Beyond the Pandemic – Impact Investment for
Sustainability and Growth
By Anton Verwey & Johan Maritz (inavitiQ)
In an article published in June this year, titled “The Recovery from Black Swans: Philosophy, Principles and Practices”, the philosophy, principles and practices required to craft the new normal were explored. Some examples of actions implemented by client systems were shared, as well as some practical guidelines for a way forward. In this article, we wish to explore specifically how investment may need to be rethought and reframed to support inclusive and sustainable impact and growth. After all, given the implosion of the global economy, it would be beyond unrealistic to expect investments to (1) be measured on financial returns only and (2) to adopt the same thinking about timeframes for investments to mature and deliver. As suggested in our article “Dealing with Black Swans” written in the first quarter of 2020, we concluded that there will be a great deal of emotional, physical and financial pain in the immediate future. A crisis of this scale will never be truly resolved until many of the fundamentals of our social and economic life have been remade. There is also the need, more than ever, for business leaders to recognise the crucial interdependencies between business and its environmental, social, and governance context. This obviously applies also to investors.
The Idea in Brief
A Thinking Framework
As our fundamental point of departure, we posed to ourselves the following question:
“IF investment has to be for IMPACT broader than financial return only, how may such impact be defined?”
In exploring thinking options, we also concluded that it may be useful to take at least two perspectives, namely (1) a human needs or motivations perspective and (2) a broader socio-political-economic perspective.
Human Needs or Motivations
For the first of these, we elected to share the framework developed by Jamshid Gharajedaghi as shared in the diagram below.
Across the five dimensions of human motivation, investment therefore should have as its goal the prevention of scarcity, maldistribution and uncertainty from a wealth, knowledge, influence, peace and beauty perspective. By achieving such an impact, challenges such as alienation, polarisation and corruption can be avoided. Already, as the consequences of the global pandemic is becoming more visible, we can see how decades, if not centuries, of a specific approach to economic programming including investment has led to increased polarisation between nations, and within nations across socio-economic levels. The Black Lives Matter campaign is not only about the murder of one person in the USA, but is a global recognition that at it’s core society is unjust in the way it allocates and develops opportunities for all of humanity. Are we perhaps seeing the eventual consequence of the greed of the few destroying the livelihood and lives of the many?
Broader socio-political-economic Goals
For this perspective, we elected to use the UN Sustainable Development Goals framework as shown in the following diagram.
The Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace and justice. The seventeen goals are all clearly interconnected.
Integrated Thinking Framework
With these two perspectives, in mind, we then asked if there is any clear relationship between such “lofty” global goals and the aspirations of individuals. The following table is our attempt to do such integration.
The purpose with such a table is essentially to pose two questions to investors and enterprise leadership, namely:
- If I mindfully and purposefully invest in or drive performance towards the global development goals, will it ALSO have an impact at the level of individuals?
- If I mindfully and purposefully invest in or drive performance towards meeting individual aspirations, will it ALSO have an impact at the global development goals level?
Of course, the response to both questions should be “yes”, and we pose them in both ways simply to make provision for the fact that the stated intent of different enterprises and / or investors may be framed differently. Finally though, it will lead to the same IMPACT.
Enterprise Philosophy and Purpose
In our view, reflecting on such a thinking framework leads to a number of fairly fundamental questions, such as:
- How can we relate the fundamental purpose of our enterprise given the above framework?
- In simple terms, how do we craft a purpose that simultaneously addresses individual aspirations and global development goals?
- In parallel, how do we define a purpose beyond our own (financial) interests?
- How should we formulate goals to achieve our fundamental purpose?
- How should we think about timelines for these goals?
At the same time, enterprise leaders, especially at the executive and senior levels, may need to confront some other realities, such as:
- Regardless of choice, individuals may have less personal wealth;
- You will have less power and control; and
- You will have to be more inclusive and collaborative.
