By all accounts, engaging the private sector in climate-smart investments will be a cornerstone to growing climate business. In many sectors they already play a large role, supplying nearly a third of global investment in research and development of new renewable energy technologies, or $2.5 billion in 2016 alone. Scaling these technologies up to meet targets set in the Paris climate agreement, however, will require trillions more in innovative climate-smart investments particularly in emerging markets. And this presents us with opportunities. In fact, IFC estimates that 21 developing countries alone hold over $23 trillion in climate-smart investment opportunities through 2030.

The time to capitalize on these opportunities is now. In the words of Michael Bloomberg and Carl Pope, from their recent book, Climate of Hope: “… We believe that by changing the way we think and talk about climate change, we can lower the temperature of the debate – and accomplish a whole lot more.”

And this captures very well what IFC is all about — creating markets, creating and supporting businesses that are financially and environmentally sustainable, and through that, making a difference. Closing off a successful fiscal year in 2017, IFC committed close to $4.8 billion from its own account and mobilized funds from other investors in climate-smart industries, helping scale up climate investments in 41 emerging markets. While these industries are all showing promise, there are five sectors where, based on our experience, innovative approaches are poised to widen the tent, attracting billions in private sector capital.

Unquestionably, meeting future demand for food will be one of the world’s greatest climate-related challenges. The human population is projected to grow from 7.3 billion as of 2015 to 9.7 billion by 2050. Without robust steps to increase productivity and climate resilience of agricultural practices, business-as-usual is expected to reduce global agriculture yields by up to 50 percent by 2030. Fortunately, businesses are beginning to employ climate-smart agriculture measures that can dramatically increase productivity and resilience while reducing greenhouse gas emissions. IFC is focused on helping scale these practices by providing investment and support for specific agribusiness needs, including increasing productivity of animal protein producers, optimizing inputs through precision agriculture, and reducing food waste through investments in logistics and infrastructure.

Another significant impact of global population growth will be the rapid growth of urban environments which will exert pressure on existing building stocks. Buildings are estimated to be responsible for about one third of global greenhouse gas emissions.

This challenge also creates an opportunity for climate-smart investment in green buildings. To help private lenders understand and engage in this opportunity, IFC is helping promote a universal and accessible green performance standard to identify areas for cost savings in buildings. The IFC EDGE program offers developers and investors a free tool to choose options to reduce consumption of energy, water, and extracted materials in new and existing building stock.

As global population and incomes rise, 70 percent of developing country populations are expected to live in cities by 2050. This opens doors for opportunities to build “smart” cities, capable of sustainably meeting demand for infrastructure in urban environments, and private sector interventions are now dramatically changing urban landscapes. In the United States, ride sharing services such as Uber and Lyft are reducing car ownership in cities, which can subsequently reduce congestion and greenhouse gas emissions. IFC is investing in public-private partnerships in Turkey to expand metro rail services and in India to upgrade street lighting networks.

In some of the emerging economies, solar and wind energy technologies are often underutilized because they suffer from variable supply, known as “intermittency.” Energy storage solutions can help reduce these impacts by providing a back-up generation option. New research from IFC suggests that over the coming decade, energy storage technologies will grow 40 percent annually in emerging markets. This growth is likely to unlock significant environmental, social, and economic benefits. IFC is growing this market through early-stage venture capital investments in energy storage markets, ranging from lithium-ion battery technologies to photovoltaic (PV) storage systems.

A critical challenge remains the ability to scale up climate-smart investments bringing new financiers into the climate-smart investment space. For example, institutional investors, comprised of pension funds, insurance companies, and sovereign wealth funds, manage $71.4 trillion in assets but currently play a limited role in global climate finance. To attract these investors, climate-smart projects must offer scale, safety, and simplicity. IFC’s Green Bonds Program has been very successful in engaging these investors, issuing over $5.7 billion in 13 currencies through 74 green bonds on its own balance sheet over the last decade.

Looking Forward

Together, these sectors represent the frontier of climate-smart investment. Innovation in climate-smart agribusiness, green buildings, smart cities, and finance can transform the way global economies function to align with a sustainable future where green growth is a norm, not an exception. By investing its resources in these emerging opportunities, IFC is helping to build the foundations for companies in emerging markets to invest and rapidly grow climate business.

