IMPACT INVESTING: Why should financial institutions consider investing in impact?

IMPACT INVESTING: Why should financial institutions consider investing in impact?

 22 August, 2021

By Janet Mulu

Impact Investing is gaining acceptance as an investment strategy that targets companies or industries that produce social or environmental benefits in addition to financial returns. With its focus, impact investing can eradicate poverty, wipe out hunger and attain food security, expand access to quality healthcare and education, achieve gender equality, ensure justice while promoting peace and creating a healthier planet. However, despite a handful of impact funds being deployed in Africa, there is still huge disparities and financing gap in Africa, mostly affecting Small and Growing Businesses (SGB’s) and the SME’s indicating systematic issues. These gaps could potentially be eradicated if impact investing is fully adopted as an investment strategy.

Why should Financial institutions consider investing in impact?

Impact investing is defined by Global Impact Investment Network(GIIN) as investments made with the intention to generate positive, measured social/environmental impact alongside a financial return. The impact investing movement which started in the early 2000’s has picked up momentum with the global impact investing market estimated at $ 715 Billion . Though much has been achieved through Impact investing, it is still at its nascent stage in Africa presenting opportunities.

One of the major benefits that come with incorporating impact investing as an asset class includes channelling funds where they are truly making an impact; matching investments to projects led by business owners who understand the real problems faced on the ground. In the end, it’s a win-win situation. Besides, the pandemic has highlighted the need for increased urgency in providing an enabling environment for financiers to catalyze strategic flows of impact investment capital in order to contribute towards addressing the major social and economic consequences as a result of the Covid19 pandemic.

Impact investing can be a tool towards closing the huge financing gap in Africa while focusing on businesses with projects that have the potential to deliver high impact to their environs and communities and Founder that are aligned with the  United Nations Sustainable Development Goals(SDG’s) and the government’s medium to long term plans and vision. To address the disparities faced by women, especially socio-cultural hurdles in access to credit and related widening ‘gender relate gaps’, Gender-lens investing strategies which integrate gender analysis into investment analysis and decision-making should be adopted. Financial institutions can also be a catalyst in reducing the damage to the planet  that has been caused by global warming and climate change effects by applying  key climate solutions

Copy of windmills field
Windmills on the field. Alternative ecological energy.

Three reasons why impact investing is not yet fully adopted as an investment strategy in Africa

  1. Despite the growth , the notion that impact investing is a trade-off  between financial returns and social/ environmental returns still persist and various studies have made efforts to demystify this trade-off myth  Furthermore, the perception that only equity portfolios can benefit by being tilted towards impact has been proved otherwise, with the use of debt instruments emerging as The Surprising Leader in the Impact Investing Boom.
  2. Previous reports have highlighted the some of the constraints and challenges of  Impact Investing in Africa  such as difficulty sourcing viable investments, poor and inconsistent impact measurement practices, limited innovative fund and deal structures. Thankfully , there are various actors such as ImpactDev AfricaThe Social Licence Platform (SLP) , AVPA  and Impactablex Analytics that are responding to these challenges and facilitating collaborative solutions to increase the uptake. With the growing support of ecosystem player, it is the right time for financiers to be part of the movement to reap potential benefits of impact  investment on the continent
  3. Impact investing is sometimes equated to Corporate Social Responsibility (CSR). While both may have much in common, there is a fundamental difference in relation with how they relate financial and benefit goals.CSR is a strategy to give back and do well towards chosen causes and is generally voluntary and not monitored whereas impact investing must demonstrate social/environment return as well as financial returns, a benefit that all impact deals must demonstrate. With clear understanding and effective implementation strategy, there is potential for growth of Impact investment, which will still remain as an important too to supplement and add to CSR Initiatives.

One of the major benefits that come with incorporating impact investment as an asset class includes channelling funds where they can truly make impact; matching investments to projects led by business owners who understand the real problems faced on the ground. In the end, it’s a win-win situation.

Janet Mulu

Its time to join the movement!

In general, there is a need for financial institutions to review their strategies not only for the sustainability of the enterprises and economies at large but also for the growth of their institutions as they accelerate impact-led recovery process; benefiting people and the planet.

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