Until recently the idea of both investing in a grassroots project in the world’s poorest corners and hoping to turn a reasonable profit were seen as mutually exclusive. If you wanted to help you donated to charity. If you wanted to invest you looked for a more traditional opportunity.
Times have changed. Growing investor interest in philanthropic investing is being matched by increasing opportunities for profit.
By John Parkhouse and Dariush Yazdani
There are now mutually beneficial opportunities for both sides of a market whose size may reach $500bn (£323bn) within a decade, according to the Monitor Institute’s Investing for Social and Environmental Impact 2009. On one side of the market are institutions and investors that want to improve living and working conditions in the long-term while at the same time generating investment returns. On the other side of the market are cash-starved, developing world entrepreneurs and communities seeking investment for enterprises, enhanced infrastructure, utilities or services that promote sustainable growth.
Bridging the divide between both sides of the market through appropriate vehicles is the key to creating long-term opportunities for all.
Types of Investors
Two distinct groups of investors are active in this market, although it is important to note that significant crossover can occur, particularly with regard to philanthropy.
Private and institutional investors – Investors in the first category comprise private investors and commercial institutions. While they aim to make social and environmental improvements, they must also achieve investment returns in order to justify ongoing involvement – a crucial factor to satisfy if greater volumes of finance are to be unlocked.
Government Financed Organizations - The second category of investors, being governments, intergovernmental organisations, development finance institutions and civil society players, may give capital on very favourable terms, or forego commercial returns via donation or subsidy. They may also be more likely to have a ground-level understanding of projects through hands-on involvement.
Both categories of investors are crucial to the ‘third sphere’ of impact investing. Each party can complement the other in terms of expertise and focus as they typically represent different disciplines. For example, one group will bring vital social and cultural knowledge, while the other group will bring financial acumen. The guiding principle for both is that the projects invested in be enriching in a societal context – not just profitable in financial terms.
Examples of impact investing are incredibly diverse, but can be broken down into a number of broad areas, including reducing poverty and hunger, improving health, greater education and environmental sustainability. Projects may, in fact, touch on more than one of these areas at the same time.
Within poverty alleviation, microfinance (including microcredit and microinsurance) is one of the most widely recognised and successful investment types. Access to loans, savings and insurance products can enable an impoverished population to smooth consumption, build assets, develop enterprises and manage financial risks. The success of microfinance is due, in part, to the nature of the business model, which provides clear investment opportunities with quantifiable returns.
In health and education, the barriers to impact investing are higher. In health, the volatility of funding flows between donors and recipients affects bargaining power and cash management (for example inefficient order sizes), however this has not prevented financial institutions from developing innovative solutions for financing healthcare programmes on the ground. Similarly, education lacks a strong multilateral framework. Yet progress is being made via microbusinesses offering low-cost education materials such as textbooks, computers and teaching aids.
Environmental sustainability covers a wide spectrum of projects ranging from areas as diverse as agriculture, carbon trading, energy efficiency and many others. In one example of the latter, a public-private partnership agreed to create a fund that would finance energy efficiency projects in the western Balkans and Turkey, mostly by expanding and strengthening the provision of loans through local financial institutions. Investors into the fund can purchase notes at varying levels of risk and return.
The opportunities involved in third sphere investing are substantial. Viable economic returns are possible for investors, while the overall impact of the investment contributes to a value chain that allows for new and profitable investments later on. As communities develop and become prosperous, so too do the possibilities for further investment.
John Parkhouse and Dariush Yazdani are based at at PricewaterhouseCoopers in Luxembourg
|This article appeared originally as: News analysis: Impact investing is the new philanthropy – FTAdviser.com|