Re-think Impact Investing

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.