My first job after leaving university was marketing water treatment systems for rural communities in developing countries. While clean water is a must to help prevent deadly but easily preventable diseases such as diarrhoea and typhoid, we constantly had to explain to potential buyers that no we weren’t a charity, but a for profit company, which often led to much confusion as providing clean water in emerging economies was so often seen as charity work.
Now the firm could have potentially attracted funding through its ability to provide a wider social good, namely clean water and would be part of a fast growing international movement called impact investing. Impact investing has taken off as investors, shareholders and consumers consider their impact on society more widely and back ventures that reduce poverty, enhance the environment or in some way benefit society.
Frontier and emerging markets are no exception to this trend. Although there might be the temptation to believe that these countries should grateful for any investment, the desire and need to ensure that firms make a difference to society at large is just as great as in developed markets.
What is Impact Investing?
Impact investment is loose term but firstly means avoiding investments in areas such as weapons manufacturing, cigarettes or other harmful products. But more specifically it means investment in companies that provide a social and environmental dividend alongside a financial return. Typically this means investment in sustainable energy, education, microfinance, or sustainable agriculture.
While financial returns are usually easy enough to measure, impact returns are often more difficult to quantify and measure. This is where firms like Magpie Advisory can help design and refine impact strategies. I was lucky enough to chat with Aleksandra Gadzala, the CEO of Magpie Advisory who explained how her firm helped others design their own impact strategies and navigate geopolitical risk in emerging economies. After focusing on political risk for an African focused fund and completing a PhD on China- Africa relations at Oxford University Aleksandra took the plunge to start her own firm.
In one example Magpie developed a market risk framework and strategy for off grid solar companies entering the South East Asian market. Often firms have the technical knowledge and can have excellent products, but a failure to understand the politics and power dynamics of a frontier market can lead to frustration and failure as local forces act a brake on ambitions.
Existing firms can be closely aligned with the government, or regulatory capture can sting even the largest most well-resourced companies in the world. Off grid solar energy is an obvious impact investment as it brings energy and light to communities which often previously had no energy sources, at the same time it avoids the uptake of environmentally damaging wood stoves or fossil fuels.
How Does it Work in Practice
Other firms are in the business of financially backing firms which embody impact principles. One example from Latin America is LGT Impact Ventures which funds purpose-driven companies that have scalable business models and provide disadvantaged people with access to essential services, products, and opportunities.
One of their target investments is Dr. Consulta which provides high-quality, low-cost specialty healthcare and diagnostic services to Brazil’s low and middle-income population. LGT Impact Ventures’ investment in Dr. Consulta has been used to expand the clinic network from one clinic to 10 clinics.
Impact can be measured in a large number of ways depending on the industry. For example reduction in a carbon intensive energy source, or increase in access to clean water, units of affordable housing, energy efficient houses built, to ecosystem protection and students enrolled. The Global Impact Investment Network (GIIN) have developed a comprehensive database of acceptable metrics for investors to utilise.
The Rise of Sustainable Investing
Fortunately companies with a social conscious are on the rise, shareholders, management and workforces increasingly want to be doing good as well as making money. Consumers are increasingly more likely to avoid ethically suspect companies and other stakeholders are pressuring firms to act in the interest of society and the planet rather than purely focusing on shareholders.
It helps that impact investing often achieves superior returns compared with “normal” investments, all of this gives impact investing a bright future. As the table shows below impact investments nearly always meet or outperform investor expectations.
The Global Impact Investment Network GIIN estimates that there is now USD 114 billion invested worldwide in ventures which incorporate these principles. This figure looks set to rise as the demand to make a positive impact whilst investing continues to grow.