Time is running out to fulfil the United Nations Sustainable Development Goals (SDGs) and ensure an equitable world for the next generation. Success will require an eye-watering amount of money – between US$5-US$7 trillion a year, according to a World Bank report.

In more positive news, there has been an increasing shift in mindset as investors adopt SDG-aligned impact investing strategies, which means more private capital is being allocated towards these 17 global targets. Encouragingly, 85% of 440 impact investors assessed by the Global Impact Investing Network (GIIN) in 2021 said their impact investment strategies focus on SDG-alignment.

But the next step is more difficult. How do investors measure the extent to which their capital is making a real-world difference?

Impact investing is when investors funnel capital into companies that are having a positive effect on the environment or society around them. To qualify as an impact investor, investments must have a measurement system in place, the International Finance Corporation (IFC) noted in a recent report. Worringly, the IFC highlighted that just a quarter of the US$2.3 trillion impact market in 2020 operated under a clear impact management system.

This is because understanding of how to quantify real-world outcomes of financial contributions to SDGs is still in its infancy.

“Investors want to stop guessing on impact,” says Lissa Glasgo, Senior Manager of impact measurement platform IRIS+ and Impact Measurement and Management at GIIN. “They want to be making impact-based decisions with the same rigour and quality of evidence as they do for risk and return-based decisions.”

Pressure is mounting for those tracking climate-related SDGs, as 2030 is also a significant milestone for investors, companies and governments that have set ambitious decarbonisation targets on the way to net zero greenhouse gas (GHG) emissions by 2050.

To accelerate action, policymakers are beginning to ask companies and investors to disclose their impact on society and the environment, adopting a double materiality lens.

Standardised, high-quality impact reporting is still a long way down the road, experts say. Getting there will require further collaboration between investors, standards-setters, data providers and policymakers to navigate the complexities surrounding impact measurement.

As reporting requirements yield the required data, investor demand will increase for comprehensive impact measurement methodologies, tools and frameworks. This is where organisations and initiatives such as GIIN, the Impact Taskforce (ITF) and Impact Management Platform (IMP) come into play.

Metrics and models

There are a number of barriers preventing impact investors from accurately measuring and modelling their contributions to the SDGs. Most obviously, these goals were not designed primarily with investors in mind and so aren’t easily quantifiable.

For example, SDG 13 (climate action) can be measured according to the number of investee companies that have made net zero commitments, but how do investors track their impact against SDG 16 (peace, justice and strong institutions)?

Even when metrics are straightforward, impact still isn’t so cut and dry. After all, how does the investor know an investee company set a net zero target as a direct result of its influence? If the company was under pressure from multiple investors, the public and its domestic government (as is most likely the case), who’s to say who had the biggest impact?

“Investors are currently trying to understand what kind of information they need, what relevant information is already being reported, and how impact-related information should inform decision-making,” says Peter Paul van der Wijs, Chief External Affairs Officer at the Global Reporting Initiative (GRI). “It’s definitely challenging.”

An unsurprising hurdle is the inconsistencies in third-party sustainability data, says Nick Parsons, Head of Research and ESG at specialist infrastructure investment firm ThomasLloyd. “A lot of asset owners and managers are trying to measure their impact at an arm’s length by relying on third-party vendors, which simply doesn’t work with this kind of strategy,” he says.

“Being a direct investor means we owns a stake in companies, so we can more easily get hold of proprietary data. As we have tracked SDG-related data since 2015, we know our impact over time.”

A number of asset owners and managers measure contributions to SDGs through investee companies’ revenues, according to a GIIN report. However, interviewees admitted that “the SDG revenue-alignment approach is […] insufficient in speaking to the outcomes or impact associated with the investments”. Instead, there is a demand to shift to more “standardised metrics”.

But a number of the impact measurement tools introducing standardised metrics are still in the “early stages of development” and therefore not yet useful to investors, according to a report by the World Wide Fund for Nature (WWF). In theory, investors can already compare their own portfolio impacts to benchmarks and other portfolios, WWF noted, adding that company laggards can be identified by comparing their SDG commitments and progress to competitors, i.e., identifying how many of the company’s direct competitors have publicly committed to the SDGs and outlined which goals are their priority.

