Wondering if impact-investing is another buzzword that will soon fade away like the rest? Read on to tell if it’s a trend or not.
For a long time, people who wanted to invest in companies that reflected their values were limited by available options. Others who could invest in ethical causes resigned their returns for smaller profits. But now things have changed. Building a profitable portfolio using an impact investment strategy is now easier as greater awareness about the environment and social inequalities continue to influence investors to fund companies that promote positive impact. Impact investment, therefore, is no longer the future, it is here to stay.
What is Impact Investment?
Impact investing is investments made with the intention to generate positive, measurable social and/or environmental benefits alongside financial returns. Impact investors provide capital to address social and /or environmental issues while gaining financial returns.
The term was first used in 2008 by the Rockefeller Foundation in response to growing conversations on how to use capital differently.
Impact investment is usually categorized under the socially responsible investing spectrum. Unlike traditional investors who are motivated by the maximization of profits above social good, impact investors seek tangible and measurable impact alongside financial gain.
Additionally, impact investors are defined as having the following characteristics.
1.The expectation of financial return: Expectation of a positive financial return over the life of the investment.
2. Intention to create impact: Stated intention to create positive social or environmental impact.
3. Commitment to measure impact: Commitment to measure and track social and/or environmental impact.
Impact Investment is not an asset class. It is an approach across all asset classes and has a full range of risk and returns. For instance, impact investment can involve a company that provides loans and other financial services to agricultural businesses in underbanked areas.
How does impact investing work?
Impact investors invest both directly into enterprises and projects and indirectly through financial intermediaries (e.g., fund managers).
How big is the impact investment market in Nigeria?
A 2015 report by the Global Impact Investing Network (GIIN) and Dalberg places Nigeria as the largest recipient of impact investments in West Africa. The report revealed that Impact investments in the country amounted to $1.9bn with a recorded 181 deals. Each deal had an average value of $1.5m with an expected return of 13% to 17%. Agriculture, Technology and Financial services were the biggest recipients of impact funds.
Although the Nigerian impact investment ecosystem outperforms its peers, the community of investors is still small compared to the size of its market with only 28 investors recorded.
Most investors were fund managers who invested on behalf of foreign investors ranging from International Development Finance Institutions such as the Commonwealth Development Corporation (CDC Investments) to Silicon Valley venture capitalists. The Tony Elumelu Foundation was the only identified local investor.
Nigerian Investors seem to be sceptical of impact investments, due to the misconception that it involves sacrificing financial returns for philanthropy.
Why is Impact Investment important in Nigeria?
Undoubtedly, the socio-economic challenges Nigeria faces is beyond the capacity of the government to handle. All hands must be on deck to tackle these issues in areas of interest and urgency. Herein, lies the opportunity for impact investors to create sustainable change.
A significant attempt at impact investing can be seen in the innovative solutions small and medium-scale enterprises (SMEs) contribute to Nigeria’s developing economy. An example of such an enterprise is HerVest.
HerVest is an inclusive, women-focused digital platform that leverages impact investing strategies to deepen women’s access to financial services. The company allows its users to fund female farmers in Nigeria by providing them with flexible loans, training and market linkages. Ultimately boosting the financial productivity of both sponsors and beneficiaries.
More so, impact investing funds have been made available by some foreign development institutions and bodies. For example, the African Development Bank invested in the Africa Food Security Fund (AFSF) to boost agri-business SMEs and enhance food security in some African countries like Nigeria.
Globally addressing key challenges requires long term investing of capital. Traditional models such as foreign aids and CSR are short term and sometimes narrow in their approach. Therefore, impact investment presents itself as the only solution to generate change and maximise sustainable profits.
