- May 6, 2019
- Posted by: CSR-in-Action
- Category: Insights
What can you do to get a million dollars if you want to solve a social or environmental problem in Nigeria? Well, this article outlines ways to make this happen!
Impact investing (II) is investment made into companies, organisations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Impact investment combines both traditional investment and philanthropy and provides capital to address social and/or environmental issues. Impact investing can be made in either emerging or developed markets, and depending on the goals of the investors, can target a range of returns from below-market to above-market rates.
Impact Investing provides capital to entrepreneurs or enterprises with a positive societal impact and make these businesses accountable to shareholders. What’s more attractive is that investors also receive returns from their investments and investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income.
Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.
Lately, investors have recognised the need to avoid negative effects to society and the environment and follow international norms and principles designed to address #ESG risks. Some investors avoid investments in specific industries that they see as causing harm—for example, tobacco and gambling. Impact investing goes well beyond avoiding harm and managing ESG risks. It aims to harness the power of investing to do good for society by choosing and managing investments to generate positive impact while also avoiding harm.
In today’s capital markets, there is a broad universe of investors who seek to do good or avoid harm. These range from those who negatively screen for ESG risks, to those that actively seek ESG opportunities, to those who seek positive social, economic, and environmental impacts across their portfolios.
Impact investors actively seek to place capital in businesses, non-profits, and funds in industries such as renewable energy, basic services including housing, healthcare, and education, micro-finance, and sustainable agriculture.
Benefits of Impact Investing
Both companies and investors benefit from committing to socially and environmentally responsible. A 2018 study by the Global Impact Investing Network (GIIN) found that over 90% of impact investors reported that their investments were meeting or surpassing their projections. As more people realise the social and financial benefits of impact investing, more companies will engage in social responsibility. There is also now empirical practical evidence built over the last 10 years that shows impact investment funds returning double digits and above comparable portfolios.
The difference between Socially Responsible Investment (SRI), a well-defined framework for choosing investments based on ESG, and Impact Investing is that impact investors are far more proactive in their intention for positive impact as opposed to merely avoiding the negative impacts. Hence, it is not surprising that the world’s biggest problems, such as humanitarian crises of refugees, alleviating poverty, mitigating the impact from climate change-induced extreme weather events, addressing ocean plastics, renewable energy, improving healthcare and education or sustainable agriculture are now attracting impact investments.
Impact Investing in Nigeria
One unique feature that amplifies the potential of Impact Investing in Nigeria is the massive supply of SMEs who are significant contributors to economic growth and development. Nigerian entrepreneurs are becoming aware of social and environmental challenges, and innovating ways to tackle them. Examples include LifeBank, which helps hospitals source blood and medical products, Wecyclers – a company which uses cargo bikes to help Lagosians earn money by recycling and the popular Andela, which seeks to find “genius-level” software developers who then work remotely for US and European companies and create the chance to generate thousands of jobs in Nigeria.
According to GIIN 2015 report, impact investments in Nigeria amounted to $1.9 billion with a recorded 181 deals, making Nigeria the largest recipient of impact investments in West Africa. Each deal had an average value of $1-5 million with an expected return of 13% to 17%. Agriculture, Technology and Financial Services were the biggest recipients of investments.
Although the impact investing sector in Nigeria outpaces other countries in the region, the community of investors is still small relative to the size of the market. Ethiopia, for example, is less than a quarter the size of Nigeria in terms of GDP but has almost triple (58) the number of non-Development Finance Institution’s impact investors.
This is therefore a call on Nigerian entrepreneurs, particularly the youths to identify social and environmental problems and proffer innovative solutions to these problems in order to make maximum impact and create shared value.