Tom Adlam and James Hills explain why the IMPACT Programme is backing ten new market building initiatives to help meet the SDGs in a post Covid-19 world. This article was originally posted in Impact Alpha.
The economic fall-out of COVID-19 – and its knock-on effect on the UN Sustainable Development Goals – will be long-term and significant. The International Monetary Fund reports that global output could decline by 4.9% in 2020, while the cumulative hit to GDP growth is expected to hit emerging markets (excluding China) harder than advanced economies. At the micro-level, the effects on business are high. The Global Impact Investing Network estimates that 42% of small and growing businesses face imminent risk of failure as a result of business and supply chain interruptions, while a survey of ANDE’s members by region reveals similar concerns. The effect on livelihoods from business failures, especially in developing countries where there are few safety nets, will be severe and long-lasting.
Against this background, the existing $2.5 trillion annual funding gap to achieve the SDGs will only widen. Impact investing can play a key role in closing this gap, and, despite some capital flight from emerging markets in general, the evidence suggests that impact investors are willing to respond. According to the GIIN, a majority of impact investors (57%) expect to maintain or increase their 2020 investment plans: an encouraging statistic. However, a lot more work is needed. At $700 billion in 2020, total impact investing accounts for less than 1% of global investment and is well short of $2.5 trillion per year.
The DFID IMPACT Programme, launched by the U.K. Department for International Development and managed by Palladium, seeks to increase the flow and distribution of impact capital in Sub-Saharan Africa and South Asia. During the last year, we have had the opportunity to partner with many industry players who are innovating on how and to whom capital can flow, and tackling pervasive market barriers. As we announce funding to 10 new partners, we reflect on three key insights on the impact investment market, and how and why these partners will play a critical role in strengthening the market in order to help close the SDG gap.
1. Impact management and measurement is key.
To sustainably integrate impact into financial decisions, investors (and institutional investors in particular) need a common, accessible yet robust framework. Investors need verifiable track records, not anecdotes, on which to base their investment decisions.
The IMPACT Programme is continuing its support to the Impact Management Project and to GIIN’s own IRIS+ in order to mainstream consistent and effective impact management, measurement and reporting across the market. Through its “Structured Network”, the IMP is driving agreement on the principles underpinning the practice and management of impact investing, so that there is commonality over what it means to be an impact investor. Through its IRIS+ database, meanwhile, the GIIN is providing investors with suitable metrics to use over a variety of SDG verticals. These two initiatives provide a toolkit to help businesses manage and measure the social impact of their work, and to help investors and intermediaries measure and report on the impact of their investments. In the long run, they facilitate comparisons in impact performance that are similar to how financial performance is compared.
2. “Fit-for-purpose” investment products, tools and services are crucial.
Investors, investment managers and investees need to have access to the right tools, services and products to align interests and to help address information gaps which hinder deployment of impact capital. We have supported the 17 Africa initiative to develop a blueprint for an SDG-focused impact investment “merchant bank” in Sub-Saharan Africa, and Cardano Development to design and fundraise for the ILX Fund, designed to attract new institutional investors into impact investing by promoting take-up of sound environmental, social and governance, or ESG, practices by projects and companies to help minimize risk and increase their contribution to the SDGs. By supporting these initiatives, we are aiming to assist the design of innovative products which speak directly to investor needs for products and services which address some of the gaps in the market.
In further response to this need, the Programme ran a call for proposals in late 2019. The call generated a high volume of response, with over 160 proposals qualifying for detailed consideration of funding. The range of proposals was impressive, too, both in terms of geography and sector focus with many proposals originating from organizations based in Sub-Saharan Africa and South Asia, and in sectors that have received relatively low levels of impact investing. Among the four proposals selected for grant awards were Athena Infonomics, in partnership with Open Capital Advisors, to develop a market-level investment analysis tool to assess the financial returns, social impacts, and risks of investments in the sanitation sector focusing on India and Kenya, but scalable across other countries; Reall to test the viability of extending mortgage finance to the ‘Bottom of the Pyramid’ and persuade formal lenders to move ‘downmarket’; and Blue Finance Coenostrum to design and structure a project financing facility that will support Marine Protection Agreements in Cape Verde, Mozambique and the Seychelles, scalable across other countries and regions.
It is crucial that these fit-for-purpose tools, products and services are tested and then scaled in order to maximize opportunities for the flow and distribution of capital. Existing and new investors have differing investment and operating models and require various investment products and mechanisms to invest. Deepening the impact investing market’s available products, tools and services should allow greater investor participation and higher capital volume flowing to impactful investments.
3. Collaboration is crucial to market building.
Many of the best proposals we received were collaborations bringing together public, private and social sector actors. To that end, we are funding the Global Steering Group for Impact Investment (GSG) to continue its work in supporting the establishment of National Advisory Boards (NABs) for impact investment in Sub Saharan Africa and South Asia. NABs convene the right actors at country level to help strengthen the market for impact investing in alignment with national developmental priorities. Besides the GSG, we have supported the conversion of the UK National Advisory Board into the U.K.’s Impact Investing Institute and are funding its international development policy work over the next two years. In addition, funding was awarded to Convergence for the set-up of a Blended Finance Working Group, bringing together major bilateral donors and foundations to share knowledge and learning on the growth of blended finance and its potential to mobilize more institutional capital towards impact.
The global economy has been affected by an extraordinary shock from COVID-19, putting at risk hard-won economic and developmental gains across sub-Saharan Africa and South Asia. To meet the SDGs, we urgently need to unlock constraints that prevent capital flowing at scale to impactful investments in these regions. The DFID IMPACT Programme has an ongoing and crucial role in this: linking ideas, products, services and players with funding and with other players to create a strong and sustainable impact investing ecosystem. We are optimistic that, despite the fall-out from COVID, we will be able to achieve the Programme’s goals and are planning to launch our next funding opportunity later this year.