Last week we took a deep dive into understanding the intricacies of the spectrum of capital, delivered by Professor Vanina Farber, that shed light onto social and financial innovation. The main takeaway being that both concessionary and non-concessionary investing can be complementary in making systematically optimal allocation decisions depending on the context and venture stage.
Coming into the class, my main question was, ‘Are impact investors guided by thematic preferences and if so, what are they?’ I quickly learned that the same way Sustainable Development Goals (SDGs) are integrated, indivisible and interlinked, when it comes to impact investors’ appetite, preferential themes for investors in both public and private markets depends on the enabling context of the markets and the risk-adjusted market returns.
Same storm, different boats: the difference between ESG investing and impact investing
ESG is usually applied in public market strategies and tracked as a means of improving investment performance. Impact investing is generally applied in private markets strategies that purposefully seek out investments providing measurable solutions to the world’s most pressing challenges. Therefore, different parties can navigate existing interdependencies within the ecosystem.
We also had the privilege of leveraging on Professor Vanina Farber’s social capital, through the thought leaders invited to speak from The elea Foundation, International Committee of the Red Cross (ICRC), Nordea, Lombard Odier, JBJ Consult and Triodos Bank. Admittedly, the tone of all the guest speakers was different given their mandate on the different sections of the spectrum, but a common underlying theme was evident. Collaboration and transparency, for better value.
Being realistic about impact measurement
Impact and responsible/sustainable finance investors are proactively forward looking guided by the plausibility of a theory of change. However, investors would need to overcome decision-making biases by purely observing the link their investments have on positive societal benefits especially when financial consequences such as ‘pay-for-success’ models are tired to achieving predefined metrics. Also, on outcomes versus outputs, a low correlation between an investment and investment outcome, is not necessarily a disqualifying factor.
Now, what about Covid-19, how can emerging markets respond with flexibility?
Drawing inspiration from my home countries of Kenya and South Africa, I would like to use the example of microfinance. The Kenya microcredit landscape has 18 players, with total of over 700k active borrowers and combined portfolio of about USD 440mn. With the new realities, the tone of social stakeholders, microfinance institutions, association, and banks needs to be aligned to support MFIs to ensure the continuity of services to vulnerable groups. How so? Through early identification, assessment of crisis recovery responses, exploring new ways of financing, and collaboration with regulators to ensure that effective relief measures are time bound and directed where impacts and risks are highest. Different stakeholders must have different responses in mobilizing resources.
So what is the mindset?
Firstly, the motivation by impact investors to achieve a positive social or environmental goal means they are socially motivated to first define the problem they would want to solve through using the right financial instruments, and this speaks to their intentionality. Without problems and desired impact there is no impact investing or sustainable finance.
Secondly, replicability, additionality, and scalability from the building blocks for reusing the results of R&D to reduce barriers for growth.
Finally, use impact/ responsible/ sustainable investing as tools within a toolbox, and not the toolbox itself, keeping in mind that framing the problem correctly is more important than having the right answer.