Impact investing: is doing well the new doing good?

Impact investing is on the rise across Africa, but the sector is yet to prove its mainstream viability.


From the interest-bearing clay tablet loans traded in ancient Mesopotamia to the corporate bonds issued by the 17th century Dutch East India Company, historians have long struggled to pin down the world’s first stock exchange. But academics broadly agree on at least one point – the trading floor has always been synonymous with the accumulation of capital and the spread of commerce.

For one African bourse, that definition may need stretching. African Exchange Holdings, a firm which established its first outpost in Kigali, has set itself a loftier goal – ensuring food security in swathes of the continent by providing farmers with a ready market for their goods. Commodities and derivatives – long the buzzwords of speculative traders – are now the talk of philanthropists. 

Backed by the charitable foundation of Nigerian banking billionaire Tony Elumelu, the firm stands as a prime example of how ‘impact investing’ – the practice of investing for a measurable social or environmental gain – is fast altering Africa’s business landscape and attracting the endorsement of the continent’s biggest business personalities.

A new survey by the University of Cape Town’s Bertha Centre for Social Innovation and Entrepreneurship found that 47% of $721bn in assets surveyed in South Africa, Kenya and Nigeria have been specifically earmarked for positive impact. According to the United Nations Development Programme, some $8bn had been invested in African projects by November 2014. Meanwhile, some of the world’s largest companies have shown an increasing interest in joining global development efforts. The likes of Unilever chief executive Paul Polman – who was a member of Ban Ki-moon’s high-level advisory panel on the post-2015 agenda – have been particularly vocal in pushing for business involvement.

Since the phrase ‘impact investing’ was coined by the Rockefeller Foundation in 2007, dozens of firms have sprung up around the world, eager to assure clients that they can have it all – an alluring mix of financial reward and the satisfaction of knowing that they’ve made a difference. That goal was pithily summed up by a recent Bloomberg headline exhorting readers to “Save the world, turn a profit”. 

As Africa moves away from an aid-dependent economic model to a tighter embrace of capitalism, impact investing appears to have captured the zeitgeist. But while projects compete aggressively for new funds, a debate has begun about what, if any, long-term effects their investments are having on Africa’s development, and whether the practice is a vanity project for wealthy investors or a new path to mutual prosperity.   

“The discourse of sustainability is to say that you can have it all,” says Stephanie Giamporcaro, research director at UCT’s Graduate School of Business. “That’s the thing that a lot of people believe in. But at the same time, it’s easier said than done”.


The relationship between business and philanthropy is hardly new. From John D. Rockefeller to Bill Gates, high-net-worth individuals have long ploughed their earnings into favoured social projects and personal foundations. Yet until the new millennium, philanthropic activity was largely seen as a by-product of business success, rather than an integral driver behind it. 

According to the United Nations Development Programme (UNDP), that mindset has finally begun to change, with the global financial crises of 2001 and 2007 being major turning points. Those seismic events led to public and regulatory pressure on corporations to increase accountability and set environmental and social objectives, according to the UNDP’s Impact Investing in Africa report.

The new-found importance of incorporating responsible practices into business decisions was highlighted in November when Trafigura – the international commodities trading firm which gained infamy after a 2006 toxic waste dump in Côte d’Ivoire – released its first ever responsibility report. In the report, chief executive Jeremy Weir explained why it is essential for the business to pay greater attention to its social and environmental footprint. 

“We know we have to earn and maintain a social licence to operate in the many countries and communities where we are active. This is more than ever a fact of corporate life, with media focusing on corporate reputation crises and governments, regulators and civil society subjecting business to ever closer and more critical scrutiny,” he wrote.

Stephanie Giamporcaro, who has spent years studying how businesses relate to sustainable practices, says that this ambition to do no harm – particularly prevalent among a younger generation of business leaders – is beginning to inform investment decisions.

“There is a rising awareness that you need to invest money for social good. This happened because of reputational damage – we had the financial crisis scandals, and incidents like Marikana [on 16th August 2012, 34 striking miners were killed by South African security forces amid protests in the northwestern town of Marikana]. Investors know their reputation is not always the best one, and they don’t want to be the bad guys, especially the younger generation.”

But it is not only businesses which have reassessed their approach to development. Much of the donor community has acknowledged that economic growth, rather than aid dollars, has lifted millions out of poverty, leading to a greater willingness to work alongside business to achieve mutually beneficial outcomes. That new openness was illustrated by the adoption of the UN Global Goals – successor to the business-free Millennium Development Goals – during last September’s UN General Assembly meeting. These goals specifically call for a focus on employment, economic growth and industrial expansion.

Yet if there is new consensus between businesses and donors, there is far less agreement on how this should happen – and whether investors can achieve real impact at the same time as strengthening their bottom line.


Profits vs Impact

For Kevin Starr, managing director at the Mulago Foundation, a US-based “impact-first” investor, industry conferences are a chance to discuss projects, make contacts and catch the latest news. But what he heard at a recent lunch confirmed a long-held belief – some impact investors are complacent about their model. 

