As of late, Impact Investing (II) and Socially
Responsible Investing (SRI) has drawn attention of a wider audience. The two
are used interchangeably and hence become difficult to draw lines between II
and SRI. Member Bodies (Global Impact Investing Network) and Policy Initiatives
(The Forum for Sustainable and Responsible Investment.) have also been launched
to look in to this area of investment. A survey by GIIN and J.P. Morgan in 2014
points out that about 55% of Impact Investors surveyed look for market rate of
returns – like any other typical investor, not categorized under II or SRI.
To narrow it down to Impact Investing, the GIIN defines
the “Impact Investments are investments made in to companies, organizations,
and funds with the intention to generate social and environmental impact
alongside a financial return”. The report further highlights that the Financial
Inclusion is the most commonly pursued theme which actually includes
investments in micro-finance, small and medium enterprise (SME) finance, and
community banking. The vast majority of
Impact Investment funds that reached Sri Lanka are also predominantly towards
micro-finance and SME finance, apart from concessionary funding which came from
Multilateral Agencies or other Development Funding Agencies (DFIs).
From the individual II Fund Manager perspective, their
expressed high-level expectations are social, economic and financial – most of
the time, broadly understood as targeting double or triple bottom line. However,
at a more operational level, the focus is not different to conventional
investing where you focus on certain financial/performance parameters in
screening, executing and monitoring deals. It all may boil down to a very
concise Term Sheet which does not even give an indication on the social and
economic returns that are expected of through such investments.
Interestingly, most of the recipients of II funding are
themselves not interested in measuring the outcomes in the Social and
Environmental parameters rather than certain key financial/performance
parameters like Portfolio-at-Risk (PAR), Non Performing Advances (NPA), Loan
Growth Ratio, Debt-to-Capital Ratio, etc. In one hand, those are the criteria
looked at by the II Fund Managers and on the other hand, most of these funding
recipients are locally listed/unlisted return maximizing companies. Hence, the
platform is well set for a conventional investment to take place – in the
pretext of Impact Investment. The ultimate result is simple. The II Fund
Manager funds the recipients at commercial rates or expects normal market
returns. Consequently, these organizations on lend their clients – who are
inevitably vulnerable (socially, economically and/or financially) segments in
the economy – at exorbitant rates. In some instances, the interest rates can
range between 27% - 47% in an economy like Sri Lanka where Sri Lankan
Government bills are issued at approx. 7% and corporate lending rates can range
between 11.5% - 14.5%. Ironically, neither II Fund Managers nor their
beneficiary local organizations do evaluate what type of returns their ultimate
clients earn by investing the financing received.
Now this entire process raises several concerns. Firstly,
it raises the question whether it is moral/humane to treat an already
vulnerable group – behind the name of Impact Investing. Secondly, the
practicing organizations in the economy might engage in malpractices – such as
multiple lending, loan rollovers, etc with the intent of preserving PAR and NPA
- due to excessive pressure exerted upon them by the II Fund Managers. Thirdly,
the beneficiaries might also be pushed – as has been the case - to go for
multiple loans with different organizations further amplifying the issue. In
the final analysis, a disruption caused – by practices like these – to the
industry may prove to be alarming as it is the only source of financing accessible
to these vulnerable segments – most of the time poor women, marginalized
communities, etc.
The situation can be simply conceptualized with the help
of a hypothetical example. Let’s say one helps – financially- a Needy in the
street. Obviously, the helper would not ask the Needy to pay back interest as
well as see him succeed in life as a result of him helping the Needy. But, the
helper has achieved something that is not financially measurable -but
measurable in other qualitative terms. For instance, the helper may have supported
the Needy with his next meal for the day, funded part of the Needy’s medical
bills, or could be anything or if not helper will at least have the inner
self-satisfaction that he/she helped someone - without actually knowing how the
Needy made use of his/her money.
However, in contrast now think of conceptualizing the
so-called Impact Investors, who tries to help some vulnerable group while
expecting them to pay market rates on the money, and also expect them to enjoy
the social and economic upgrades as a result of their funds, wherein the
investor enjoys the qualitative outcomes/returns -like the helper did in the
example above.
However, it should be understood that the suggestion is
not to provide funding free of charge like the helper did in the above
hypothetical example but to provide funding at rates/returns that are not
commercial or exorbitant given the segment served. The justification for giving
up on commercial rates/returns would be that the Impact Investors are enjoying
the other non-quantitative outcomes as a result of their funding being used without
a burden by the recipient. The resultant
returns would thereby be the quantitative plus the qualitative elements. As the
ultimate recipients graduate to small and medium scale – when they are able to
pay higher returns - progressively higher rates/returns may be applied by the
II community.
Or else, it looks
that it is not humane or moral to exploit vulnerable segments in any market
under the appearance of Impact Investing. Or accept to compromise on the
financial and qualitative returns. Isn’t that what Impact Investing should be
or else why do we need alternative terminology to identify Investing.
