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Impact Investing: International Development’s New Front Line?
August 21, 2020
We are living in unprecedented times. Between global economic, health, and environmental crises, our path forward can best be described as opaque. The sheer scale of the world’s challenges – the COVID-19 pandemic, climate change, 750M people living on less than $2 a day – compels citizens and world leaders, to think critically about the stakeholders that must be engaged and the tools and strategies that must be exercised to adequately address these concerns.
A useful global framework for such challenges is the United Nations’ comprehensive and ambitious Sustainable Development Goals agenda, which includes commitments to ending poverty and hunger, guaranteeing access to quality education and healthcare for all, and stressing conservation and environmental sustainability, among other critical topics that will govern the planet’s future in the decades ahead. Five years into the 15-year roadmap, there is little indication that the world’s governments are up to the task of independently ushering in what amounts to a fundamental sea change in the global development arena, nor can they. Rather, the UN itself has indicated that up to fifty percent of necessary financial obligations are not being met, with a shortfall of $2.5T on an annual price tag of between $5T and $7T to fully implement the SDGs. Before the COVID-19 pandemic, more widespread buy-in and collective action was desperately needed to undertake these massive, arduous challenges. Today, more so than ever, the world’s most pressing development, social, environmental, and humanitarian needs can only be addressed through willing and active participation from the private sector – corporations, independent investors, foundations, and more – in a grand coalition to achieve these strategic development objectives.
Without a strategic and expansive influx of much-needed capital to address the world’s most urgent concerns, it is likely that many of these challenges – rising temperatures and sea levels, global poverty and hunger, rampant gender disparities – will persist. Impact investing represents an innovative and pragmatic approach to increasing the responsibility and participation of the global private sector and other key stakeholders, beyond traditional “development practitioners” – like government-sponsored aid and development entities (e.g. the United States’ USAID and the United Kingdom’s DFID), international governance and financial organizations (e.g. the UN and the World Bank), non-profits and charities (e.g. Oxfam and the International Rescue Committee), and private foundations (e.g. the Bill and Melinda Gates Foundation and the Ford Foundation). Impact investing is an attractive option for less developmentally-minded investors and private entities, as it offers a means to provide capital and financing that, in many cases, can still result in expected returns while simultaneously addressing acute social, economic, environmental, and humanitarian concerns around the world.
Less an industry, more an evolving trend or phenomenon, impacting investing is relatively new and still gaining its footing. Just entering the popular lexicon in 2008 via the Rockefeller Foundation, “impact investing” has undergone rapid expansion as a vehicle and framework for private corporations and investors to leverage their capital for good, both in service of their own growth and to accommodate a consumer base that is increasingly conscious of social and environmental issues. According to an analysis published by the Global Impact Investing Network (GIIN) in early-2020, the impact investing industry was worth approximately $715B last year, growing more than three-fold since 2017. This figure represents a diverse umbrella of investments and assets, which cannot be easily classified. Impact investing’s wide net might catch anything from microfinance small business loans to women in developing countries, to bonds that support the construction of sustainable infrastructure, to private equity funds that focus on job creation or affordable housing. For the casual investor sitting at home, impact investing may manifest in the form of exchange traded funds (ETFs) that consolidate financial assets under a single purchasable commodity with an underlying subject area or theme, like gender equality, clean energy, etc.
The key concepts underpinning impact investing today are the Environmental, Social and Governance (ESG) and Socially Responsible Investing (SRI) frameworks. Impact investments very much rely on ESG and SRI criteria for outlining the specific impact on the public good that a given investment is intended to have, the absence of which undermines the purpose of the larger mission. These criteria not only inform the evaluation of a given investment at a point in time, but also probe for their potential long-term impacts, resulting in a curated inventory of vetted impact-driven assets and investment opportunities. Some online brokerage platforms, like Merrill Edge, now even provide ESG ratings for commodities to help inform and guide impact-minded investors. These frameworks are critical to ensuring corporations, independent investors, and other sources of private capital are able to differentiate between potential investments that may service an impact-focused agenda and those that may not.
Impact investing represents a critical evolution in the world’s approach to global development, as it expands the pool of responsibility, and strengthens the incentives for participation. This rapid uptick in interest related to impact investing comes at a time when the traditional drivers of development are reckoning with the reality that their limited resources, human capital, and overall reach simply aren’t enough to tackle these immense 21st century challenges. Take, for example, the United States Agency for International Development (USAID) – when the organization was created in the early 1960s, it and other development agencies were contributing more than 70% of all financial flows into developing countries; by 2016, this trend had been virtually flipped on its head, with 86% of financial flows into developing countries now originating from the private sector, with a small share attributable to traditional development and foreign aid organizations. This shift underscored and informed USAID’s strategic pivot to emphasizing the role of the private sector as a key partner in international development and their release of a Private Sector Engagement (PSE) Policy in late-2018. PSE at USAID and other development agencies is a useful lens through which to view the growing influence of impact investing, writ-large, as it represents a formal mechanism through which the corporations and investors can engage with ESG and SRI projects that have been officially vetted by the US Government, ensuring the value, impact, and promise of their investments.
Further, the United States has doubled-down on international investment and overseas financing with the creation of the new United States International Development Finance Corporation (DFC), a successor to the Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority (DCA). The DFC builds on the investment capacity and capabilities of OPIC and DCA, most notably through an increased overall lending ceiling of $60B. DFC represents an invaluable staging-ground for the continued growth of impact investing throughout the world. American (and foreign) entities have the ability to access financing through the DFC to pursue projects across a wide range of sectors and industries in developing markets, including energy, women’s economic empowerment, and environmental conservation, among others. Like USAID, DFC can act as a strategic conduit in outlining projects and markets where investments can be particularly impactful, providing private investors a convenient roadmap for scaling up and focusing their own impact investment agendas. DFC has the added distinction of directly serving American foreign policy interests, globally, by offering an alternative to China’s ambitious overseas investment activities.
As the impact investing field grows, both naturally and as a reaction to increased demand for socially and environmentally equitable uses of capital, we may be able to successfully close the financing gap for the SDGs and other ambitious development priorities. More promising is the self-reinforcement of increased private investment for public commitment and contributions – the more private sector funds dedicated to addressing these massive challenges, the easier it is for governments and international organizations to maintain or increase their giving as well, de-risking investments across the board for the range of key stakeholders.
Impact investing is not a panacea for every ill facing global development, but it is a huge step in the right direction. Financial returns and positive social and environmental impact do not have to be mutually exclusive. As current events, namely the global supply chain and service disruptions due to COVID-19, call our interconnected world into relief – the private sector is keenly aware that ambitious strategies and considerable resources are required to strengthen our delicate economic ecosystem. Shared challenges call for collective responses – impact investing is a key instrument in aligning critical financial resources to achieve crucial social, environmental, and humanitarian ends. Practitioners, investors, and policymakers would be wise to continue cultivating it as a core tool for global development.