By  ALZBETA KLEIN

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

Mainstreaming ESG and impact investing

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

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

Growing investor demand further driven by the SDGs

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

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

SDGs create a doorway to impact investing in public equities

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

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

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

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

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

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

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

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

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

The role of education in improving the people’s lives and encouraging economic development is widely recognized, making it a focus for national governments, philanthropic bodies and international development agencies. Increasingly, it’s viewed as an indispensible tool for easing poverty, reducing inequality and boosting economic sustainability. Research has shown that one year of education can increase wages by five to 15 percent, while each year of secondary school raises them by up to 25 percent.

What’s more, quality education for all—including marginalized groups, women and adult learners—can generate huge economic rewards for a country, increasing its gross domestic product per capita by 23 per cent over 40 years.

More investment is needed—right now

There’s little doubt about the value of education. Yet, despite making commitments to Millennium Development Goals in education, the global community has so far failed to come up with the investment needed to hit education targets. While spending on education by low-income countries has increased by an average of 2.9 percent to 3.8 percent of GDP over the last decade rich countries have not stepped up to the same degree.

In 2010 estimates showed that an additional $16 billion per year would be needed just to provide basic education for children, youths and adults by 2015. However, actual spending has hovered around the $3 billion mark annually. The result is a funding gap that has almost doubled in the intervening years. Today, estimates place the annual financing shortfall at a staggering $26 billion.

It now seems likely that the Millennium Development Goal for education will not be reached by the 2015 deadline and there are concerns on the part organizations like Education for All about what will happen to education development post-2015 and in years to come.

In a further development, low-income countries and poor populations aren’t the only ones facing an education crisis. The education systems in rich countries like the US, the UK and Australia, for instance, are also suffering from the effects of squeezed public budgets and skyrocketing costs, especially in the higher education sector. This has left educational attainment rates dropping, especially among poor people and minority groups, over a number of years.   Many would-be students are priced out of access to higher education just when the need for an educated workforce is on the rise.

Innovative finance solutions

So what can be done to help the poorest attain access to quality education and the better-off optimize their access to higher forms of learning? The key, recent research suggests, is to bring more private capital into the sector and to experiment with new kinds of investments that target specific educational problems and meet the needs of specific groups.

In many parts of the world, education has until now been the sole preserve of governments and development aid agencies, but there is evidence that this is beginning to change as new funding approaches — like impact investing— gain popularity and prove their viability. Though governments and development aid agencies will continue to play a central funding role, the education sector is now actively looking for ways to attract private capital, often in the form of impact investment, as a means to fill that yawning $26 billion funding chasm.

Though it’s early days, there’s already evidence that impact finance can be effective in education.  George Soros’ Open Society Foundations have produced some first findings on impact investing in developing countries’ education systems. The results suggest that workable models are evolving on a small scale, often in collaboration with governments, and some are already showing respectable track records of financial return and demonstrable benefit.

These indications are hopeful, yet impact investing in education is still in its infancy. Education accounted for only 3% of the investments of participants in the GIIN’s recent sector survey, a figure that suggests that impact investors have been hesitant to engage in this sector.

The OSF report confirms this image of tentative, early-stage activity in education by impact investors:  “Most deals remain small, and investments in schools currently dominate deal-making, with more innovative technology and management models just beginning to emerge. As yet, few business models deliver strong immediate financial return while reaching the most vulnerable beneficiaries.”

More worrying perhaps is the fact that impact’s involvement in education investing remains split into two camps, according to the report. On the one hand there are impact investors focused on “reaching the lowest income populations without expectation of any financial return”; on the other are investors who expect market rate returns and place capital into deals that “target middle and upper class populations.”

By now, this is a familiar situation for impact, with well-meaning investors in many sectors still struggling to find ways to engage with the middle ground and find models that meet needs while maintaining profitability. Yet, given the pressing global demand for education, there is enormous potential for innovation, both in terms of finance models and in terms of education delivery methods. With more impact engagement—and a renewed commitment by the education sector to finding new ways to finance and deliver good quality education on all levels—there is scope for significant  positive change in which impact investing can play a significant role.

By deepening its commitment to investing in education, the impact community has the opportunity to help solve one of the world’s greatest challenges.In the next blog in this series, we’ll be looking at the places where impact capital has the potential to be most effective in the education sector. As the need for education continues to grow, so will the range of methods and approaches for private capital, including public-private collaborations, an expanded role for impact intermediaries, and new technologies with the potential to deliver education to underserved communities as never before.

