How to hack finance to create widespread social change
PRESS OFFICE: Bertha Centre
Last year was a monumental one for social change. Globally, the #MeToo and #BlackLivesMatter movements exploding into the mainstream, while #FeesMustFall reached new levels of awareness in South Africa.
These developments did not just change public consciousness. They impacted the way that investment committees and corporate board rooms think about the way that they allocate capital.
Financial markets have long been ruled by the imperative of profit maximisation. Shareholders typically demand the greatest financial return on their investment. However, there is a growing movement towards investment strategies that consider social and environmental impact alongside financial return that is more than likely influenced by the rise of critical conversations on social media around topics such as gender equality and access to education.
It’s not surprising that the movement towards more sustainable investing finds many of its strongest champions in the millennial generation. According to a recent study by Swell Invest, 76% of millennials believe business can be a force for positive social impact and 36% think improving society should be business’s primary purpose.
One part of this trend is responsible investing, which takes into account how companies rate on environmental, social and governance (ESG) issues. The focus here is on buying into companies that have sustainable policies and deliver a positive impact on the environment and their communities, while also having a corporate structure that’s fair to all stakeholders.
Globally, US$23tn is now allocated to funds committed to responsible investing. This has grown 25% since 2014 according to the Global Sustainable Investment Alliance. In addition, the global green bond market is estimated to reach $250bn-$300bn in 2018, up from $155bn in 2017.
Much of the draw of ESG investing is that it helps companies focus on fundamental measures of risk. Companies that are more cognisant of the impact that they have on society and the environment are more sustainable, better managed, and will eventually deliver higher returns to shareholders.
Taking this further, however, many investors believe that we need to look not just at reducing risk, but also produce tangible positive benefits. This is the emerging field of impact investing, which seeks to allocate capital into companies, organisations, and funds with the intention of generating a measurable, beneficial social or environmental impact alongside a financial return.
As more financial actors have realised that issues such as inequality and climate change pose huge risks to short, medium and long-term sustainability, they have identified the role that they can play in creating solutions. Impact investors, who are estimated to manage $224bn by the Global Impact Investing Network (although this number is likely to be under-reported), have started to rally around the United Nations Sustainable Development Goals. These provide a set of objectives for development that have broad global buy-in and can create a framework for capital allocation.
In the past 10 years this space has also seen the creation of new types of investment vehicles that embed impact into the allocation of capital, which have massive potential.
Recently, for example, we saw the launch of an innovative South African outcome-based financing mechanism that seeks to improve early childhood learning and development outcomes in the Western Cape. A collaboration between mothers2mothers (m2m), Volta Capital, and the Bertha Centre for Social Innovation and Entrepreneurship at the UCT Graduate School of Business with implementing partners the Western Cape Foundation for Community Work (FCW) and led by the Western Cape Department of Social Development (DSD), the Impact Bond Innovation Fund (IBIF) is the first Social Impact Bond focused on Early Childhood Development (ECD) to be launched in the Global South.
Another example would be the Green Outcomes Fund, which works similarly to an impact bond, but seeks to catalyse investments into small green businesses that contribute to social and environmental outcomes.
Other exciting innovative financing concepts include algorithmic based lending platforms for social enterprises, affordable housing/small enterprise rental solutions in townships, youth unemployment challenge fund for girls, impact funds for municipalities, stokvel aggregators that create credit scores and build investment portfolios, blended conservation funds that address poaching, blockchain enabled impact verification funds and much more.
All of these innovative approaches to financing impact bring together different types of capital and different stakeholders in new and innovative ways to align incentives for everyone involved. They use business model innovation, technology and multi-stakeholder partnerships to drive towards meaningful social and environmental impact, which can create meaningful returns (financial, social and environmental) to all stakeholders involved.
Although we are facing obstacles in the South African economy that can feel insurmountable, we need to recognise that the country possesses the resources to lift up all of its citizens. If we can capacitate and motivate enough people, pool resources and direct them strategically, it is possible to shift the fortunes of this economy. Every South African can play a role in the movement to bring about social change and, frankly, it is necessary that we all are prepared to step up to the task.
Aunnie Patton Power is the course convenor on the Bertha Centre’s (a specialised centre at the UCT Graduate School of Business) five-day Executive Education Impact Investing in Africa and three-day Impact Measurement and Management courses. For more information on these courses go to www.gsb.uct.ac.za/impact-investing.