Of course, this is assuming companies are providing investors with decision-useful information in the first place.

Standards-setter GRI recently published its findings following analysis of 200 companies’ approaches to SDGs. While four in five committed to the SDGs within their sustainability reports, less than half set measurable targets outlining how their actions are contributing to the goals, the report said.

In response, the GRI has outlined a series of recommendations for companies making commitments to the SDGs, including meeting stakeholder demands for transparency on negative impacts, making SDG performance data accessible by using recognised frameworks, and disclosing targets outlining how they plan to support the SDGs.

Asset managers are continuing to struggle to analyse data from investee companies using different disclosure frameworks, meaning they cannot accurately work out the overall impact of the fund, Cliff Prior, CEO of the Global Steering Group for Impact Investment (GSG), tells ESG Investor.

“Likewise, an asset owner using multiple asset managers across its impact investments – who are likely all providing differing data – has the same problem,” he adds.

Too many options?

Nonetheless, there are a number of platforms and initiatives offering guidance to help investors get started on their journey towards aligning their impact strategies with the SDGs.

“Investors are coming to us every day, saying that they want to drive impact and they need XYZ data to be able to understand what their impact even looks like and what targets they need to set moving forward,” says GIIN’s Glasgo.

The network’s COMPASS methodology gives practical examples of how investors can measure their impact across the SDGs. For instance, investors tracking SDG 6 (clean water and sanitation) can measure the percentage increase (or decrease) in the number of people accessing clean drinking water compared to the previous year. This can then be compared to the rate of increase in access to clean drinking water that is required to achieve SDG 6.1: universal access to clean water.

IRIS+, also run by GIIN, was originally set up as a “dictionary of impact metrics”, explains Glasgo. However, recognising investors’ growing need for a single source of information and guidance on assessing impact, the platform evolved and began aligning with multiple frameworks, generating over 700 metrics covering a variety of standards – including the SDGs.

“If an investor is tracking the SDGs, they can select the specific goals they are focused on and then IRIS+ outlines the recommended metric approach for them,” she says.

For private equity funds, bonds and enterprises, the UN also offers the SDGs Impact Standards framework, which provides best practice guidance and self-assessment tools to align internal processes and practices with contributions to the SDGs.

With funding from the Swedish International Development Cooperation Agency (SIDA), the GRI also updated its disclosure standards, outlining how corporates can align their GRI disclosures with the SDGs.

Building on the work of the Impact Management Project, in 2021 the 2° Investing Initiative (2DII) consulted on and created an impact investment framework. Finalised in November, its Climate Impact Management System provides investors with guidelines on how to devise, refine and communicate about impactful climate strategies.

Further, advisors and consultants are working with impact investors on SDG alignment. Pensions for Purpose, an impact-focused advisor to pension funds uses SDGs as a framework for discussion with clients on their sustainable investment beliefs and priorities.

Despite impact data remaining unstandardised, investors are proving they can partially measure SDG contributions for themselves.

The Sustainable Development Investments (SDI) platform is run by asset owners and supported by index provider Qontigo. Powered by AI-driven technology, SDI has so far analysed over 8,000 companies globally on their existing contributions to the SDGs. It identifies which SDGs companies within an asset owner’s portfolio have committed to, mapping the portfolio’s overall exposure to the 17 goals according to companies’ reported areas of focus. Asset owners involved include PGGM, AustralianSuper and APG.

Bespoke approaches proliferate among asset managers, too. Morgan Stanley Investment Management (MSIM) identifies one or two relevant SDGs it believes are relevant to an investee company’s business model, according to Vikram Raju, Head of Impact Investing for MSIM AIP Private Markets. From there, the firm creates a contractual obligation for this data to be reported by the company in question at a reasonable periodic interval so MSIM can capture any meaningful changes.

“The key is avoiding overcomplicating the reporting ask, bearing in mind that smaller companies with limited resources will struggle to comply with onerous data tracking and reporting requirements,” he notes.

Having financed and developed five utility scale solar plants in Negros, in the Philippines, as well as three biomass energy plants, ThomasLloyd measures the impact of its investments independently, says Parsons. For example, the investment firm measures its contributions to SDG 7 (affordable and clean energy) by annually recording the number of houses in the local area that have access to electricity provided by the plants.