Whether we like it or not, and whether we agree with it or not, individuals, communities, societies and humanity are in the process of redefining WHAT matters, as well as WHO matters. The days where we could comfortably agree that our only purpose is to create wealth for investors / shareholders are over. The days where we could rationalise the enormous discrepancies between executive and employee remuneration and benefits are over.
The Philosophy at a Practical Level
Covid 19 highlighted the vulnerability of people who experience poverty and inequality, exacerbated by the economic collapse. During early June 2020, Oxfam warned that more than 40 million people in Southern Africa are at risk of increased hunger and poverty due to the double threat of the coronavirus and consecutive climatic shocks. This is a worldwide trend. Hunger is now the next “pandemic” the world will face. Poverty and hunger will have a big impact on both society and the environment, especially in South Africa.
Oxfam said that South Africa is emerging as a hunger epicentre. Millions had been “tipped over the edge” by the COVID-19 pandemic and lockdown. Before the coronavirus, 13.7 million South Africans did not have access to enough food. Now, about 15 million South Africans have inadequate access to food. This could soon increase dramatically.
In urban areas, millions of informal workers have suddenly found themselves out of work and do not have access to sick pay or unemployment benefits. One of the contributing factors was a lack of democratisation in the food system. Monopolisation of the food market and food systems by multinational corporations is quite a common trend worldwide. Ironically South Africa is considered a ‘food-secure’ nation, producing enough calories to adequately feed every one of its people. Some problems arising are:
- More than half the population are at risk of hunger;
- Women and children are the human face of hunger;
- Jobs and livelihoods do not provide enough to buy adequate food;
- Poor economic growth led to high unemployment. According to Stats SA it
increased to 30,1% in the first quarter of 2020. Post Covid this could increase to
40%+ according to South Africa’s National Treasury Director General Dondo
- Food is available but inaccessible;
- Rising food prices have worsened hunger;
- Access to land and resources is limited;
- The food industry is dominated by large firms that control food access and
- Poor households have good access to bad food, but bad access to good food; and
- Climate change is affecting poor people’s ability to cope.
Hunger, as described by participants in a recent SA study, means more than physical sensations of emptiness or pain, more than incessant cravings that cannot be satisfied. It is described by those interviewed as a phenomenon that creates ‘genocide of the mind’, inducing hopelessness and despair, depriving hungry individuals of dignity.
In Gharajedaghi’s model, the economic dimension regarding the expectation of goods and wealth is of importance in the above situation. When addressing poverty and hunger in South Africa, the first order of obstruction namely scarcity is not a problem, but scarcities in certain communities are caused by maldistribution, followed by anxiety. Poverty, in this instance, leads to disparity, exploitation, fear of deprivation and instability. This in turn can lead to desperation with social upheaval as a possible result. Businesses and citizens, who still have the means to a quality of life, can become the targets of the disenfranchised.
The Investment Challenge
From an investor perspective, whether institutional or individual / private, the perspective shared above also has some implications. Whether the choice is to generate profit first and then distribute wealth, or the distribution of wealth first and then generate profit, the result is the same namely that investors will sacrifice dividends / returns, and the timeframe over which they will do so will also increase, we suspect quite dramatically.
To clarify, we are NOT suggesting that generating profit is somehow “wrong”. What we are suggesting, is that profit as the ONLY purpose or the desired endstate is not achievable anymore. The mindset has to be one of being profitable so that:
- We are not a burden on society;
- We enable the achievement of global development goals; and
- Enable individuals to meet their reasonable aspirations;
- In a manner that will leave a better world for future generations, rather than one that is destroyed and saddled with debt.
The Global Impact Investing Network (GIIN) defines impact investments as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Through impact investments, financial markets can serve all members of society, where finance plays a central role in solving the social and environmental challenges facing the global community. The future vision is that more investors integrate impact into all decisions, thereby helping to build strong communities, a healthy environment, and a sustainable future for all people.
Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals. This capital addresses the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
Core characteristics of impact investing (GIIN):
- Intentionality: An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing.
