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More funding for education alone will not solve unemployment

Tue, 27 Mar 2018 05:45:09 +0000

There is a renewed focus on the importance of allocating funds into Africa’s education systems to suit the changing job market in Africa, and while this is welcome, experts argue that an overhaul of the education system is crucial.

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.

In Impact Investing’s Rush to the Mainstream, Who Are We Leaving Behind?

Wed, 03 May 2017 10:07:26 +0000

After a long march toward mainstream acceptance, many in impact investing are claiming victory. The industry is garnering attention at major publications like The Economist, and recently celebrated the emergence of a star-studded $2 billion fund. Meanwhile, studies have proliferated supporting the idea that you can earn market rate returns while making a meaningful difference in the world, and investors have taken note: The GIIN’s 2016 Annual Impact Investor Survey states that 84 percent of survey respondents were targeting risk-adjusted market rate returns or close to market rate returns.

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:

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.
The sector needs greater transparency around reporting both the impact and financial returns(gross and net) achieved by impact investors.
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.
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.
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.
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

How Impact Investing can solve Africa’s trickle-down woes

Sat, 08 Oct 2016 12:13:18 +0000

With the experience of major African economies showing that the benefits of growth at the top are not trickling down to the poor, it is time for innovative economic alternatives such as impact investing to show the way forward for inclusive growth.

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.

Top Cultural impediments for Donors and Impact Investors in Ghana

Thu, 01 Sep 2016 03:05:36 +0000

At the close of a long day, Songhai’s Managing Partner Nana Ampofo and Social Impact Director Lord-Gustav Togobo go back and forth about the challenges facing impact-oriented clients investing in Ghana. At the top of the list, it turns out, are ‘soft’ issues surrounding communication between investors and principals, principals and customers – four of which are laid out below:

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.
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.
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.
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)

Obama’s $1B Impact Investment Program Could Be Here to Stay

Sun, 28 Aug 2016 22:01:34 +0000

Nate Yohannes, his three siblings and their parents were exiled from Eritrea shortly after the country’s war for independence in 1991. They ended up in Rochester, New York. Every winter when he goes home to visit, Yohannes says, he jokingly asks his parents: Why such a seemingly random, bitterly cold city? But he knows the real answer.

“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

IDENTIFYING IMPACT INVESTMENTS FOR INSTITUTIONAL INVESTORS

Mon, 01 Aug 2016 22:05:21 +0000

Institutional investors often have different characteristics than the family offices and foundations that have helped define the field of impact investing. It is therefore imperative that institutional investors find impact investments that suit their investment objectives. With their significant size and long investment horizons, institutional investors are among those best positioned to reap the returns of impact investing, which also favors stability and profitability over the long term.

This section profiles several sources of potential impact investments suitable for institutional investors. Similar to conventional investment management, these sources include companies (private and public), indices, ETFs, and bonds (or other fixed income instruments). For investors who seek to define what makes an “impact investment,” refer to the Appendix for an explanation of IRIS, a series of metrics that encapsulates many environmental and social themes. It should be noted that the number of new impact investment vehicles continues to grow, and this is by no means an exhaustive catalogue. Whatever the objectives or preferences are, this guide can serve as an introduction to institutional investors who are interested in a broad overview of existing impact investment tools and vehicles.

Companies

Many funds choose to invest in companies individually based on their operations or mission. Some specialized venture capital firms, for example, choose to support only clean technologies. Although this is certainly possible for an institutional investor, investments in larger publicly traded companies may be preferred. Institutional investors can choose companies that value certain ethical guidelines in their business operations or products. To determine whether a company qualifies as an “impact investment,” several frameworks can be used. One popular concept that many companies adopt is “corporate social responsibility,” which is loosely defined as compliance with ethical standards in a business model. CSR frameworks can be used to identify companies or organizations that are ethical or impactful in their business operations. Another more active approach for companies is to make social or environmental impact the core of their mission. It is up to the institutional investor to select companies that best fit their appetite for impact (i.e. in operations or in mission) and preferences (e.g. investment horizon, company performance, and company size).

By Rachel F. Wang, Fellow, Bretton Wood’s Initiative.

Download her report at: https://na-production.s3.amazonaws.com/documents/Impact-Investing-for-Institutional-Investors.pdf

Understanding Impact Investing Performance

Mon, 01 Aug 2016 09:15:39 +0000

Unlike conventional investment management, impact investors can benchmark their performance in social or environmental returns in addition to traditional financial returns. Investors in ESGthemed indices, ETFs, or equity can track financial returns using the same conventional benchmarking tools as other traditional investors. A discussion of financial benchmarking tools will not be included here as there is already a variety of literature on investment portfolio management.