The firm also reports on the indirect contributions its investments are making to other SDGs. “In the Philippines, we contribute to SDG 11 (sustainable cities and communities) when paying local taxes,” says Parsons. “We look at how much tax we pay in the region every year and compare that to how total tax revenue is being generated and spent locally.”

Global standardisation

Of course, the most certain way to ensure companies are all providing the accurate and comparable impact-related data in the future is to mandate standardised reporting requirements and, ideally, a common methodology for impact assessment.

“Investors do have a role to play in asking for SDG impact-related information from corporates, but governments can have a lot of influence here – more are going to be asking for companies and investors to disclose their social and environmental impact,” says GRI’s van der Wijs.

The shift to double materiality-based sustainability reporting in the EU and the UK will increase the need for an alignment in existing impact and SDG standards, he notes.

The ITF – an independent, industry-led body of more than 100 businesses, investors and public policy institutions – recently called for the Group of Seven (G7) nations to mandate impacting accounting. The report outlined the importance of policymakers leading multilateral efforts to improve the transparency and integrity of disclosures around impact investment outcomes.

“The Taskforce has found that companies and investors are really interested in aligning standards around impact reporting,” says GSG’s Prior. “Ultimately, they recognise that there are investment opportunities in impact investing, and standardised reporting will help to unearth them.”

ITF further outlined proposals to stimulate the development of policies that would channel more capital into the SDGs, including increasing the supply of investment vehicles suitable for institutional investors and promoting the use of just transition principles to better integrate social and environmental objectives.

The WWF report also called on regulators and policymakers to mandate sustainability disclosures, and called for impact disclosures for financial products to better encourage financial institutions to adopt “robust and credible impact assessments”.

Other initiatives are working to improve interoperability. Launched in November 2021, the Impact Management Platform was developed to improve cohesion between existing standards as well as support industry impact-related dialogue with policymakers.

“IMP is ensuring that everybody – investors, standards-setters, regulators – are using the same language around impact, which is pivotal to driving improvement and growth,” says van der Wijs.

Coordinated by the Impact Management Project, a five-year consensus-building forum that ended in 2021, the platform hosts impact measurement and reporting resources provided by standards-setters and frameworks, such as the SDGs. Currently, the Organisation View for companies is now live, with the Investment View for asset owners and managers expected later this year.

“As the world moves towards greater cohesion on how to deeply and thoughtfully measure impact, we will see an emergence and strengthening in the impact-related data sources we need for investors to be able to make smarter SDG-oriented decisions,” says Glasgo.

By Emmy Hawker

Verdane, the European specialist growth equity investor, has announced that it has held a final close on Verdane Idun I (“Idun” or “the Fund”), an impact focused fund investing in technology-enabled businesses based out of Europe. The Fund is classified as “Article 9” under the European Union’s Finance Disclosure Regulation and closed at its hard cap of €300 million, over its target fund size of €225 million. With Idun, Verdane continues to demonstrate its commitment to driving positive impact through investments in ambitious companies whose impact scales with business growth.

The Fund has already made three investments: in Auntie, a digital provider of workplace wellbeing services; in Spond, a digital enabler of grassroot sports and physical health; and in a third business that contributes to a low-carbon society, to be announced in the next few weeks.

Bjarne Kveim Lie, Co-Founder and Managing Partner at Verdane commented: “We are delighted and humbled by the strong support from existing and new investors for Idun and would like to thank them for putting their trust in us. Today more than ever, there is a growing pool of opportunities to combine technology and sustainability, and we believe that investors like Verdane can take a leading role by supporting founders and management teams who can truly integrate sustainability into their business models and create value through impact. The success of the Idun fundraise reflects the continued development of the firm, and we are excited by the unique opportunities available to us on this journey to drive positive impact with our investments.”

The Fund counts leading institutions among its investors, including Nysnø Climate Investments, Norway’s state climate investment fund, AP3, one of Sweden’s main national pension funds, Adams Street Partners, a private markets investment management firm, and clients advised by Mercer.

