Johannes adds.

His father now works in a probation office, managing cases involving domestic violence. His mother recently retired from a career in nursing. Yohannes went to law school in Buffalo, and clerked for a judge in Western New York. But thanks to another fortunate connection to a mentor in Washington, D.C., he got into the world of finance. “Finance was never in my language. My DNA is fighting for those who are in need and I got that from my father,” Yohannes says. Now, he can’t imagine himself in another industry.

President Barack Obama announced a new federal $1 billion fund for impact investing in 2011, and he eventually called upon Yohannes to finalize its design and make the program permanent. “This program makes sense to me because it fits my theme in life — make a dollar as well as create positive results for our country,” says Yohannes, whom the president officially appointed to serve as senior adviser to the chief investment and innovation officer at the Small Business Administration (SBA).

The specific goal of the $1 billion is to support small business investment strategies that maximize financial return while also yielding measurable social, environmental or economic impact. The program is housed under the SBA’s Small Business Investment Company (SBIC) licensing program. Under the impact investment program, SBIC-licensed funds promise to invest in small businesses in federal priority sectors and underserved communities, while at the same time contributing to the growth and development of the impact investment industry.

One possible example: using some of that $1 billion to invest in a small real estate developer that is also utilizing new markets tax credit financing for a project to create jobs in a low-income neighborhood.

The standard SBIC license has been a sweet deal for many venture capital or private equity funds. Under the program, for every dollar in capital they raise, the SBA matches up to 2-1, up to a maximum of $150 million. Fund management firms then go out with that federally supersized pool of capital and make investments in small businesses. The fund management firm eventually pays back the SBA, with interest. SBA operations require zero taxpayer dollars, instead funding operations through interest earned on its various investments such as SBIC-licensed funds.

The SBIC licensing program was born when President Dwight Eisenhower signed the Small Business Investment Act, on August 21, 1958 — a date that many would argue is also the birth date of the modern venture capital industry. The program provided the first legal framework as well as financial incentives for people to pool money from strangers for the sole purpose of investing in other strangers — specifically, small business owners. As two legal scholars wrote, in 1959, “Congress has for some time been acutely aware of the difficulties facing small business concerns seeking adequate long term financing for modernization, growth and development. It realized that commercial banks are not able to furnish such long term financing, that public [i.e. stock market] sale of small issues of securities involved prohibitive costs, and that private placements had afforded no general solution to the problem.”

The first SBIC-licensed fund managers were essentially the first modern venture capital firms. “The iconic venture capital firms and private equity funds, generally speaking, have received SBIC dollars or have had a SBIC license,” Yohannes says. “Arguably the most iconic brands have received investments through the SBIC license.” Apple, Intel, FedEx, Costco, Staples, even Build-a-Bear are just a few of the companies over the years that got early stage investment from an SBIC license holder.

While there have been more than 300 SBIC-licensed funds at this point, today they are only a small fraction of the venture capital industry, which has grown to have several well-known shortcomings. Eighty-seven percent of venture-backed startup founders are white; 92 percent are men. More than three-quarters of venture capital ends up in just three states: California, New York and Massachusetts.

In some ways, the SBIC program has already been addressing some of that. From 2011 to 2015, SBIC-licensed funds invested $21 billion in more than 6,400 companies, 20 percent of them located in low- to moderate-income areas. A majority of SBIC-licensed capital went into states other than California, New York or Massachusetts. Part of the impetus for the $1 billion SBIC Impact Investment program is to be more intentional about driving capital to communities that have long been neglected by venture capital and other investment sources.

“Early on it appears that our funds invest more in women and minority-led companies than your standard private equity fund,” says Yohannes. “We’re gonna continue to do that, we’re gonna continue to invest money in the Mississippi Delta, we’re gonna continue to invest money in Detroit, we’re gonna continue to invest money in American small businesses where gaps are the widest.”

So far there are seven impact SBICs. One of them, Bridges Ventures, comes from the U.K. Founded in 2002, Bridges Ventures was created solely for impact investing.

“We have a pretty high bar for impact at Bridges, which is one of the reasons why we felt comfortable committing ourselves to the SBA’s impact bar,” says Brian Trelstad, global partner at Bridges Ventures.

In the U.K., the firm has been active in the pay for performance (or social impact bond) space, for example. They regularly speak about or find other ways to share their evolving approach to impact investing, how to measure it and what are some case studies.

In the U.S., Trelstad says, they are looking at businesses that are located in or serve underserved communities, in the areas of health and wellness, education and skills, or environmentally friendly living.

The SBIC license was an invaluable tool to help them raise capital for the fund. Even conventional SBIC-licensed funds automatically qualify for Community Reinvestment Act credit, providing a strong incentive for banks. “It allowed us to get about $18 million of bank capital,” says Trelstad.

The SBIC impact investment licensing process for Bridges took about a year, but didn’t slow them down from their usual process. “While we were fundraising [from investors] we were also going through the licensing process at the same time,” Trelstad says, adding that one of the advantages of the impact investing program is that they could cut the line in front of others seeking conventional SBIC licenses. The SBA evaluates all SBIC licenses on a rolling basis.

Bridges Ventures has made one investment so far out of its SBIC-licensed fund, in an education company. In addition to businesses creating social impact, they’re looking for a few years of positive cash flow, ideally with $5 million to $10 million in revenue. “We have some flexibility to go earlier, but we’re not going to do a complete startup,” says Trelstad.

While the SBIC Impact Investing program was created as a temporary policy under Obama, Johannes and his team are still working to move it into permanent status. “Our goal is before the end of this year. I can’t say exactly when,” says Yohannes.

By Oscar Perry Abello