Tracking social or environmental returns, however, is more difficult. Tools such as B Analytics (profiled in more detail in the Appendix) allow investors to manage their companies based on ratings derived from IRIS or GIIRS. Most of this information is only collected ex post facto and cannot be exhibited in real-time. Furthermore, most of the ratings are based on “scores” given to broader themes within environmental, social, and governance categories. This information is qualitative and therefore difficult to assimilate into economic returns, which are tracked in quantitative financial terms. Quantifying social and environmental returns remains a challenge for investors seeking more specific information on whether their “impact investments” are truly making a difference. One possible solution to this problem is the social return on investment (SROI) concept.

Social Return on Investment Social return on investment (SROI) as a benchmarking tool is unique to impact investing. It can be compared to the price/earnings ratio in terms of its potential for evaluating performance. These metrics are used to measure value creation, and the SROI specifically measures the amount of social impact generated on a specific amount of investment in a particular subject.

SROI is not a new phenomenon in the world of impact investing–there have been discussions on SROI in the 1990s–however, measuring SROI remains tricky. Emerson, Wachowicz, and Chun of the Roberts Economics Development Fund (REDF) concluded that social enterprises create value in a continuum that ranges from economic, to socioeconomic, to social value.45 Economic value is the traditional motive for most enterprises; common measurements include return on investment, price/ earnings ratio, and profit margin. Social value is created when processes and inputs are combined to create improvements in the lives of individuals or society as a whole. Emerson, Wachowicz, and Chun state that this is where most non-profits operate, and it is difficult to measure value in this space since most “products” are qualitative and not reducible to analytical terms.

Socio-economic value, on the other hand, includes economic and social value. An entity creates socio-economic value by generating economic value from its inputs, but also by creating social impact. For example, an initiative that provides job-training programs to unemployed people who currently receive public support would qualify as socio-economic value. This initiative develops professional abilities with the potential result of reducing unemployed workers dependent on government support.46

Socio-economic value can be quantified and calculated as SROI, which in turn can help investors evaluate investments before and after they invest. A study conducted by SVA Consulting in Australia on the impact of SROI and SROI reporting showed that the SROI analysis gave organizations a deeper and more analytical insight into their value creation.47 The study also found that the SROI report helped investors and organizations understand the true costs associated with delivering social impact, resulting in better strategic planning. However, SROI is not without its flaws. The study also noted that there were only two forms of SROI analysis: one that estimates social value creation in the past, and one that projects social value creation in the future. The study proposed a need for a third form – “baseline SROI” – that assesses SROI in the present.48

Despite these considerations, calculating SROI can be a powerful way to track portfolio performance. Guidelines on calculating SROI and isolating social cash flows are available in Emerson, Wachowicz, and Chun’s paper. The SROI Network also offers assistance in calculating SROI, social net present value, and sensitivity analysis.49

Market Performance

It can also be challenging for institutional investors looking to understand and benchmark their performance against the general impact investing market. At the time of this writing, there is still a significant lack of analytical research on the impact investing market. Although there have been numerous developments in qualitative frameworks, there is still a dearth of research on market performance and other retrospective benchmarks. Some of the reasons that contribute to this could be 1) the market is still nascent and time horizons are too short to make significant conclusions, 2) many funds or organizations do not release data on their investing performance to the public, and 3) not all actors in the impact investing market are familiar with investment research or analysis. Despite these challenges, the literature on impact investing is constantly evolving to fill new informational gaps.

Impact Investing Benchmark

The Impact Investing Benchmark (IIB) is the first comprehensive analysis of the financial performance of private equity and venture capital impact investing funds. Although it leaves out institutional investors such as sovereign wealth funds and pension funds, the IIB is still useful for any impact investor. To date, it is the only initiative that is produced similarly to analogous financial performance reports for traditional investment funds. In doing so, the IIB is paving the way for analysis of impact investments as an asset class.

Managed by Cambridge Associates and GIIN, the IIB is comprised of 51 private investment funds that were launched between 1998 and 2010. According to their 2015 inaugural report, the IIB found that these funds performed comparably well, despite the perception that impact investing may generate subpar returns.50 From 1998 to 2004, the IIB funds outperformed similar conventional funds, and over the entire 1998 to 2010 time period, underperformed conventional funds by about 1.5 percent. IIB also showed that funds that raised under $100 million returned a net IRR of 9.5 percent to investors – outperforming similarly sized conventional funds (4.5 percent). As with any other investment strategy, manager selection, due diligence, and risk management are still important factors to achieving high returns. The IIB provides much-needed information on impact investing as its own asset class. Its decision to focus on private investments shows that the impact investing strategy can be viable on a smaller basis as well. For institutional investors, this means that impact investing can be done without usurping many other fund resources.

