The ‘why’ behind Impact Investing
‘The world must wake up’. Those are the words of the UN’s secretary general António Guterres sounding the alarm to the rising global inequalities that have ‘super-sized’ in the face of the COVID-19 pandemic. His wakeup call makes clear that we are not on track to achieving the UN’s Sustainable Development Goals by 2030 and that perhaps it is time to rethink our approach to tackling these global issues.
Civil society and governments recognise that their combined philanthropic and political actions are no match for the world’s social, economic, and environmental challenges. Steps for greater collaboration with the private sector need to be taken. Why? Because their wide-sweeping financial and non-financial resources place them in the unique position to deploy the capital that has the capacity to accelerate sustainable development.
The current levels of investment required to realize the SDGs by 2030 fall short by US$2.5 trillion. According to the United Nations Conference on Trade and Development (UNCTAD), the private sector has the potential to bridge this gap by $0.9 to $1.8 trillion. It’s evident that the private sector has an economic might like no other. If the sector were to mobilise their innovative capacities to source finance, they would be able to provide solutions at scale that could complement the crucially valuable work of the third and public sector.
‘Do well to do good’
Tapping into private finance may seem essential for narrowing the inequality gap, but if we are to advocate for a holistic cross-sector approach, then it’s only fair that we take a holistic view. While the current consensus is that corporations should focus on becoming purpose, instead of profit driven, there is an inversion to this. Corporations still need to see financial success in order to utilise their resources for social and environmental good in the first place. While businesses desire to ‘do good’, they also need to be ‘doing well’. So how exactly can corporations make a big dent without economic hinderance? This is where impact investing comes in.
A double bottom-line return
GIIN defines impact investing as ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.’ Think of it as a combination of traditional philanthropy with the rigorous analytics of traditional investment. Corporations align investment capital with projects or organisations to create social and ecological progress alongside financial return. This compounding effect means that corporations are able to utilise their expertise for social and economic vitality without financial loss - a somewhat regenerative form of capitalism if you like.
Still, private sector investors often demand attractive rates of return for given levels of risk, and channelling funds into projects in developing economies -where SDG financing is most needed - does not make for a compelling business case. So from the perspective of corporations, why do it? In their 2021 edition Investing for Global Impact, Barclays found impact investment to have been resilient in the face of market volatility during the pandemic. 60% of respondents reported deliveries of solid financial returns, while nearly 20% reported that their expectations were surpassed. HSBC also reported that 51% of their issuers and investors saw improved returns and lower risks in their sustainable investments. Impact investment breaks down the traditional thought process that views development financing as a dilution of returns. What this proves is that when done right, it has the potential to unlock substantial for-profit investment capital for the private sector.
It’s also worth remembering what the private sector would have to gain in an increasingly developed world. According to the UN department of Economic and Social Affairs (UNDESA), achieving the SDGs would open up market opportunities worth USD 12 trillion in several major economic areas. Economic Insight also found that a 1% increase in research and development expenditure could lead to a 0.68% increase in private expenditure. This makes for a strong business rationale for engaging in this form of investment. Channelling funds into research and development could unlock unexplored markets, providing the private sector with a greater competitive advantage and opportunities for growth.
It’s not worth keeping the private sector on the bench any longer. We all have power in our different roles. For corporations, who are repeatedly heralded as a prime catalyst for development, their involvement could be a force for good at scale. Impact investing could be the key to becoming that third pillar of social change, while still supporting and driving their own economic agenda. It’s important to pave the way for greater private sector participation, because as the world continues to face a cascade of crises ahead of us, we need all hands on deck. And only with the concerted, collaborative effort of all stakeholders, can the integrity of our social, economic, and environmental ecosystems be protected.
Katherine Page
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