03 MAY 2021 - 16:40 BORIS URBAN - BusinessDay
Effect of global crises on socially orientated businesses shows that big crises unleash altruistic initiatives
The spread of the Covid-19 global pandemic has brought about a positive rethink of the significance of impact investing and its role in helping address global social and environmental challenges.
The effect of global crises on socially orientated businesses does show that big crises unleash not the criminal in society but rather more altruistic initiatives.
In spite of the aggravating socioeconomic challenges caused by Covid-19, a phenomenon is emerging where, contrary to the decline in commercial investments during the pandemic, there is an increase in the number of impact investments employed towards social entrepreneurial ventures, says a report by the Oxford Business Group in 2020.
The impact investment market is estimated to be worth $715bn, with 1,720 impact investor fund managers by 2019, says the Global Impact Investing Network. The rise in the level of impact investing is attributed to impact investors who are proactively pursuing efforts to support venture investees, to ensure these enterprises recover, grow in impact and financial performance, and become sustainable after Covid-19.
Affect investing termed “investing with purpose” because of its pursuit for positive social change that is not driven through philanthropy, has the potential to improve the quality of life and make social progress.
The impact investing ecosystem in Africa has been criticised for being fragmented and underdeveloped, as a consequence limiting the prospects to connect investors with potential investees. A report by the UN Development Programme on impact investing in Africa shows how poor linkages between sustainable social enterprises, entrepreneurs, investors and innovation networks inhibits impact investing in Africa.
These “poor linkages” also indicate that many social enterprises in Africa are not affiliated to professional associations and are not connected to formal impact investing networks. To remedy such weaknesses there has been a deliberate shift in the proportion of impact investing channelled to African and emerging countries.
Research shows SA attracts the largest combined pool of local and international impact capital (investments) in the Sub-Saharan African region, while East Africa is the other magnet for impact investing activity in Africa.
Not surprisingly most of the impact investing capital originates from developed economies such as the UK, other European countries, the US, Canada and Oceania, which is mainly sourced from family foundations, high net-wealth individuals, development banks and charitable organisations that are the leading investors.
Many African countries rely extensively on foreign aid to address societal challenges. A reliance (albeit declining) on aid has led governments to reduce their spending allocation on the delivery of social relief programmes. This creates an opportunity for African governments to attract alternate sources of investment to finance socioeconomic challenges such as impact investing.
However, there are not enough investment-ready opportunities (in Africa, even internationally), to meet the investors’ requirements. According to the Global Impact Investing Network, small and/or new social enterprises fail to demonstrate healthy financial track records, realistic projections and strategies to scale. As a result, standard impact investments tend to be overlooked, which is disappointing since without support early-stage enterprises cannot achieve the level of growth needed to attract investors.
The competitive pressures that drive innovation in commercial markets are often missing in the social field, and the absence of institutions and funds devoted to social innovation means too often it is a matter of luck whether ideas come to realisation. As a result, many “wicked social ills” remain more acute than they need to be.
Governments and corporates must recognise the need for specialist social business support organisations and enterprise development initiatives that directly address impact investing requirements and standards. For instance, investment advisers in Germany provide incubation, together with business support services and financial advice, to ensure the investment readiness of innovative social enterprises.
In Africa there is a need to develop strong networks between various ecosystem actors (academic institutions, industry sector clusters, government and corporates) to nurture the capabilities of enterprises and match interested funders with investment-seeking entrepreneurs. A lack of such a network means there is no comprehensive database investors can use to identify vetted, investment-ready enterprises.
The growth of impact investing is attracting venture philanthropists to explore business models that have a funding repayment element, while stakeholder activism is putting business under pressure to be more responsive to societal needs rather than focusing solely on profits. Similarly, national governments are recognising the role of impact investing, as evident in the establishment of the Group of Eight, which developed a social impact investment task force with the aim of creating a vibrant global social impact investment market.
The Covid-19 pandemic has honed our focus on the need for public and private organisations to collaborate and adopt impact-orientated, innovative and unconventional approaches to alleviating suffering and achieving positive social impact. In SA, more effective impact investing through “innovation connectors” is urgently needed — the agents, entrepreneurs and institutions that link together people, ideas, money and power.
• Urban is a professor at the Wits Business School.