Literature on Impact Investing Practices

While impact investing is not new, the recent exponential growth in the demand and diversity of this type of investing means that few widely established practices exist. An increasing number of organizations are producing both theoretical and practical advice for crafting a successful impact investment portfolio. For investors looking for qualitative information on how to manage an impact investment portfolio, several entities conduct their own internal surveys of institutional investor practices.

J.P. Morgan and GIIN conduct an annual impact investor survey that includes information on asset allocation and performance, portfolio management, and general perspectives on the impact investing market. Their latest edition, published in 2016, featured answers from 158 impact investors that allocated capital to a wide range of asset classes and industries.51

The Sovereign Investor Institute has also conducted surveys on institutional investors – many of whom are impact investors as well. The Institute’s polling reports feature perspectives on macro risks as well as the percentage of participating institutional investors that promote good governance in their portfolios.52

Other resources include the UK DFID, Rockefeller Foundation, and various academic institutions. For example, Rockefeller Foundation not only publishes articles on their investment performance, but also makes public their list of grantees and investments.

By Rachel F. Wang, Fellow, Bretton Wood’s Initiative.

Download her report at: https://na-production.s3.amazonaws.com/documents/Impact-Investing-for-Institutional-Investors.pdf

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Add Impact

Mon, 18 Jul 2016 22:47:36 +0000

“Add Impact” is the new rallying cry of the Global Impact Investing community, which concluded a two-day plenary meeting of its Steering Group in Lisbon, Portugal on July 8. Championed by Sir Ronald Cohen, founder of Big Society Capital (BSC), which is hailed as the world’s first social investment bank, the Global Impact Investing Steering Group is the heart and mind of a growing social investment movement bent on making impact investing mainstream.

Impact investments are those that intentionally target specific social objectives along with a financial return and measure the achievement of both. BSC formally launched in April 2012, using an estimated £400million in unclaimed assets left dormant in bank accounts for over 15 years and £200million from the UK’s largest high street banks.

The UK experience is now informing a global impact investing movement, and the Lisbon meeting provided a venue for many country delegations to showcase their fledgling National Advisory Boards, comprised of policy makers, impact-oriented organizations, nonprofits, and intermediaries. New boards from Argentina, Australia, Brazil, Canada, Germany, India, Israel, Italy, Japan, Mexico, Portugal, the UK, and the US are organizing and innovating to solidify and strengthen the impact investing landscape and resources in their respective countries. And it’s clear the UK is the trend setter. Many countries are following the Big Society Capital model and working to set up impact investment wholesalers funded with unclaimed assets to unleash new sources of social finance to support access to basic services, education, improved housing, and aging populations in underserved communities in rich and poor countries alike.

What’s needed: scalable enterprises, new funding facilities, regulations, and champions of impact investing

However, along with this greater mobilization of impact capital comes the need to stimulate deal flow, which still lags behind investor demand. There is an overall lack of scalable social enterprise models, signaling the need for catalytic grants, other flexible financing tools, and acceleration support to help social entrepreneurs validate proof of concept, solidify business models, and become investment-ready.

It’s also clear that new funding facilities, regulations, and champions are needed to make impact investing mainstream. Social impact bonds (SIBs) were introduced in 2010, a type of “Pay For Success” model where private investors invest capital and manage public projects, usually aimed at improving social outcomes for at-risk individuals. SIBs are gaining traction with 57 models operating, but they have proven complicated and costly to design and implement. Yet, the practice of pay-for-performance that the SIB model requires has captured the minds of policy makers, non-profits, development finance institutions, and private sector investors, including the Multilateral Investment Fund of the Inter-American Development Bank Group, which is working to help bring the first SIBs to Latin America.

Likewise, in addition to direct investments in high-impact companies, impact investing funds are taking different approaches towards strengthening the sector. For example, the US$20M Inter-American Opportunity Facility - a partnership between Calvert Foundation and the IDB Group – provides debt financing to socially responsible financial institutions intended to support small business lending, education, housing, and other businesses that benefit the base of the pyramid.

