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Impact investing can be a post-Covid economic catalyst

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Brett Wallington is the founder and CEO at Impact Capital Africa, an independent advisory firm that offers specialist advisory services in ESG and SDG impact investing to financial services providers.

South Africans will be paying careful attention to President Cyril Ramaphosa’s State of the Nation Address on Thursday. With more than 600,000 formal sector job losses already reported, there is huge interest in what can and should be done to reverse the economic downturn inflicted by Covid-19.

While we have seen sizeable economic stimulus packages introduced by governments in the developed world, the South African government faces severe fiscal constraints. The looming sovereign debt crisis, several credit rating downgrades and a shrinking tax base make spending our way out of this recession a fiscal impossibility. There is also a great deal of uncertainty around the procurement and roll-out of the Covid-19 vaccine, which means our economy could be in this holding pattern for longer than anticipated.

So, given these circumstances, it is time to think about what can be done now to give our economy a much-needed “immune-boosting” shot in the arm. And one solution for consideration must be the mobilisation of capital into profitable investments that also achieve positive and sustainable results for societies and the environment.

The growing global trend of “impact” or “ESG” (environmental, social and governance) investing achieves just this. An impact investment is designed to generate measurable positive social and/or environmental impacts alongside a financial return. This structure has seen investors using non-financial standards included in ESG criteria and the UN’s Sustainable Development Goals (SDGs) to guide their decision-making — a crucial paradigm shift needed to decouple economic growth with environmental and social degradation.

While it is a relatively new idea to most people, the impact investing field is growing exponentially. The period of 2012 to 2018 saw a 274% growth in impact assets under management in the United States, from $3.1-trillion to $11.6-trillion. Furthermore, the Covid-19 pandemic seems to have brought the need for more socially and environmentally conscious investment into sharper focus — in 2020 alone investors in mutual funds and ETFs (exchange-traded funds) invested $288-billion globally in sustainable assets, a 96% increase over the whole of 2019.

The heightened attention being given to impact investing is due to increased awareness of critical environmental degradation and social inequality, especially among millennials (those born between 1981 and 1996). While it is encouraging that the younger generation cares about making the world a better place, it helps that impact investments also make financial sense.

Impact investing by private investors — especially those aimed at social upliftment through job creation and investment in poor communities’ infrastructure such as schools and water supply — could be a serious force for change in South Africa. Although a nascent industry, some encouraging stories are emerging of how socially and environmentally conscious South African investors are directing capital towards high-impact projects with astounding results and financial returns. There is increasing evidence of impact investments outperforming those of the traditional investments.

Last week, Impact Capital Africa reported on the excellent +Impact SDG Investment Grading results (AA+, 82%) of the Mdluli Safari Lodge in the Kruger National Park. The lodge is a partnership between impact investors and the rural Mdluli community which, after being forcibly removed in the 1960s and gained freehold title of their land in 1998, agreed with private investors to develop a luxury tented safari lodge in the Kruger Park.

Many people from this rural community are benefiting from the lodge as 85% of the 64 staff are community members (and 61% are women). The project is also enabling investments into the community’s villages, including the upgrading of roads and building of schools and clinics. In addition to creating opportunities for vulnerable communities and significantly contributing to conservation in the Kruger Park, new investors in the Mdluli Safari Lodge can look forward to healthy financial returns, with this particular investment also being fully income tax-deductible under section 12J of the Income Tax Act.

Opportunities for impact investors abound in a wide range of sectors in South Africa, including education, agriculture, renewable energy and tourism. Indeed, the impact investing industry is showing significant growth and, increasingly, asset managers are seeking to add impact or ESG investments to their portfolios.

So what should the president do to harness the power of impact investment in South Africa and enable private and other institutional investors to contribute to rebuilding our economy post-Covid-19?

Given that impact investments create positive social and environmental returns, tax rebates for high-ESG-impact commercial activity and investment could be fiscally desirable, even when the balance sheet is strained. The success of some outcomes-based social impact bonds illustrates how such tax rebates could be efficiently structured to reduce risk on the government’s cash flow while incentivising impact investors to remain true to their purpose.

The State of the Nation Address on Thursday may well be an era-defining speech, and every South African will be looking to President Ramaphosa for solutions. We hope that the president takes stock of the role that impact investing could play in rebuilding the economy post Covid-19 — it may just be the shot in the arm our country needs. BM/DM

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  • Is there a difference between “impact investing” and passably-responsible, or not-measurably-damaging, investment?
    Reference to “a 274% growth in impact assets under management…” suggests that this is a clearly-defined category – requiring more than investors pledging to give consideration to ESG or “non-financial” criteria – yet no definition or benchmark is offered for the purpose of motivating tax concessions.
    The invidious flip-side of championing this latest bandwagon (basically an adaptive move by an ever-more self-serving financial sector) is that instead of recognising the principle of ‘do no harm’, as an expectation or requirement for all investments, it both presumes and normalises the sense of entitlement to inducements or concessions for avoiding doing harm, or for having a positive impact for anyone other than the investors.