Building on Verdane’s proven track record of investing in European tech-enabled sustainable businesses, Idun will make investments focused on driving impact in three clusters: energy transition; sustainable consumption; and resilient communities. The Fund will leverage technology to significantly scale portfolio companies’ impact, and Verdane’s background as a growth investor means the firm is uniquely positioned as a leader in this space.

Every investment that Idun makes will have to meet both financial and elevated impact criteria, with impact defined as addressing at least one of the Sustainable Development Goals (SDGs) and qualifying inside Verdane’s proprietary impact framework, built on the Impact Management Project. At the portfolio level, each Idun portfolio company will regularly report on bespoke sustainability KPIs and both the Fund’s ‘carried interest’ and credit facility are linked to goal attainment. The credit facility is issued by Nordea.

Idun received strong investor support from Verdane’s existing pool of LPs and is made up by a majority of institutional capital, including endowments, family offices and pensions funds.

Idun’s dedicated team combines entrepreneurial and impact investment experience and will be integrated with Verdane’s wider platform of over 90 investment professionals and its team of operational experts, Verdane Elevate, to create value and drive impact in the portfolio. The Fund is headed by partners Christian Jebsen and Erik Osmundsen, who will work alongside directors Reed Snyder and Karin Kans, and Sustainability Lead Axel Elmqvist.

Christian Jebsen, Partner at Verdane commented: “As we enter 2022 and announce the final close of Idun, we are seeing a very strong pipeline of potential investment opportunities across Northwestern Europe, as demonstrated by the Fund’s early deployments into three compelling and ambitious new portfolio companies. We believe that sustainability is an increasingly competitive strategy, especially as the growth and private equity industry is steadily moving towards a more impact-driven mindset. As both a technology and sustainability growth partner, Verdane is strongly positioned to add value and scale its partner businesses, and we look forward to working alongside management teams to drive positive impact.”

Verdane is one of the most active growth equity investors in Northwestern Europe, having completed 17 investments, of which four were portfolio deals, in 2021. Idun will sit alongside Verdane’s existing strategies, Capital and Edda, and represents an important initiative for the firm. The Fund will develop leading-edge, best practice frameworks and toolkits within the impact space that will help Verdane’s teams drive value across all of its strategies.

This independent, third-party funding will accelerate the expansion of Bowery’s network of smart indoor farms beyond the East Coast and brings its total debt and equity capital raised to more than $647 million — representing the strongest institutional backing in the Controlled Environmental Agriculture industry. KKR’s credit investment follows Bowery’s $325 million Series C funding in 2021 led by Fidelity Management & Research Company LLC.

The Company also announced today that it is building two new state-of-the-art farms serving the Atlanta, Georgia and Dallas-Fort Worth, Texas metro areas. The farms will create more than 200 year-round green jobs across both markets and provide locally grown produce to a population of 20 million and 16 million within a 200-mile radius of Locust Grove, Georgia and Arlington, Texas, respectively. Both farms are expected to open in the first quarter of 2023.

The two new farms, leveraging billions of data points collected from previous farms, will feature industry-leading tech innovations resulting in efficiency improvements to all elements of the grow environment, from LED lighting to water recapture to climate control, ultimately improving quality and yield. These farms represent a recommitment to Bowery’s sustainability goals; the company plans to use power from 100% renewable sources.

“We’re thrilled to announce our expansion beyond the Northeast and Mid-Atlantic regions,” said Irving Fain, CEO and Founder of Bowery Farming. “KKR’s support is a testament to the proven success of our business model and a strong vote of confidence in our technology leadership and ability to address critical challenges in the current agricultural system. There is enormous economic opportunity that comes with supporting our mission to democratize access to local, pesticide-free Protected Produce, and now we are ready to continue our growth more rapidly.”

The new financing will also provide resources to accelerate advancements in farm design and the BoweryOS, giving more communities access to a reliable supply of locally-grown produce, year-round. Bowery’s proprietary farm design and technology have been a key priority since the Company was founded and are at the heart of its efficient and scalable business model. The BoweryOS, the central nervous system of the business, integrates software, hardware, sensors, computer vision systems, AI, and robotics to orchestrate and automate the entirety of operations. Each new farm comes online in record speed, collectively benefitting from the power of the network and its billions of data points.

