N’Gunu Tiny, founder of the Emerald Group, investor and fintech expert, on the increasing need for mainstream investors to turn to impact investment and how they can still make money.
At a time of unprecedented global uncertainty and with increased focus on the imbalance of business and society, it’s time for mainstream investors to turn to impact investing.
What is impact investing?
Companies, financial institutions, investors and all kinds of stakeholders now actively seek investments that generate not only financial returns, but societal returns too. Impact investing directs capital to projects, enterprises and businesses that directly generate environmental or social benefits. This could be anything from affordable housing projects to ensuring timber is sustainable.
Impact investing finances the vital initiatives that are necessary for the survival of humanity. Traditional business models have always prioritised profit over anything else. Mainstream investors have avoided impact investing due to the idea that any kind of social investment leads to weak returns on investment (ROI). This is not the case.
Due to the reluctance from mainstream investors, impact investment has been left to venture capitalists (VCs), far-reaching adventurous investors and often nongovernmental organisations (NGO). However, the tide is turning. Impact investing reached a market size of over £400 billion in 2019, according to data from the Global Impact Investors Network (GIIN).
Research shows impact investment can lead to good returns
McKinsey has released data following a research project about impact investing in India that shows impact investment is growing on the continent at 14% annually. Around 50 major investors have ploughed $5.2 billion into impact investment projects over the last ten years. The study also looked at challenging the traditional assumptions made about weak returns on this kind of investment. Results show that when mainstream investors and a wider range of businesses understand the actual ROI available on sustainable investments, they will discover more opportunities in line with their longer-term objectives.
These investments in Indian projects show that capital can be used sustainably and can give investors the financial returns they expect. From 48 investor exits between 2010 and 2015, a median internal rate of return (IRR) of 10% was produced. In addition, the mean and median holding periods are at about five years, which is pretty much the same as VC firms and conventional private enterprise investment. All of this shows that social enterprises that incorporate strong business models will not need longer than normal holding periods to give ROI to investors.
Financial inclusivity goes hand in hand with impact investment decisions
Of course, the link between improving society and economic growth is extremely complex. There is no easy answer, but we should all agree that collectively working towards an inclusive model of economic growth that actively and directly benefits every level of society is now essential for a sustainable future.
Financial inclusion stimulates the economy and social development, which helps to move people towards the UN Sustainable Development Goals (UN SDGS). This means the provision of safe, secure and accessible financial services. Impact investment that drives this kind of financial inclusion, particularly across continents like Africa and India fosters economic growth and builds societies that can survive future challenges.
And while financial inclusion is primarily the focus for developing economies, access to safe and responsible financial services and credit is still a major challenge for both emerging and developed economies too. Early moves towards financial inclusion were spearheaded by NGOs and institutions working towards development financing. As such, social considerations outweighed the returns that could be made.
More recently, there has been a shift towards the understanding that positive social impacts can be made without sacrificing financial returns. This allows us as investors to fund projects that provide solutions for financial inclusion and make the kind of returns we want to see. This is driving an increase in investment from the private sector in this newly consolidating industry.
Impact investors are helping to create inclusive, workable and resilient economies and societies. This is what will help countries navigate the challenges arising from globalisation and digitalisation. At the time of writing, the pandemic caused by Covid-19 is presenting the world with one of the biggest collective challenges in a generation. Impact investing is likely to move up the priority list as the world’s markets begin to recover from the impact of the unprecedented economic impact of the pandemic so far.