Article kindly contributed by Kelsey Tanner, Senior Private Equity Analyst, RisCura
- Africa gets 12% of total impact investing into emerging markets
- Africa has under-served sectors which can be great place for impact funds to deploy capital
- Beware “impact washing” and “mission drift”
- More adoption of global standards such as GIIRS and IRIS for funds
Despite being only a decade old as an industry, impact investing globally has shown impressive growth and obtained mainstream acceptance. However, there are some credibility concerns, particularly in Africa, that can be addressed with clear industry guidelines. This could help to accelerate the allocation of investors’ capital into impact investments.
Essentially, impact investing is where investments are made with the intention of generating a social or environmental benefit alongside financial returns. Individual and institutional investors pursue impact investing primarily in private capital markets, including closed-end private equity or private debt funds.
Impact investing differs from socially responsible investing, which is the process of selecting or eliminating investments based on screening criteria. For example, an investor may want to avoid companies that have products that may be addictive or dangerous, such as tobacco or firearms. With impact investing, funds actively seek to invest in companies or projects with the potential to have a positive impact on social and/or environmental outcomes. Key impact areas in Africa have typically included education, housing, energy and financial services.
According to a survey published by the Global Impact Investors Network (GIIN), over half of total impact investing assets under management is allocated to emerging markets, with 12% of that going to sub-Saharan Africa. This region was also cited as one of the top three geographies for capital deployments in 2017. While this is significant, Africa has a multitude of under-served sectors where a social or environmental impact can be made, which can potentially make it a favoured place for impact investing funds to deploy their capital.
However, investors are hesitant to commit capital without sufficient information on impact investment funds, and the impact they are making. This is inherently difficult in Africa where the impact investing market is small compared to global capital markets. With only a few pioneering fund managers, and the system still making forward strides, there is a lack of data at both the fund and investment level.
Some investor concerns include the risk of “impact washing” and “mission drift”. “Impact washing” is where companies or funds market a social/environmental impact that doesn’t exist or is highly exaggerated. “Mission drift” is when an organization or company moves away from its social or environmental mission and starts focussing more on their financial returns.
Proposed solutions and industry guidelines, such as independent assessments or third-party verification of investments, are necessary to allow investors to make informed decisions, particularly where there may be a trade-off between impact and financial returns. Increased transparency and accountability can address investors’ concerns and establish the credibility of funds’ impacting investing actions.
A step in the right direction is to increase the adoption of independently assessed rating systems, such as the Global Impact Investing Rating System (GIIRS), a product of GIIN. GIIRS provides a standard framework for funds to measure their portfolio’s impact.
Funds can also incorporate IRIS (Impact Reporting & Investment Standards) in their measurement process. IRIS presents metrics for social and environmental benefits of products and services and allows investors to quantify an investment’s impact in a particular sector. Metrics for an impact investment in the education sector could include, for example, the number of schools opened. Using IRIS reduces the need to find or create performance metrics and facilitates easier comparison across funds or investee companies.
While standardization allows for comparability, there are still difficulties as impact areas vary significantly between investors. Furthermore, since this is currently a voluntary exercise, and standardized systems may prove onerous, funds may prefer to use frameworks or metrics that are not aligned to external methodologies. This approach will likely still be still useful for investors, as ultimately investors want transparency on impact strategy and results.
The adoption of objective, comparable measurement standards is one of the enablers of sound financial markets. By leading adoption of these standards, and addressing concerns around transparency and credibility, impact investing into the African continent can be significantly accelerated.