In a time of global crisis, what can be done to accelerate positive change? Impact investors have a key role to play, whether they are entrepreneurs, venture capital firms, financial institutions or big listed corporations.
For those not familiar with the term, impact investing is a rapidly growing investment strategy, where investors aim to generate significant financial return while at the same time addressing a variety of challenges – from climate change and water scarcity to a lack of access to health care, education, and the widening wealth gap.
One recent example is the development of Covid-19 vaccines during the pandemic: an enormous challenge solved in record time thanks to the collaboration between the public and private sector, where private-equity portfolio companies were involved in nearly every step of the process, from drug development to vaccine transportation.
The idea that impact investing will play an important role in solving many of the world’s problems is increasingly mainstream in both business and public policy. For example, the European Commission actively promotes impact investing as part of the EU’s 2030 targets to achieve a 55% cut in greenhouse gas emissions.
An investment trend on the rise
The worldwide impact investing market is estimated to be over $1.1 trillion. One of the largest philanthropic organizations in the US, Rockefeller Philanthropy Advisors, says that impact investing is now representing one in every three investment dollars in the United States, and that this is driven, to a large extent, by the increased role of women and the next-generation wealth holders in investment decisions.
The major focus among impact investors so far has been on decarbonization initiatives. One such example is found in the steel industry, a sector still highly reliant on coal. Backed by private investors including pension funds, the Swedish company H2 Green Steel was established in 2020 to produce steel through a green hydrogen-powered steel plant. The company aims to produce 5 million tons of fossil-free steel by 2030 and estimates that using hydrogen will cut CO2 emissions by 95 percent.
There is now an increasing focus among impact investors on broader economic and social factors, including access to education and finance.
Closing the digital divide
One productive area for impact investors to focus on now is closing the digital divide, which would bring a range of social and economic benefits. Access to internet in schools has been shown to increase the GDP of an economy, because a more educated youth population leads to a more educated workforce, more capable of innovation and groundbreaking ideas. This will in turn facilitate a virtuous cycle of more income, more spending, more jobs, more economic development and back to more income. For example, by 2025, Niger’s GDP would increase by an estimated 20 percent if it increased its connectivity to the same level as in Finland.
The World Bank recognizes financial inclusion as a key enabler to boost prosperity. Today, affordable loans, insurance, savings accounts, and digital payments are still out of reach for about 1.4 billion adults globally. In Africa, almost 60% of the population do not hold any kind of bank account, and the lack of trust in the traditional banking system is widespread. But what most Africans do have is a mobile connection and a trusted relation to their mobile operator.
Mobile money systems serve as an engine for financial inclusion that can significantly improve people’s lives, while also being a huge business opportunity for providers such as telecom operators, banks, fintech firms and financial institutions. One of the investors that have spotted the potential is American investment company BlackRock. Through its Global Impact Team, the firm invests in several companies offering mobile money services that reach underserved populations in emerging markets.
Another player who bet big on mobile money is the telecom operator MTN. Its mobile money service is one of the biggest on the African continent, offering mobile wallets to over 63 million Africans across 16 countries. These types of mobile financial services have enabled many financially excluded people to get included in the formal financial ecosystem – but as about one-fourth of adults globally are still unbanked, we still need to make progress in this area.
The 2030 target to achieve UN’s Sustainable Development Goals (SDGs) is rapidly approaching, and the capital allocation towards these goals remains insufficient. To be precise, the funding gap required to achieve the SDG’s is estimated to be $4.2 trillion. It is imperative, therefore, that industry players across all sectors should invest in the transformation needed to reverse climate change and address social and financial inequity.