This month, we continue our celebration of operating in Ethiopia for 10 years with a special focus on impact investing and where the field has come in the last 10 years. In case you missed previous posts in the series, you can find them here:
When RENEW found its home in Ethiopia in 2012, ‘impact investing’ was considered a $46 billion industry. Only a handful of practitioners had started to tackle the complex challenge of deploying capital to achieve both financial and social returns. Only a few people and organizations were even familiar with the concept.
Fast forward to today, estimates suggest that the impact investing industry will surpass $1 trillion in assets under management (AUM) by the end of 2022. While this still only represents around 2% of global AUM, impact investing is becoming increasingly mainstream as investors are demanding that their capital is deployed to achieve good, and institutions are responding.
The industry’s growth over the past decade is exciting, and the world has welcomed many new practitioners to the field. At the same time, the global social and environmental challenges are becoming increasingly urgent. Climate change, natural disasters, political discord and human conflict are highlighting the fragility of our existence and the imminent need to act. Furthermore, if we are to achieve the United Nations’ Sustainable Development Goals by 2030, there is an estimated $4.2 trillion in annual unmet financing needs for developing countries.
It is evident that the development and aid community cannot fill this gap alone. The private sector has the opportunity and the responsibility to substantially increase its sustainable financing commitments and be accountable for the actual social and environmental impacts of their investments. Enter Impact Investing.
Context and History
While the term “impact investing” is relatively new, it falls under the broader concept of socially responsible investing that has existed in different forms for centuries. For example, 18th century Methodist and Quaker groups in the United States banned all investment in slavery, war and other “sinful” industries. In the 20th century, the World Bank established the International Finance Corporation to promote sustainable development through private sector investments. Financing became a lever for ending the Vietnam War and South Africa’s Apartheid system, as well as saving the environment.
These efforts focused largely on exclusion of harmful activities from portfolios. Falling short of true impact investing, they are more aligned with Environmental, Social, and Governance or “ESG” investing, a term coined in 2005 by UN General Secretary Kofi Annan to create a framework for incorporating values into capital markets. In addition to screening out harmful investments, ESG focuses on the identification and mitigation of environmental, social and governance risks that have a material effect on the business.
Another industry that helped shape impact investing is microfinance. Emerging in the 1970s, microfinance set out to drive positive non-financial outcomes through small, high-risk investments. The primary goal of microfinance is the social impact, and as such, it does not seek out the same combined financial and social returns that define impact investing.
Such socially-minded investment strategies continued to evolve, but it was not until 2007 that the term “impact investing” was introduced by the Rockefeller Foundation as “investments made with the intention of generating both financial return and social and/or environmental impact.”
Soon after, the Global Impact Investing Network (GIIN) was founded to convene market practitioners and relevant stakeholders. Such early steps were important for the industry, but as noted at the outset, impact investing was very much in its nascency in 2012.
A Decade of Growth and Maturation
The defining theme of the impact investing industry over the last decade has been its tremendous growth. GIIN’s 2020 Investor Survey estimates that there was over $715 billion impact investing AUM in 2019. The estimated total AUM over $1 trillion by the end of this year represents a more than 20x increase from ten years ago.
The number of impact investors has similarly proliferated, estimated to have reached 1,720 strong in 2019, including numerous mainstream institutions. In just the last few years, notable entrants launching impact initiatives include traditional private equity firms such as Apollo and KKR and corporate initiatives such as the Citi Impact Fund and Salesforce Ventures Impact.
However, the field remains diverse by investor type, ranging from family offices to large pension funds. Development finance institutions (DFIs) manage more than one-third (36%) of AUM, while 1,200 asset managers account for just over half (54%). Allocation also ranges widely across industries and markets. Of the investors sampled in GIIN’s report, 59% of capital in 2019 was allocated to emerging markets, with Sub Saharan Africa (SSA) capturing the largest portion at 21%.
Many factors have propelled impact investing’s takeoff in recent years, including rising awareness of global challenges, shifting investor preferences and a generally supportive economic backdrop. The industry’s growing track record of achieving competitive financial returns and demonstrable impact outcomes has helped attract additional capital. One of the most crucial developments, however, has been the establishment of market standards and frameworks to help safeguard against concerns of “impact washing.”
Similar to prior “greenwashing” concerns around the environmental movement, “impact washing” refers to investment practices that claim to generate positive social or environmental outcomes but lack supporting evidence for those assertions. These types of reputation-laundering marketing practices rightfully engender suspicion about the industry.
To its credit, the impact investing community has recognized and is continuously making steps to mitigate this risk by promoting transparency and accountability through iterative initiatives. For example, in 2016, the Impact Management Project was established, bringing together more than 2,000 enterprises, investors and practitioners to facilitate collaboration and consensus-building on impact best practices.
Such frameworks and tools help protect the impact investing market’s integrity by defining standards and best practices that investors should adhere to when claiming the impact label. GIIN’s 2020 report noted that “in the first edition of the Annual Survey (2010), 85% of respondents used their own proprietary [Impact Measurement and Management] systems. One decade later, 89% use external systems, tools and frameworks for IMM.”Regulatory action such as the European Union’s Sustainable Finance Disclosure Requirements and the U.S. Security and Exchange Commission’s proposed guidance on ESG and impact categorization are welcome developments to bring further accountability to the industry.
Of course, more work needs to be done. Transparency and accountability to demonstrable impact outcomes are central to the industry’s future, and all market practitioners have an on-going responsibility to help substantiate impact investing’s potential.
Advancing Impact Investing in Africa
RENEW is proud to have been an early advocate in the impact investing space and all that we have achieved on our journey. We are inspired by the number of lives we have been able to touch, yet we recognize that impact investing remains substantially underutilized in East Africa. Our team is driven by the opportunity we have to continue leading this movement, constantly pushing boundaries to learn how capitalism can be re-imagined and harnessed to drive positive outcomes for Africa, transforming the continent’s narrative from a place of giving to a place of investing.
Renew Capital is an Africa-focused impact investment firm that backs innovative companies with high-growth potential. Renew Capital manages investments made on behalf of the Renew Capital Angels, a global network of angel investors, foundations and family offices who seek financial returns and sustainable social impact. For the latest on investing in Africa, subscribe and follow us at our social links below.