The bright light of impact investing


November 14th, 2013

Bright lights can both attract and blind. I have been asking myself whether Practical Action is being rather ‘moth-like’ with the bright new (to us) ‘lights’ of impact investing. We’re not the only ones. In Washington DC at the SEEP Network conference the topic of impact investing was big on the agenda. Over 500 practitioners from over 65 countries had convened to shape development practice on ‘financial and market inclusion’ so that more people living in poverty can build sustainable livelihoods. Meeting rooms were full and corridors buzzed as our collective global experience was shared and challenged.

Impact investing is not new but to many of us it’s an area we have not considered before. Its appeal is that it offers some opportunities to access a different type of finance. This is finance that will generate not just monetary returns but social or environmental returns too. It is ‘equity’ not a loan or a grant, which is means an investor ‘owns’ part of the enterprise they are putting money into. Not all impact investors are equal – some want near commercial returns, others are happy to see just part of their money back and yet others accept that in very risky and difficult situations even that may not be possible. It seems everyone, from donor governments to practitioners (us NGOs) and investors themselves want to get in on it. Donors like what it offers as they struggle to balance their squeezed aid budgets with their ambitious poverty reduction objectives, NGOs like it partly because we hope it will help us ’diversify’ our funding sources and investors seem to like it too, especially those at the ‘philanthropy’ end of the spectrum. Increasingly investors are getting interested in ‘doing good’ with their money. And of course many economies and markets in Africa and South Asia are growing faster than other parts of the world.

Practical Action is exploring how investments can be made that deliver more than benefits for one company (the one that actually receives the finance). Our interest lies in using this type of money so it is ‘catalytic’ i.e. it can have wider effects on a system. For example, our work in the vegetable market system in Zimbabwe is designed to enable thousands of farmers to benefit from stronger more resilient linkages and a better enabling environment. If one of the main processors of vegetables is struggling to get investment and business support then it can become a blockage that affects farmers. Would enabling the processor to get access to investment ‘unlock’ and begin to transform the system? This type of thinking is quite new so we’re very glad to be working with 5 other organisations* to build ACRE: Access to Capital for Rural Enterprises. We want to see how tapping into this type of finance could benefit the systems where we are facilitating change; whether the livestock sector in Bangladesh, crops in Zimbabwe or energy in Nepal we could enable key enterprises to grow so that they can provide more and better goods and services to those in poverty.

It’s challenging to get it right. From the outset we have been concerned that the brilliance of the ‘impact investing’ light will put other aspects of pro-poor market transformation into the shade. So we are working to ensure that ACRE looks at not only what an individual enterprise, however strategic, might need but that we keep a focus on all the other elements that will be important for poverty reduction. We will be bringing our expertise and experience of the past decade and using our Participatory Market Systems Development approach to have the right type of lens for this work and keep ourselves grounded in the realities of the systems that are important for those in poverty.

We’re excited to be part of the bigger SEEP global community working on these issues. The Omidyar Foundation’s recent thinking on impact investing looks spot on. They talk about impact investing needing to shift in focus “from growing individual firms to scaling entire….sectors”. We couldn’t agree more.

As we get drawn towards the bright light of impact investing we just need to make sure we’re not blind to what is around it.

 

*Christian Aid, Challenges Worldwide, Traidcraft, Twin Trading, VSO,

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