Among the US policy and impact investing experts who make up the National Advisory Board, there is agreement on the need to change regulation to enable more capital from pension, endowment, and public finance vehicles to meet the needs of entrenched social and environmental challenges. Innovative impact-oriented businesses need investment, and certain regulatory barriers stand in the way—leaving much private capital on the sidelines. According to the US Advisory Board members, the IRS could further clarify and refine its rules about foundation investments in for-profit enterprises to help fill the funding gap between grants and commercial capital, and this would be cost neutral.

As for champions, there are many and the field is growing. Having Pope Francis sign on to the impact investing movement certainly helps to raise visibility. But, it’s time for business to broaden out its buy-in. The Sustainable Development Goalsare helping to raise the profile and alignment of business and development goals. CEOs from large companies and banks are signaling that they want to be part of the development conversation in the communities where they operate. Corporates are playing an increasingly important role in enabling and driving innovative solutions for the world’s most pressing challenges, alongside impact investors. Today, we see VC tools being used to seed corporate startups, as many large companies are deploying capital to innovate with entrepreneurs and invest for the future. While many of these investment vehicles have expectations of financial return, they also require that the startups make a positive social and/or environmental difference, a de facto impact investment.

Measuring social outcomes will help make the business case

But, the business case still needs to be made. As Shawn Cole, of Harvard Business School commented in a panel on Unlocking Flows of Impact Capital at the GSG meeting in Lisbon, not one finance text book includes impact investing. Measuring and embedding impact in investment decisions is needed, and firms like Bridges Ventures, which has over $1 billion invested in impact, are helping to develop the metrics and tools to capture positive social outcomes of their investments.

And the rise of the Benefit Corporation and B Corps —those companies that use business as a force for good and meet defined standards of social and environmental performance, accountability, and transparency—is taking hold. Today, there is a growing community of more than 1,812 Certified B Corps from 50 countries and over 120 industries working together toward one unifying goal: to redefine success in business. In the US, 31 states have passed legislation to allow for Benefit Corporations.

Danone, a leading global food company, pledged in December 2015 to help more people use business as a force for good by joining B Lab’s Multinationals and Public Markets Advisory Council (MPMAC). Danone has joined a group of experts committed to using the B Impact Assessment to measure and manage the social and environmental performance of 10 Groupe Danone subsidiaries in 2016. Danone’s example opens the door for other multinationals to measure their impact, an important step towards creating the shared prosperity many in the impact space are seeking.

As David Blood, cofounder of Generation Investment Management, commented in his closing remarks in Lisbon, there’s no evidence that you have to trade impact for return. But for scale to happen, more dollars, billions of dollars, need to flow into the impact space.

By Elizabeth Boggs Davidsen

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How the Future of Impact Investing Will Affect Investors

Mon, 18 Jul 2016 09:14:19 +0000

The World Economic Forum has predicted the impact investment market will grow to $500 billion by 2020. Other analysts place the figure closer to $1 trillion. Despite all the enthusiasm surrounding impact investing, some financial advisors remain uninformed. According to a CFA Institute report, 66% of advisors admitted to being unfamiliar with the practice. The continued growth of impact investing will depend on educating financial advisors and investors.

A major reason for this expected growth is the impending transfer of wealth from parents to their children. Millennials and Generation Xers stand to inherit between $30 and $40 trillion dollars from the baby boomer generation. The magnitude of this wealth transfer is unmatched by previous generations. Beyond simply the size of the inheritance, Millennials have different priorities than the generations before them. Younger investors seek investments that yield a social return, as well as a financial one.

When asked about the primary purpose of business, 36% of Millennials selected “Improve Society” as their answer. Other answers included “Enable Progress,” which was chosen by 25% of participants, and “Create Wealth,” which was picked only 15% of the time (Deloitte Survey, 2014).

In the past, investments in emerging or non-traditional markets were viewed as exceedingly risky. A lack of transparency and available information discouraged investors from exploring opportunities abroad. The digital age has changed that. Enhanced connectivity now makes it possible for investors to act wisely when investing in emerging markets. Moreover, the credit ratings in many developing nations—such as Mexico and Brazil—have improved as governments exercise greater fiscal responsibility. This development creates more opportunity for impact investing.

Investing for gender equality is rapidly becoming one of the most popular forms of impact investing. The goal is to promote gender parity and personal empowerment through debt and equity investments. There are three basic types of gender equality investments: supporting female-owned enterprises, funding companies that offer products and services for women, or expanding employment opportunities for women.

Organizations like the Calvert Foundation and Root Capital have launched initiatives to promote gender-focused investments. To quote Jackie VanderBrug, a former managing director of Criterion Ventures and now SVP at U.S. Trust: “Women are key assets in combating poverty, building their communities, and creating new pathways to a more just and sustainable world. Investing in women’s education, economic welfare, health, and overall well-being produces powerful results that benefit families, communities, and entire societies. When women become economic agents and leaders, social change accelerates and returns multiply.”

