Impact Investment: Filling The Gap to Solve World’s Most Critical Problems
The World Bank estimate in 2012 depicted that there were over 2.1 billion people, in the developing world alone, who lived on less than US $3.10 a day, with increasing levels of income inequality1. The Rockefeller Foundation has estimated that trillions of dollars are needed, including around US $2.5 trillion annual funding gap necessary to achieve the Sustainable Development Goals (SDGs) in the developing countries alone2. The picture is particularly dismal in Southeast Asia. Based on the 2007-2008 UNDP Human Development Report, there are still more than 50 million people living below the poverty threshold, at US $1.00 a day, in ASEAN member states, except Singapore and Brunei Darussalam3.
This size just proves that the margins are not margins anymore, they present their own unique needs and requirements. Private capital needs to be converged to meet these needs and the desired development goals. The needs of poverty struck population are as mainstream.
The magic formula to avail this private capital is yet to be cracked. Impact investing seems to be coming very close to solving this problem, although there are long-held views which state that market investments should center exclusively on accomplishing financial returns, and that social and environmental problems should only be addressed by philanthropic donations. Simply put, impact investments are investments made for making social and environmental impact as well as financial return4. These investments are made into sectors such as sustainable agriculture, clean technology, micro-finance, and affordable and accessible basic services including housing, healthcare, and education5. In 2013 at G8 Social Impact Investing Conference in London, former UK Prime Minister David Cameron made a keynote address about impact investing, saying that “The potential for social investment is that big” and that it has the power to “tackle the most difficult social problems”.
“We’ve got a great idea here that can transform our societies, by using the power of finance to tackle the most difficult social problems. The potential for social investment is that big”
–David Cameron, former UK Prime Minister—
Impact investment are distinguished from crowdfunding sites, because they typically take forms in debt or equity investments of over US $1,000. Also, they usually come with longer times compared to traditional venture capital payment and without an “exit strategy” which traditionally take forms in an initial public offering (IPO) or buyout in the for-profit startup sector. Impact investment are also distinguished from non-profit social enterprises as they typically involve for-profit, social-, or environmental-mission-driven businesses.
According to a report published by a research firm named the Monitor Group in 2009, it was found that the number of funds involved in impact investing showed a rapid growth over a five-year period6. It was also estimated that the impact investing industry has a potential to grow from around US$50 billion in assets to US$500 billion in assets within the subsequent decade7. Factors which caused new investors to join the industry may vary, but the Global Impact Investing Network (GIIN) has summarized three common motivations as follows,
- Banks, pension funds, financial advisors, and wealth managers might provide client investment opportunities to both individuals and institutions based on interests in general or specific social and/or environmental causes,
- Institutional and family foundations might leverage significantly greater assets to advance their core social and/or environmental goals, while maintaining or growing their overall endowment at the same time, and
- Government investors and development finance institutions can provide proof of financial viability for private-sector investors while targeting specific social and environmental goals8.
Despite its massive potentials, impact investment are not free from challenges. Right talents are needed in order to make them effective. Another challenge is that, very early-stage social entrepreneurs often do not have access to impact investors, a phenomenon often referred to as a “Pioneer Gap”. Also, solution finding process is a challenge itself. Not every solution that could help the poor and unhealthy could generate revenue.
“It’s going to take far more money than all the philanthropies and governments have at their disposal to make a significant impact on improving the lives of all the poor and vulnerable people in the world.”
In conclusion, impact investment can be a great force for social change on the planet. As the Rockefeller Foundation reported, “It’s going to take far more money than all the philanthropies and governments have at their disposal to make a significant impact on improving the lives of all the poor and vulnerable people in the world”. Impact investment are indeed, the right tools to make solving social issues a part of business.
About the author:
Rizki N H Penna is the Regional Representative (Southeast Asia) – Sankalp Forum at Intellecap where he is part of the core team that formulates and manages the Forum’s expansion into the Southeast Asia region as well as creating a partner ecosystem for the Forum.
1The World Bank. (2016, April 13). Poverty: Overview. Retrieved from THE WORLD BANK: http://www.worldbank.org/en/topic/poverty/overview#1
2The ROCKEFELLER FOUNDATION. (2016, February 23). Innovative Finance. Retrieved from The ROCKEFELLER FOUNDATION: https://www.rockefellerfoundation.org/our-work/initiatives/innovative-finance/
3United Nations Development Programme, n.d. Human Development Report 2007-2008, s.l.: United
Nations Development Programme.
4,5,8GIIN. (2016). What You Need to Know About Impact Investing. Retrieved from Global Impact Investing Network: https://thegiin.org/impact-investing/need-to-know/#s3
6,7Monitor Institute. (2009). Investing for Environmental and Social Impact: A Design For Catalyzing An Emerging Industry. Monitor Institute.
9Horoszowski, M. (2014, January 24). Impact Investing is Becoming Mainstream, Here’s Why. Retrieved from MOVINGWORLDS: http://blog.movingworlds.org/impact-investing-is-becoming-mainstream-heres-why/
10Intellecap. (2016). POST-SUMMIT REPORT: JANUARY 2016. Intellecap.