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Impact investing: Businesses with an impact mindset are more likely to be successful in the long term

In a world where there is a known need for - and sufficient opportunity to - invest for positive change, heightened uncertainty and increased risks often hinder these efforts. Investors are thus seeking innovative ways to achieve sufficiently attractive risk-adjusted returns, while simultaneously contributing to a positive change within the economy.

What we are witnessing is increased investors’ awareness of the benefits of contributing positively to economic development, and as such the momentum behind investments that have a positive impact in both financial and economic systems is rapidly building. 

While in the past investing typically prioritised making a profit, the COVID-19 pandemic has accelerated the tangible global shift toward impact investing and sustainability. The magnitude of economic uncertainty, mounting social and environmental challenges, specifically growing inequality, has brought the need to adapt thinking patterns and contribute positively to the forefront of investment decision making. This has not only impressed on the private sector the need to share the responsibility for surmounting these challenges with the government, but has also encouraged investors to be catalysts for change through impact investing. 

What is impact investing and how does it work? 

Impact investing is financial investing targeted at generating positive and measurable social and environmental impact, alongside financial returns. It integrates Environmental, Social and Governance (ESG) factors and specific impact factors in its investment decisions and process alongside the traditional financial assessments. This contrasts with ESG investing, which is an investment approach that incorporates ESG factors into decisions throughout the investment life cycle. The key differentiator with impact investments is the active intent to generate a positive impact, be it specific or general in nature. According to the IFC’s principles for Impact Management, there are three key criteria to be considered for an “impact investment”. 

1.Intended impact: The investor is required to articulate specific outcomes that will have to be met throughout the life of the investment, and will have to specify the beneficiaries thereof.

2.Contribution to impact: the investor is required to demonstrate how the investment will assist in achieving the intended outcomes specified in point 1 above. These can either be in financial or non-financial terms.

3.Measuring impact: the investor is required to demonstrate that both the intended outcomes and contribution to actual improvements across the factors stated can be measured.

Impact investors can be commercial investors, fund managers, foundations, government agencies or individuals; investors who  are now financing a diverse set of solutions to many social and environmental issues, some of which are listed below: 

  • Expanding access to critical basic services
  • Supporting environmental conservation
  • Driving the transition to renewable energy
  • Poverty
  • Education disparity
  • Climate change and
  • Job creation or wage inequality.

Why get involved

The essence of impact investing is putting your principal where your principles lie. Thus, investors are increasingly channelling finance towards shared goals for creating a better world. The growth in impact investing is also a result of investors’ increased understanding that there is no binary divide between investing ‘for profit’ and ‘impact investing’. According to a 2017 investor survey by Schroders, 81% of South African (SA) investors reported that sustainable investment is of growing importance to them in recent years. This is significant given the understanding of the contribution that investing through an ‘impact investing’ lens can make in addressing local and international socio-economic challenges. 

The Sustainable Development Goals (SDGs), along with the National Development Plan (NDP) adopted by the South African government, calls for private capital to help overcome these social and environmental challenges by 2030. Some of the primary trends noted within these are climate change, economic inequality, gender disparity, and racial injustice. 

Research shows that there is a $2.5 trillion annual funding gap that stands in the way of achieving these SDGs globally. The pandemic has disrupted many lives and economies, making it difficult to achieve the SDGs, particularly when governments have been required to shift resources and take on new levels of debt to deal with the threats of the COVID-19 pandemic, including the exacerbation of inequalities

In light of the above, it is a known fact that SA in particular is considered as one of the most unequal nations worldwide. Elias Masilela, chairman of Impact Investing South Africa (IISA), has noted that the interest in impact investing in South Africa is being fuelled by growing socio-economic imbalances, poor economic growth, high rates of unemployment, deepening poverty and gaping inequalities. Thus, impact investing would play a critical role in addressing key challenges facing the nation, particularly through partnerships between public, private and donor funders.

Not only will impact investing assist in addressing these challenges, but there is also increasing evidence that investing in businesses with an ‘impact-mindset’ are more successful over the long term.  For example, businesses that are envisioning a net-zero future to combat climate issues are proactively transitioning to a low-carbon footprint and reducing their energy costs. Businesses whose boards constitute of truly independent and diverse members, both racially and gender, are believed to make better risk-management decisions and allocate capital more efficiently. Thus, impact investing can earn a risk-adjusted return, while also allocating capital that leads to transformations of legacy businesses and the creation of remarkable societal benefits.

As a fiduciary asset manager, Prescient’s approach is to invest in assets and projects that are likely to have a positive impact, without compromising returns. Our systematic investment process is premised on conducting thorough due diligence, investing with care, considering the impact our investments will have and partnering with all the stakeholders involved. 

Seeking to be a catalyst for positive change, Prescient has invested in an exciting opportunity via Africa Direct Edubond, whose primary goal is to bring about positive change in the unsecured lending market. With research indicating that there are approximately 65 000 government employees who are homeowners but have unsustainably high levels of unsecured lending, it has established a unique debt restructuring model that addresses the indebtedness of these individuals through the consolidation of secured and unsecured credit agreements into a single mortgage-backed facility. 

In doing so, the initiative has been able to financially rehabilitate borrowers and alleviate the financial burden of paying high-interest rates that cripple the self-worth of the individual and the family. The programme seeks to educate borrowers over 12-18 months through Edvance, Bond Optimiser’s inhouse financial literacy program, with the aim of facilitating positive, long-term shifts in financial behaviours. 

In 2015, we also launched the Prescient Clean Energy and Infrastructure Debt Fund, a Socially Responsible Investment Vehicle. The Fund focuses on investments that have positive infrastructural, environmental, and socio-economic impacts and development within Southern Africa. To date, investments have focused on clean energy-focused projects, with the fund’s most recent asset supporting South Africa’s water needs. Investments in this Fund have all had a positive social and environmental impact, which include improved infrastructure, job creation, environmental benefits, housing, access to basic services, water and improved healthcare.  

Given our track-record and active role in the infrastructure ecosystem, we believe that we will be able to make a meaningful contribution to the economic development of SA, without compromising client returns. In line with our impact ethos, we are launching our second fund, which we believe will have a further positive impact locally.  DM/BM

This article was written by Michelle Green – Credit Analyst at Prescient Investment Management

Disclaimer

  • Prescient Investment Management (Pty) Ltd is an authorised financial services provider (FSP 612).
  • The value of investments may go up as well as down and past performance is not necessarily a guide to future performance.
  • There are risks involved in buying or selling a financial product.
  • This document is for information purposes only and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions expressed in this document may be changed without notice at any time after publication. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information.
  • Prescient Investment Management (Pty) Ltd is an authorised financial services provider (FSP 612).
  • The value of investments may go up as well as down and past performance is not necessarily a guide to future performance and there are no guarantees.
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