By Marta Maretich

Many African countries are struggling badly to finance their energy requirements. For example, virtually no African electricity utilities have an “investment-grade” rating which prevents them from raising debt at reasonable rates in order to finance their energy projects.

Projects backed by publicly-owned energy providers also encounter certain limits. Long development lead times together with uncertainty over government commitments to purchase volumes produced – key to any financing project – have led some African countries to entrust energy production to the private sector.

Developing IPPs in Africa

In a bid to leverage the Continent’s vast solar capacities, wind and water resources, many corporations are turning to IPP-type private projects (“Independent power projects”, in industry jargon), primarily to meet their own needs, before transferring any energy left over to the grid. As the authorised production threshold has been raised, the number of such independent projects to produce energy for own-use has grown.

Although the situation varies by country, Africa has enacted a series of sector-based legislation over the past few years, such as Law 13-09 in Morocco 1. This allows programmes to produce energy with an installed capacity of up to 50MW to apply for authorisation from the Moroccan Energy Ministry. Any surplus must be sold exclusively to ONEE (the national electricity and water agency), with whom the independent producer must negotiate a transport agreement and a connection agreement (for the transfer of any surplus energy produced).

Other factors have also contributed to the success of IPPs in Africa: deregulation (albeit partial) of the energy sector, increasing demand for energy and the availability of special purpose financing, all supported by government guarantees to purchase power produced.

Development finance institutions (DFIs) have also played a key role alongside financing from foreign backers, especially Chinese concessional lenders and private investors. It is estimated that energy projects attracted USD 14 billion worth of financing in 2014, the bulk of which came from concessional loans put up by China Exim Bank.

Very welcome structural reforms

Participation in private sector financing is therefore an opportunity not to be missed. However, most African governments continue to regulate their national energy sectors via a single publicly-owned utility. This is still the case in Benin, Burkina Faso, Congo, Gabon, Equatorial Guinea, Mali and Niger, to mention but the countries belonging to the CFA franc zone. Nevertheless, beginning in the 1990s, a number of countries began to introduce structural reforms designed to partially deregulate their vertically-integrated monopolistic utilities. South Africa was the first to do so, followed by Ghana, Nigeria, Uganda and then Kenya. A third category of countries – comprising Angola, Cameroon, Côte d’Ivoire, Madagascar, Morocco, Mauritius, Senegal and Togo – have continued with their monopolies but adopted legislation conducive to IPP-type structures. Indeed, within this category of countries, publicly-owned agencies frequently acquire stakes in dedicated IPP project companies, generating a hybrid market with all sorts of complex governance-related issues. While the existence of an independent regulator may be seen as a safeguard for reassuring investors it does not appear to be an absolute imperative.

Although structural reform has undoubtedly resulted in better governance in the energy sector and an environment that is more conducive to IPPs, widespread financial mismanagement of publicly-owned bodies means that private electricity buyers are becoming more and more common in the industry. Nevertheless, there has to be sufficient industrial demand. Madagascar is a case in point. A number of hydroelectricity projects have been launched by JIRAMA, the public water and electricity utility, however, firm credible commitments to purchase power could not currently be secured for the total cumulative installed capacity of the projects due to the serious financial difficulties of the public energy body. Even by trying to sell to the private sector, there is no guarantee that the shortfall in demand could be made up. Thence the African paradox: a lack of creditworthy customers alongside massive energy requirements!

Adopting and complying with best practices

Nevertheless, the success of IPPs is down to a number of best practices that include more effective coordination between the assessment of requirements and power purchase agreements (or PPAs), setting up a clear, predictable and transparent framework for transferring procurement documentation – even for private initiatives, and coherent decisions regarding project structure and power purchase tariffs.

As regards the first point, too many African countries still suffer from inadequate public policy planning tools in spite of loud media declarations concerning plans or strategies that are supposed to last for a generation. Apart from South Africa, very few governments have actually linked their energy planning requirements to energy procurement strictu sensu. Fragmented structures frequently hamper a coherent public policy capable of ensuring diversity in the energy mix, a network capable of absorbing new projects and consistent arrangements for organising and awarding tenders and concessions.

