Impact Investing – a catalyst for SA’s growth
At the dawn of the new decade, the outbreak of COVID-19 has, amid existing challenges, brought about severe economic challenges for most countries around the world.
SA is no exception and the circumstances have forced us to rethink our investment landscape and to identify ways to unlock opportunities that support reliable and sustainable growth in SA.
Although investing for impact is not a new concept or investment strategy, the benefits and intended outcomes are now more critical than ever to SA’s current economic situation.
What makes impact investing different?
The rise of impact investing comes in response to the more traditional one-dimensional search for the highest return. Instead, the impact investor considers the tangible impact of investments on the environment and society while seeking financial outcomes. As a result, large global pension funds and foundations, such as Ford Foundation in the USA, now commit a portion of their investment to “impact investing”.
The concept to impact investing has grown significantly in the last decade, leading investors to realise that there is no such thing as a neutral investment. It goes beyond considering environment, social and governance (ESG) factors to unlock opportunities and identify investment risks. Impact investors acknowledge that each transaction has an impact, positive or negative. Therefore, they seek investments in products and services that purposefully drive a change to society and our environment. The goals and measurement of such changes are critical to evaluate investment returns.
The 17 United Nations Sustainable Development Goals, or SDGs, ranging from poverty alleviation, zero hunger, climate change and inequality, to environmental degradation, provide a globally recognised blueprint for measurement.
SA, along with many nations, has committed to achieving these SDGs as part of its National Development Plan (NDP) with specific targets identified for 2030. Impact investing allows the private sector to support government in achieving these targets. As such, impact investing allows those who take up this opportunity to play a more purposeful role in shaping SA’s future, while elevating the standing of the entire financial sector.
Why is impact investing so relevant to SA?
SA’s economic woes are not new. The COVID-19 pandemic has simply exposed and amplified existing economic vulnerabilities, placing more pressure on government to raise funding, and thereby increasing their already heavy debt burden. The country’s budget deficit is expected to widen to a considerable -14.6% of GDP in 2020/21. Furthermore, National Treasury has revised SA’s growth estimates to -7.2% in 2020, 2.6% in 2021 and 1.5% in 2023.
The South African government will need to hasten sorely needed structural reforms to address the many challenges. It will also need to find solutions to raise and drive funding to support economic growth and prosperity. This is a significant task for government to achieve alone. How can impact investing help support economic growth and prosperity?
For long-term investors, there is a growing recognition that further investments into traditional asset classes, whilst potentially serving as a tool for wealth preservation, will not be enough to contribute to solving SA’s socio-economic problems.
Deploying capital into equity and debt structures may support companies that contribute to creating jobs and stimulating economic activity. While these efforts are important, they must also be supported by strategic capital deployment into projects that will have a catalytic effect on development and the creation of a competitive enabling environment. Without this, the capital deployed through traditional channels will take time and require significant scale to affect the real economy.
To secure a future that will do justice to our wealth creation efforts, it is therefore not enough to pour investment into the symptomatic effects of imbalanced societies, but emphasis must be placed on filling gaps in market ecosystems and value chains.
Examples of the impact investing initiatives that have the potential to act as change catalysts inSouth Africa include:
- Inclusive and quality healthcare
- An effective education system
- Access to financial services for previously marginalised communities
- Access to affordable housing
- A cleaner and more stable supply of energy
- Leveraging funding and expertise
The private sector has the funding and expertise to develop, manage and deliver projects that can alleviate SA’s most pressing challenges. And, to its credit, the government is now engaging with the private sector to bring impact investing opportunities to life. SA’s Public Investment Corporation (PIC) is spearheading impact investing in Africa.
To quote the Chair of Impact Investing SA, Mr Elias Masilela; “The impact investing movement is mindful that governments around the world have failed to make meaningful progress around SDG issues. This is particularly the case with the National Development Plan (NDP) in SA.” He goes on to state that the need, not only for public-private partnership but also for leadership, is at the heart of the movement.
In our engagements with relevant government forums, there are indications suggesting that there is definite positive momentum for government to work more closely with the private sector and seeing these various initiatives come to fruition. The result is that significant investment opportunities are opening up for investors, across both equity and debt asset classes.
An investee perspective
Small to Medium Enterprises (SMEs) and the informal sector in SA play a significant role in economic activity, job creation and growth. A study conducted by the Small Enterprise Development Agency suggests that the SME contribution to economy-wide employment stands at 66% and Stats SA pegs the SME contribution to total turnover in the country at approximately 39%. This business sector therefore represents an important example of an investee perspective that would benefit from impact investing.
While playing an important role in supporting and sustaining the economy, large corporates, including the banks, are unlikely to drive the required growth impetus. The pandemic has forced these entities to shift their focus to preserving their bottom line through cost curtailment efforts, and in doing so, they are exacerbating the country’s unemployment problems. With business confidence at an all-time low and businesses adopting a conservation mentality, new initiatives and investment in innovation are being stifled. Add to this a lack of financial and other support into the SME and informal sectors, the problems of growing unemployment and low growth will compound.
Where impact investing could bridge the gap, is by unlocking and placing capital that will naturally support fund flows to these smaller enterprises as investment objectives align to the business purpose and growth strategy. A policy environment that supports and stimulates small business growth will further ignite the potential.
By allocating capital to investments that provide more than just returns, South African investors can play a meaningful role in alleviating the host of damaging socio-economic challenges our country currently faces. Advisers and capital allocators who choose to invest with impact could, through their actions, take an active role in changing the course of our shared future. As the Case Foundation says; “A growing number of investors are making the case that ‘impact’ may represent a fundamental insight that the rest of the market doesn’t yet fully value, raising the possibility of market-beating returns. These investors reject the trade-off between social impact and financial return – rather than seeing returns or impact, they see returns from impact.”