- Range of Return Expectations and Asset Classes: Impact investments target financial returns that range from below market to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
- Investment with Return Expectations: Impact investments are expected to generate a financial return on capital or, at a minimum, a return of capital.
- Impact Measurement and Management: A distinctive characteristic of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.
Most investors surveyed in the GIIN’s 2018 Annual Impact Investor Survey pursue competitive, market-rate returns. A large majority of investors surveyed reported that their investments have either met or exceeded their expectations for both financial performance and impact. This trend continued in 2019, but will certainly be influenced by the coronavirus pandemic in 2020.
According to GIIN April 2020 Survey, the crisis is highlighting and even exacerbating the most troubling global trends. The climate crisis is growing continually more dire, while the global ‘inequality crisis’ is threating lives in other ways. This year’s fifth anniversary of the adoptions of both the United Nations Sustainable Development Goals and the Paris Climate Accord is marked by insufficient progress. Around the world, we face a crisis of distrust in business and government, the very leaders we need guiding us toward progress. But if crisis exacerbates our most troubling trends, it can also amplify our most encouraging trends, as well. More Impact Investors are needed than ever before.
Perhaps most promising of all, the world’s current crises are not scaring impact investors away. On the contrary, the survey finds most are maintaining a positive outlook for the future, despite substantial COVID19 related headwinds. The unprecedented crisis is also an unprecedented opportunity to ensure a more sustainable future. Impact investment can shape a recovery that improves the lot of all the world’s citizens and can lead the way toward a transformed financial system that honours the role of every stakeholder, from workers to the planet itself. One thing is sure; deploying capital effectively in the current climate requires innovation and efficiency.
Impact investment can be the vehicle for business to focus on issues like poverty, hunger and inequality. Business cannot see them as distanced from society, but as part of it. After all, business sells its goods and services to society. During lockdown business and society became aware of just how interdependent they are and that they cannot survive without each other.
Currently we are using 1.5 times the regenerative capacity of the earth due to businesses ambition to grow financial profit. Unfortunately, this comes at the expense of natural capital and social capital. Financial and economic systems traditionally saw itself on top of society, where it is actually the other way around.
This way of reductionist thinking will bring capitalism, democracy and sustainability in question. Business as usual and current brands will soon seem a lot less important than they once did before Covid 19. In the near future there will be an exponential breakdown of business as usual. Parallel to that, the potential of the breakthrough of exponential growth opportunities. The green consumer, triple bottom-line and business as unusual will become important.
Transformational change will be moving beyond responsibility to resilience. According to Elkington we are moving from a world where we talked about responsibility through to a time where resilience will be on everyone’s lipsxi. Elkington says, “How do we build resilience into our companies, our supply chains, our economies, our societies and communities and the biosphere? In the end, the only way to do that is through regeneration.” This regeneration will be in the environment, agriculture, urban areas, the economy/capitalism, the political system, the financial system, the health system and many other business-as-usual aspects of life. These complex issues can only be addressed by systems thinking and system models like that of Gharajedaghi. Impact investment, from a systemic and holistic perspective, can help in this regenerative challenge.
John Fullerton specifically looks at regenerative capitalism. The study of systemic behaviour is now producing a very practical, rigorous, and even common sense new picture of how the world works. The combination of practical experience gleaned from investing in and observing regenerative New Economy experiments rising up worldwide, anchored in today’s rigorous form of holism, can show us how to turn today’s lopsided (and unsustainable) form of capitalism into an integrated network of balanced, vibrant, and regenerative economies, all serving systemic health within their own unique contexts. This learning journey lies ahead for policymakers, as well as progressive leaders in business and financexii.
Impact investors overwhelmingly use metrics to measure and manage social and environmental performance. When assessing the integrated Gharajedaghi and UN SDG goals to determine where to start your impact investment focus, it is difficult to determine off hand. Geographical context assessment is needed to identify an investment focus for a way forward.
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