Procedures for awarding IPPs, even within a private framework, must be clear, comply with  principles of equal treatment of candidates and remain constant over time. This does not mean that they have to be rigid! In a rapidly changing market where technical advances and competitive pressures are tending to push down the cost of equipment and material, investors should be able to enjoy contractual stability and the gains generated from lower market prices should also be split among the different parties. This will ultimately result in lower prices for end consumers, particularly in projects where surplus power is purchased by the national utility.

Lastly, “feed-in tariff ” arrangements (FiT) do not have to be a dogma. While FiTs are attractive because they reassure investors and because they have been successfully used in countries like Kenya, Ghana and Senegal, they curb competition significantly.

The financial strength of “off-takers” (i.e., power buyers), the scalability of their industrial plan and the reliability of their power purchase commitments will all be key to the success of an IPP venture in Africa, especially where the public utility is insufficiently creditworthy to be able to purchase the energy produced over the long term.

By Hugues de La Forge, Partner – Holman Fenwick Willan

More than 35 CEOs and civil society leaders of the Business & Sustainable Development Commission (the Commission) today reveal that sustainable business models could open economic opportunities worth at least US$12 trillion and up to 380 million jobs a year by 2030. Putting the Sustainable Development Goals, or Global Goals, at the heart of the world’s economic strategy could unleash a step-change in growth and productivity, with an investment boom in sustainable infrastructure as a critical driver. However, this will not happen without radical change in the business and investment community. Real leadership is needed for the private sector to become a trusted partner in working with government and civil society to fix the economy.

In its flagship report Better Business, Better World, the Commission recognises that while the last few decades have lifted hundreds of millions out of poverty, they have also led to unequal growth, increasing job insecurity, ever more debt and ever greater environmental risks. This mix has fueled an anti-globalisation reaction in many countries, with business and financial interests seen as central to the problem, and is undermining the long-term economic growth that the world needs. The Commission has spent the last year exploring a central question, “What will it take for business to be central to building a sustainable market economy—one that can help to deliver the Global Goals?” Better Business, Better World—the release of which is timed with the World Economist Forum in Davos and the U.S. presidential inauguration—shows how.

“This report is a call to action to business leaders. We are on the edge and business as usual will drive more political opposition and land us with an economy that simply doesn’t work for enough people. We have to switch tracks to a business model that works for a new kind of inclusive growth,” said Mark Malloch-Brown, chair of the Business & Sustainable Development Commission. “Better Business, Better World shows there is a compelling incentive for why the latter isn’t just good for the environment and society; it makes good business sense.”

At the heart of the Commission’s argument are 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 Commission believes 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.

The report reveals 60 sustainable and inclusive market “hotspots” in just four key economic areas could create at least US$12 trillion, worth over 10% of today’s GDP. The breakdown of the four areas and their potential values are: Energy US$4.3 trillion; Cities: US$3.7 trillion; Food & Agriculture US$2.3 trillion; Health & Well-being US$1.8 trillion.

“Global Goals hot spots” identified in the report have the potential to grow 2-3 times faster than average GDP over the next 10-15 years. Beyond the US$12 trillion directly estimated, conservative analysis shows potential for an additional US$8 trillion of value creation across the wider economy if companies embed the Global Goals in their strategies. The report also shows that factoring in the cost of externalities (negative impacts from business activities such as carbon emissions or pollution) increases the overall value of opportunities by almost 40%.

“At a time when our economic model is pushing the limits of our planetary boundaries and condemning many to a future without hope, the Sustainable Development Goals offer us a way out,” said Paul Polman, CEO of Unilever, and a commissioner. “Many are now realizing the enormous opportunities that exist for enlightened businesses willing to stand up and address these urgent challenges. But every day that passes is another lost opportunity for action. We must react quickly, decisively and collectively to ensure a fairer and more prosperous world for all.”

While the opportunities are compelling, the Business Commission makes it clear that two critical conditions must be met to build these new markets. First, innovative financing from both private and public sources will be needed to unlock the US$2.4 trillion required annually to achieve the Global Goals.

“As stewards of long-term capital, the investment industry and its clients can support the achievement of the SDGs by creating simple, standardized sustainability metrics integral to the investment process,” said Hendrik du Toit, CEO, Investec Asset Management, and member of the Commission. “We also need new streamlined partnerships with governments and communities that can reduce risks for everyone and bring more private investment at lower cost into sustainable infrastructure development.” 