“We are excited to support Bowery’s pioneering efforts in vertical farming, which are directly contributing to the resiliency of our food supply,” said Michelle Hour, Director at KKR. “We believe that Bowery has the right commercial model, technology and team to capitalize on the rapidly growing consumer demand for sustainably-sourced food, and we look forward to helping the Company continue to innovate and scale to benefit communities across the United States.”

Bowery has continued to grow at a significant pace in 2021 and achieved a number of milestones; highlights include:

• More than doubling revenue
• Opening Farm X,  a state-of-the-art innovation hub for plant science in Kearny New Jersey, expanding R&D capacity by nearly 300%
• Transforming an industrial site in Bethlehem, Pennsylvania into a technologically advanced smart farm
• Breaking ground on two additional large-scale commercial farms in Locust Grove, Georgia (located in Henry County near Atlanta, home to rapid population and job growth) and Arlington, Texas (located in the center of the Dallas-Fort Worth Metroplex, a rapidly growing technology and manufacturing hub)
• Expanding our reach to more than 800 stores through a partnership with Wakefern, the nation’s largest retailer-owned cooperative, including brands such as Gourmet Garage, Shoprite, Fairway, The Fresh Grocer, and Dearborn Market

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)

Although small-scale solar providers focused on the rural off-grid market have been the darlings of the development world, they generate just enough electricity to power more than a few basic appliances such as light bulbs, fans, and televisions. These improvements are undoubtedly an important improvement, but the vision for energy access should embrace a more comprehensive and robust potential. Improvements in quality of life and productivity should be the centerpiece of the agenda for powering Africa. A sustainable vision is required to identify feasible, durable solutions. Unless government and industry stakeholders invest in larger renewable systems, we will continue to champion an unsustainable model of sustainable development.

While African governments have increasingly framed renewable energy as the linchpin of their climate change and development strategies, solar energy still remains largely dependent on public sector capital from sources like the World Bank and the African Development Bank. At present, Africa lacks sufficient investment to fund enough energy projects to achieve universal energy access by 2030. In 2015, the African Progress Panel found that current energy-sector investments in Africa are about US$8 billion a year—less than one-sixth of the US$55 billion per year required to meet electrification targets. And even those funds won’t meet the renewable energy sector’s financing needs.

According to a recent Power for All report, only 11 percent of World Bank energy access funding and 1 percent of African Development Bank funding went to decentralized renewables between 2011 and 2014. With climate mitigation funding in flux due to the U.S. withdrawal from the Paris Agreement, Africa’s solar industry must rapidly develop more capital-efficient ways to reach consumers outside of the grant-based or subsidized rural electrification model or risk future impediments to growth.

Solar companies providing subsistence-level energy to consumers with poor economic prospects have provided an important basis for the industry’s development. Investors betting on the off-grid rural market are right about the transformative impacts of models like M-KOPA, which enables customers to repay the cost of a $200 entry-level solar system over time. These systems provide the means for children to read at night, and they improve household health by reducing reliance on dirty fuels like kerosene. However, if these investors hope to generate long-term growth and improve economic livelihoods, solar systems must be able to generate enough output to power products like refrigeration, which improve food security, or irrigation and agricultural machinery, which enable productivity in the increasingly promising smallholder-led agricultural industry in sub-Saharan Africa.

Likewise, water heating is a staple and important aspect of daily urban living. Enhanced access to electricity shouldn’t just be a stop-gap solution: it should provide a means of reducing poverty and create better conditions for healthier, more financially stable lives in the long-term. As governments and development partners work to catalyze Africa’s green revolution, energy generation must play an essential part of the story. In Kenya, for example, energy accounts for nearly 15 percent of agricultural input costs. Harnessing enough energy to enable customers to expand their discretionary income is a critical path to improving the customer experience while also helping the energy industry’s profit margins—everybody wins. Electrification efforts that focus solely on basic solutions will not uplift the continent as a whole.

For renewable energy to create scaled impact, greater focus is needed on urban and peri-urban locales, which are often neglected in the race to power Africa. The sheer number of customers in urban areas means that efforts to improve electrification among all residents will reduce marketing and distribution costs. Although the electricity deficit is most stark in rural villages, the continent’s most developed cities from Nairobi to Johannesburg also confront irregular power, which, given the rapid urbanization trends in Africa, will become an ever-greater problem as more slums spring up on the urban periphery.