Foreign investment in developing countries dropped 16% in 2014. This has resulted in a $2.5 trillion funding gap, which has made it nearly impossible for these countries to cope with lingering problems like food and water shortages, limited healthcare access, and failing infrastructure.

Similarly, the clean energy sector is experiencing a major shortfall. The International Energy Agency calculates that an additional $36 trillion will be needed over the next 35 years to curb the most extreme effects of climate change. Since philanthropic activity alone cannot bridge the gap, advisors must educate themselves and their clients on impact investing. Our globalized economy has made it possible to engender social change and produce a healthy return on investment. Whether we can find solutions to the most pressing global challenges will depend on the commitment and foresight of investors.

By Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth and Blue Ocean Global Technology.

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Crowdfunding Industry Overtakes Venture Capital and Angel Investing

Wed, 01 Jun 2016 09:35:56 +0000

By 2016 the crowdfunding industry is on track to account for more funding than venture capital, according to research firm Massolution’s annual report. With an estimated market value of $34 billion in 2015, crowdfunding has come a long way since its valuation of $880 million in 2010.

In comparison, the VC industry invests an average of $30 billion each year. Meanwhile the crowdfunding industry is doubling or more, every year, and is spread across several types of funding models including rewards, donation, equity, and debt/lending. In particular, equity crowdfunding – now being legalised in the US – holds huge disruptive potential.

Crowdfunding industry growth figures, as reported by Massolution

The crowdfunding market grew by 167% in 2014, continuing the exponential growth of previous years. Two months ago the thriving British FinTech (financial technology) sector witnessed its first billion-dollar business. The company? Funding Circle, a five year-old crowdfunding platform. Their $150 million funding round was over-subscribed.

It should come as no surprise that a crowdfunder is the first business in the booming world of FinTech to break through the billion-dollar mark. Small businesses are finding it harder than ever to raise money from traditional sources. Quite simply, banks don’t seem up to the task. New bank loans to small businesses in Europe plummeted by 35% between 2008 and 2013. Meanwhile, crowdfunding platforms are enjoying huge support from policymakers in the form of tax breaks, and from institutional investors looking to diversify their portfolios.

Crowdfunding is moving mainstream. So, what does this mean for older, more established types of business financing?

Venture capital overtaken

The World Bank estimated that crowdfunding would reach $90 billion by 2020. If the current trend of doubling year over year continues, we’ll see $90 billion by 2017.

VC funding, a well-travelled avenue for small businesses trying to raise capital, accounts for roughly $30 billion a year. Angel investing, meanwhile, accounts for roughly $20 billion a year. In short, the crowdfunding industry is scaling up rapidly with VC and angel investing firmly in its crosshairs.

Note: growth figures of the entire crowdfunding industry

Interestingly, the crowdfunding sector with the most potential for disruption is yet to truly take off. If, as expected, equity crowdfunding doubles in size annually over the next few years, it will overtake venture capital as the largest source of startup funding by 2020 ($36 billion). Equity crowdfunding in Europe has been flourishing for several years, while the US – the birthplace of crowdfunding generally – has been slow in legislating for its introduction.

Currently the US equity crowdfunding market is limited to accredited (professional) investors only. But what happens when an entirely new class of investors – namely 250 million Americans – are empowered to participate and invest for the first time under new equity crowdfunding laws? In theory this would more than double the current European-dominated equity crowdfunding market.

The potential growth and impact is staggering.

How will angels & VCs respond to equity crowdfunding?

What will the market for startup investing and small business finance look like as equity crowdfunding continues to grow? And are VCs embracing the changes?

It’s fair to say that crowdfunding was originally looked down upon by professional investors. Some angels and VCs have begun integrating equity crowdfunding as a step in their investment strategy. Increasingly we’re seeing startups in talks with bigger investors after a successful crowdfunding campaign, as fund managers scout platforms for interesting ideas.

The lines are being blurred across the early stage investment ecosystem – some equity crowdfunding platforms are effectively becoming venture funds of their own. Meanwhile, VCs are integrating equity crowdfunding into their investment processes due to the marketing and strategic benefits it can bring.

What’s for sure is that the real winners are the high-growth entrepreneurs who have more sources and channels for finding capital than ever.

A giant new capital market is taking shape before our eyes.

By Louis Emmerson, Editor-in-Chief, Symbid