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 recently released 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.

“The promise of the Sustainable Development Goals and the Paris Climate Agreement is a zero-carbon, zero-poverty world,” said Sharan Burrow, General Secretary, International Trade Union Confederation, and commissioner. “To achieve these Global Goals, we need to rebuild trust. A new social contract for business where people, their environment and economic development are rebalanced can ensure that everybody’s sons and daughters are respected with freedom of association, minimum living wages, collective bargaining and safe work assured. Only a new business model based on old principles of human rights and social justice will support a sustainable future.”

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.

“The Global Goals provide a sustainable, profitable growth model for business, and have the potential to trigger a new competitive ‘race to the top,’” said Jeremy Oppenheim, Programme Director of the Commission. “The faster CEOs and boards make the Global Goals their business goals, the better off the world and their companies will be.”

— ENDS —

The Business and Sustainable Development Commission was launched at the World Economic Forum in Davos in January 2016. It brings together leaders from business, finance, civil society, labour, and international organisations, with the twin aims of mapping the economic prize that could be available to companies if the Global Goals are achieved, and describing how they can contribute to achieving them. To access the report, visit report.businesscommission.org (live on 16 January 2017). Better Business, Better World launch events will be held throughout the week of 16 January, first at the Philanthropreneurship Forum in Vienna, then at the World Economic Forum in Davos. Regional events are also scheduled.

To learn more visit www.businesscommission.org.

To read the full report visit report.businesscommission.org.

Follow us at twitter.com/BizCommission

Media Contact:

Iain Patton, Global & Regional Media

i.patton@businesscommission.org  & +44 (0)7956 430543

OUR COMMISSIONERS

The Business and Sustainable Development Commission was launched in Davos in January 2016. It brings together 36 leaders from business, finance, civil society, labour, and international organisations, with the twin aims of mapping the economic prize that could be available to business if the UN Sustainable Development Goals are achieved, and describing how business can contribute to delivering these goals. The full list of our commissioners includes:

• Amr Al-Dabbagh, Chairman & CEO, The Al-Dabbagh Group

• Laura Alfaro, Professor, Harvard Business School

• Peter Bakker, President, The World Business Council on Sustainable Development (WBCSD)

• Sharan Burrow, General Secretary, International Trade Union Confederation (ITUC)

• Ho Ching, CEO, Temasek Holdings Private Ltd.

• Bob Collymore, CEO, Safaricom Ltd.

• John Danilovich, Secretary General, The International Chamber of Commerce (ICC)

• Begümhan Do?an Faralyal?, Chairwoman, Do?an Holdings

• Hendrik du Toit, CEO, Investec Asset Management

• Richard Edelman, President & CEO, Edelman

• Hans Vestberg/Elaine Weidman Grunewald (acting), Ericsson

• John Fallon, CEO, Pearson plc

• Ken Frazier, Chairman & CEO, Merck & Co Inc. (2016)

• Mats Granryd, Director General, The GSM Association (GSMA)

• Helen Hai, CEO, The Made in Africa Initiative

• Svein-Tore Holsether, President & CEO, Yara International ASA

• Mo Ibrahim, Founder, Celtel & The Mo Ibrahim Foundation

• Mary Ellen Iskenderian, CEO, Women’s World Banking

• Dr. Amy Jadesimi, Managing Director & CEO, Lagos Deep Offshore Logistics Base (LADOL)

• Donald Kaberuka, former President, African Development Bank Group

• Lise Kingo, Executive Director of the United Nations Global Compact

• Jack Ma, Founder and Executive Chairman, The Alibaba Group

• Lord Mark Malloch Brown, former Deputy Secretary-General, United Nations (Chair)

• Andrew Michelmore, CEO, MMG Ltd.

• Sam Mostyn, President, Australian Council for International Development (ACFID)

• Arif Naqvi, Founder & Group CEO, The Abraaj Group

• Mads Nipper, Group President & CEO, The Grundfos Group

• Cherie Nursalim, Vice Chairman, GITI Group

• Ricken Patel, President & Executive Director, Avaaz

• Paul Polman, CEO, Unilever

• Vineet Rai, Co-Founder & Chairman, Aavishkaar Intellecap Group

• Grant Reid, CEO, Mars, Inc.