According to the Honourable Akinwumi Ambode, Governor of Lagos State, nearly 86 people enter Lagos every minute of the day—a rate 10 times that of New York. As new settlements crop up, the grid has yet to keep pace with the scale of development. Because the cost of solar power has gone down by 80 percent since 2010, renewable energy solutions have become an increasingly appealing option to expand access to energy in urban environments, the primary drivers for Africa’s economic growth. In these environments, community-level mini-grids and individual solar home systems are models that can deliver higher returns for customers and solar providers alike. Expansion of solar provision in urban areas can subsidize the costs of expansion of solar power in rural communities, and translate into a more commercially sustainable approach to achieve universal and, equally as important, reliable electricity access for more Africans.

As hubs of innovation, urban areas also offer more opportunities to experiment with various types of solar solutions on a large scale. It is hard to imagine testing a scalable power system in a small village—distribution and maintenance would be expensive due to infrastructural and access issues, and piloting a scalable system in a population-limited area is difficult.

Urban settings are ideal testing grounds because research shows that innovation in urban areas grows at the same rate as populations because it increases more opportunities for personal interaction and leads to exposure to new ideas. Directing more investment towards urban energy solutions can improve local resilience by helping balance the over-stretched power grids found in most African countries, and facilitating nationwide energy efficiency.

Expanding electrification in rural Africa is an important step towards building an inclusive future, but the solar industry’s preoccupation with last-mile off-grid solutions will not deliver transformative growth for the continent. Empowering entrepreneurs at a scale that enables them to grow their businesses and generate more economic employment will require firms and investors alike to balance urban with rural concerns, and immediate energy access with a longer-term, sustainable vision.

By Ademola Adesina is the Founder and CEO of Rensource, a West Africa-focused distributed energy services company.

To help close the gap, new sources of capital, especially private, need to be tapped. One key to investing at scale for impact is to attract deeper pockets of private capital by leveraging limited public funding through blended finance. Capital alone, however, is not the only challenge to be tackled.

Professional intermediation and capacity to do so is a considerable bottleneck. This ranges from identifying or even developing investable opportunities, designing investment vehicles, raising capital or matching investors with investments, and managing these impact assets with developmental goals and returns at heart–throughout all stages of an investment cycle, starting from sourcing.

Funds and fund managers who live and breathe impact investing have been proliferating more recently. Yet, the professionals and assets under management lag far behind the numbers needed to address any significant part of the multiple trillion-dollar gap. Fund managers who are new to this space find it hard to gain credibility and traction, cover any pilot testing and ramp up periods, and source capital, for instance.

Creating the universe of future leading fund managers and investment vehicles to achieve the SDGs is as key as capital to be invested. Impact investing veterans, such as Innpact, thus work on a range of solutions to help build professionalism–capacities, competence, expertise–and ecosystems for impact investing.

One initiative is the Climate Finance Accelerator announced in June 2017 by the Government of Luxembourg and developed together with eight private actors–including Innpact, the Luxembourg Microfinance and Development Fund and leading accounting, legal and tax firms. The accelerator will address three main issues for start-up fund managers in climate finance and will be a central point of support and access for them by providing:

• early stage loans for operating capital
• bespoke mentorship in neuralgic areas such as fundraising, climate finance expertise or impact methods
• a ready-to-use toolbox for fund set-up and management, e.g. financial model, policies and procedures, impact monitoring and reporting tools
• training in core areas.

In another initiative, Innpact pursues the development of a turn-key platform for impact investing. This white-label platform will address the constraints of many, especially innovative, smaller funds. By engaging an impact fund manager and drawing on impact finance services, such as developing fund policies, systems and reporting tools, the initiators will be able to strengthen their fund management expertise while focusing on the delivery of investment advisory services.

At Innpact (www.innpact.com) we specialise in services fostering sustainable impact finance initiatives. To this we dedicate our advice and expertise in design, set up and management for impact investing, drawing on our team and an established network of partners and advisors in Africa and around the developing world.

Meet Innpact at the 2nd Africa Impact Investing Leaders Forum 2017 in London, United Kingdom.

By Innpact

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