“I was recently at a lunch led by a prominent impact investor. Someone blithely said the conflict between impact first and profit is over – they declared this fundamental issue irrelevant. I thought that was tidy but simply not true.

“It was as if a fundamental debate that needs to be ongoing was just becoming too inconvenient,” he says. 

That tension between profit and impact gets to the heart of the debate over whether investors can “have it all”. For Starr, whose foundation targets investments on the basis of social impact, the ability to make significant profits at the same time as achieving maximum social gain remains more of a myth than reality.

“What is the jackpot? It’s when maximum profit lines up with profound impact. In the world where we operate, we find that doesn’t happen very often, and if it did, we wouldn’t really have any need for this thing called impact investing lying in the grey zone between maximum impact philanthropy and maximum profit investing,” he says.

Starr argues that investors typically shun the sort of projects that Mulago is interested in due to their low potential for financial returns. Yet many investors appear to be persuaded that economic returns are compatible with social impact. Annual research conducted by the Global Impact Investing Network (GIIN) finds that 55-60% of impact investors attempt to achieve market rates of return, while around 40% are content to achieve less. Abhilash Mudaliar, research manager at the GIIN, says that there is a range of approaches in the market for firms operating under the impact investment banner.

“We notice that with large commercial-driven investors, impact investing is seen as an approach that can achieve financial returns and an impact. There are other players for whom impact investing will deliver less than commercial returns.”

Mudaliar said that recent research conducted by the GIIN found that private equity firms in the impact investing space achieved market returns comparable with buyout firms operating without a social or environmental mandate. Nevertheless, for many commercial investors, the risks of investing in the impact space remain high. A recent report from British bank Barclays found that wealthy individuals preferred to give money to philanthropic causes alongside traditional investments, with many finding impact investing too complex.

James Mwangi, executive director at Africa-focused advisory firm Dalberg, says that this attitude may be turning investors off interesting opportunities.

“Increasingly advancing the needs of society and the environment is just good business. The fastest-growing firms across the African continent are in renewable energy, inclusive financial services, and pro-poor technologies. … Often the assumption that serving social needs has to be at odds with profit blinds business leaders to real opportunities.”

Even if more businesses can be lured to the impact sector, Starr’s hypothesis – that maximum returns are not necessarily compatible with maximum impact – remains up for debate. In particular, there is widespread consensus that the industry must get much better at explaining itself.

Communication breakdown

When Cape Town’s Bertha Centre began the comprehensive task of reviewing Africa’s impact space, their researchers came up against a familiar brick wall – there is simply not enough data to evaluate the overall social impact of many projects. Despite amassing evidence that firms are increasingly investing for good, the report found that only a handful of industry leaders are able to demonstrate that they do it consistently well.

For lead researcher Stephanie Giamporcaro, a full assessment of the sector will require far more transparency. “Are they doing what they claim? To know that, there aren’t many things you can do except track and try and understand their practices. It’s a complicated exercise which takes a lot of time – you need to compare the data.”

Sachindra Rudra, chief investment officer of US-based venture fund Acumen, agrees that the wider industry has been unsuccessful in making its case. He argues that investors tend to look at broad indicators, such as the total number of lives impacted by projects, without really getting down to the granular detail of exactly who benefits.

“At this point we must articulate what are the key metrics and then work with experts in the field or internally. … Frankly speaking, the whole sector has kind of stopped or got stuck on the number of lives impacted. And nobody’s really doing much on poverty focus or depth. My hypothesis is that you would quickly come up against a wall in terms of aggregating data for the whole sector,” he says.

Without a more rigorous approach to assessing the impact of their projects, well-intentioned investors could find themselves accused of “greenwashing” – the strategy of making erroneous or inflated environmental and social claims to burnish their reputations.

With impact investing showing every sign of playing a key role in Africa’s future – a JPMorgan Chase survey of investors found that they intend to deploy 16% more into the global impact sector this year – securing a compromise between acceptable returns and measurable impact will be essential if the practice is to forge a lasting legacy. The sector will likely be the key battleground in the argument over whether doing well financially is compatible with achieving social good.

Given Africa’s uneasy relationship with capitalism, rooted in the abuses of the colonial period, the outcome of that debate could shape the views of many towards the economic growth story unfolding on the continent. If businesses are not seen to serve the majority or leave a legacy beyond profit extraction, billions could turn away from the principles of open markets upon which Africa’s latest economic renaissance relies. For UCT’s Giamporcaro, all stakeholders will have to play their part if Africa’s growth is to benefit more than the usual gilded elite.

“Everybody needs to do his job, but being honest about what we can do – it’s framed by what the investment industry can give us. We’re still in a place where they’re saying they can do it but we cannot know. Maybe 5-10% are doing something very interesting but for the rest it’s on the surface, it’s in the marketing discourse. How do we change that together, and do they really want to?”

Acumen’s Rudra agrees that the time has come for the industry to step up to the plate.

“We need to become better at being able to articulate what it is we are delivering both on the financial and impact side. We are absolutely in the window where we have the experience which is sufficient to start talking in a concrete way about where we are coming from, what we’ve learned, and what is the path forwards.”        

David Thomas

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