• Dinara Seijaparova, CFO, ‘Baiterek’

• Sunny Verghese, CEO, Olam International

• Gavin Wilson, CEO, IFC Asset Management Company LLC

• Mark Wilson, CEO, Aviva plc

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Oscar Perry Abello

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

It also supports the creation of a larger variety of products and services, improves the management of risks, makes payments easier and helps lenders better monitor their clients. In addition, it provides instruments, such as insurance packages, and information that help households and firms to cope with negative events, ensuring more stable consumption and investment.

Given the weakening growth outlook for the region, examining all potential sources or lubricants for growth is now of particular interest. So, in our latest Regional Economic Outlook for Sub-Saharan Africa we examine the extent to which developed, well-functioning and accessible financial institutions and markets could boost growth and what policy options would best help achieve this potential.

Good progress but significant challenges remain

To fully appreciate the potential for further financial development, take a look at the encouraging progress sub-Saharan African countries have made over the last decades.

First, the region has led the world in innovative financial services based on mobile telephones, especially in East Africa. The fast spread of systems such as M-Pesa, M-Shwari, and M-Kesho in Kenya has helped reduce transaction costs and facilitate personal transactions even in the absence of traditional financial infrastructure. Microfinance has also grown rapidly, providing services to customers at the lower end of the income distribution, and large parts of the population now have access to financial services more generally (Chart 1).

But financial inclusion, the degree to which all segments of the population can benefit from financial services, still lags well behind that of other developing regions of the world. For instance, as cellphone ownership continues to grow among the poor, the less well educated, and women, there is a large potential to fully exploit mobile payments to compensate for the shortcomings of traditional methods in providing financial services to the most underserved.

Second, the financial sector has deepened—the region’s median ratio of private sector credit to GDP has doubled from its 1995 level. However, with the exception of the region’s middle-income countries, financial market depth and institutional development are also still much lower than in other regions.

Third, we now find Pan-African banks—locally-owned banks that operate in several countries—in the vast majority of sub-Saharan African countries. Their expansion has filled gaps in services left by European and U.S. banks, promoted greater economic integration, and made the sector more competitive. But as often is the case with new and rapidly growing financial developments, Pan-African banks also bring a number of challenges, in particular the need to strengthen supervisory oversight on a consolidated and cross border basis and improve the internal controls and transparency within those institutions.

A large untapped growth potential

But how much more financial development could sub-Saharan African countries realistically achieve? Examining a combined index of the various dimensions of financial development shows there’s a substantial gap between the level of financial development at which many sub-Saharan African countries are currently operating, and what they could reach when compared to other regions with similar structural characteristics.

So, the potential for further financial development is substantial, and the impact of filling the gap is about 1½ percentage points additional annual growth for the median sub-Saharan African country, with variations across country groups (Chart 2).

In addition, we show that higher financial development can reduce the volatility of growth, especially if financial development is initially relatively low, as is the case for most countries in the region (Chart 3). Here, more financial development relaxes credit constraints and provides instruments to withstand adverse shocks. However, as the sector deepens, its contribution to reducing volatility declines because financial depth also increases the propagation and amplification of shocks.

Safeguard macro-stability and strengthen institutions stability

So, what should policymakers do to help sub-Saharan African economies reap this potential?

Our analysis shows that the region’s financial development has been largely driven by better macroeconomic fundamentals over the last decades, but hindered by weak institutions. So, providing strong legal and institutional frameworks and corporate governance in particular, are critical for creating an environment in which the financial sector can develop and thrive.

But countries also need to be vigilant about risks to the financial system and their spillovers to the economy. As regulations in many countries are not fully in line with global best practices, and their implementation remains weak, improving the regulatory framework and strengthening supervisory capacity as well as enforcement powers are essential. Among many other reforms, the harmonization of regulations and supervisory procedures to avoid regulatory arbitrage and establishing an appropriate mechanism for resolving nonviable financial institutions are high priorities.

Finally, financial supervisors should monitor carefully the risk related to mobile money transactions as they become increasingly popular in the low-income segment of the population—ensuring households’ funds are safe while allowing them to enjoy making transactions more easily, saving for worse times or taking up a loan to start a business.

By Anne-Marie Gulde-Wolf 

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“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.

By Elizabeth Boggs Davidsen

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