Impact Investing: The Different Perspectives

I am writing this as I travel back from Chicago in the US after attending a two day conference of the leading faculty in the world in the area of Impact Investing and all other terms that are close to it, i.e. responsible finance, social entrepreneurship, corporate social responsibility etc. Impact investing refers to a …

I am writing this as I travel back from Chicago in the US after attending a two day conference of the leading faculty in the world in the area of Impact Investing and all other terms that are close to it, i.e. responsible finance, social entrepreneurship, corporate social responsibility etc. Impact investing refers to a perspective of investing wherein an investor invests with a clear intent to not only make financial returns, but to also have clear and measurable impact on the environment and social issues. In some instances the investor may also push for responsible governance of the institution where they sink their money.

This was my first visit to the US and I must say it delivered; the sights, people, shopping experience, everything was impressive. With everything going on in the US vis a vis travel bans, the leadership, the Black Lives Matters movement arising from racial issues; I was a bit worried and expected a tougher visit all the way from immigration and moving around. I was however pleasantly surprised. Imagine the odds of meeting an immigration official who had worked in Kenya assisting to address the elephant poaching menace that has seen Kenya loose a significant proportion of its elephant population. I expected a barrage of questions and a hold up at immigration however the official was really happy to see me, we even managed a chit chat around the political situation in the US and Kenya. Getting out of the airport and the rest of my stay was smooth. Technology has really changed the world, between Uber, booking.com, TripAdvisor, whatsapp and facebook I literally gelled in.

Chicago Skyline

Chicago is a lovely city, I was staying in the Evanston area next to Lake Michigan; the sights were breath taking! Jogging and riding a bicycle along Lakeshore Drive with a breeze from the pristine blue lake bordered by the luscious green vegetation was what I would call an eschatological experience! The architecture of Chicago is sophisticated and beautiful at the same time. Having done the architecture tour I was amazed by the engineering feats employed to make the city’s skyline what it is today.

150 North Riverside

The tour guide explained that on one of the buildings, 150 North Riverside, has a significantly low base ground built area to the actual base (around 35%) due to railway tracks and the lack of build space within the City. This building is one of the tallest buildings in Chicago, that easily dwarfs Kenya’s Kenyatta International Conference Centre and has a gravity defying appearance due to its narrow base. The engineers and architects behind the project had to create huge water tanks which would be filled with water and used to help ensure that in the event of extreme wind conditions the water would sway to ensure that the weight of the structure would not cause it to collapse. How’s that for clever!

 

I could go on and on about my impressions of the city but really I set out to put down some of my views from the conference I was attending. The faculty in attendance was world class. Harvard, Stanford, Wharton, Northwestern Kellogg, Maastricht were among those represented, of course not forgetting myself from Strathmore Business School in Nairobi Kenya. The attendees of the conference were largely Western, from North America and Europe; there were only two persons from Africa, myself and lady from University of Cape Town.

The conversation over the two days was fascinating. My main takeaway was that there is a double lens from which to view the impact investing discussion; that of the investor and that of the investee /entrepreneur. In my day to day job at InVhestia as a principal, I work a closely with both private equity and venture capital (PE/VC) investors focused on Africa as well as entrepreneurs. One of the key characteristics of these PE/VC investors is that they have raised most of their funding from development finance institutions, family offices and other Western investors for whom impact is more than a financial return. Bearing in mind the attendees were largely Western and their major audience were these investors carrying out investments in emerging economies, the discussions we had were mostly from the investor’s perspective. We had really good discussions on why it is important to include the impact lens in any investment decision, measurement approaches, the needed research in the field, what students should be learning etc.

The on the ground lens, that of the entrepreneur who receives the capital was not covered as much, almost non-existent. This lens would reveal that for most emerging economy entrepreneurs, impact is mostly just measured by the number of jobs they create which for the most part is a sufficient criterion. Consider an entrepreneur who sets up a bakery in Nairobi and goes on to open 20 other branches across the country. Just by growing her business to these 20 branches she employs an average of 5 persons per branch making for a total of 100 employees. These 100 probably support a family of 4 each taking the impact number to 400. In addition, the entrepreneur sources for raw materials used in production from various stake holders hence having even more impact on more and more lives. What’s the implication of this? As far as the entrepreneur is concerned, they are having significant impact by being core to what they do… growing their business. Now enter a Western based investor who has a ‘sophisticated’ understanding  of impact and now requires the entrepreneur to ensure that 50% of her employees are women, that they source their raw materials from small holder farmers, that all employees have private medical insurance, are market rate wages etc. The entrepreneur’s life is now more complex than it was. While before they were content with creating employment now they need to add all these other factors together with the relatively tough operating conditions in emerging economies.

In the above case both the entrepreneur and investor are right. The investor needs to feel that their cash is having the impact they feel is right and the entrepreneur needs to have a business that is not too complex so as to jeopardize its very existence.

As said earlier, the impact investing discussion for the most part is being driven by the investors, in most cases with investors who lack the relevant context of what their decisions and expectations in board rooms mean for the teams on the ground. Two things need to happen to ensure proper alignment. First, any impact investing course should be coupled with a context creating discussion. This could be achieved through ensuring any ‘would be investors’ are required to have an experiential visit to places where they expect to carry out their investing to appreciate the on the ground challenges. Hopefully such visits would show to the investors that impact should be viewed from a spectrum and any impact metrics set for an investee should take into account what they are already doing. Second, entrepreneurs need to understand the investor mind-set. In my teaching of PE/VC courses, I have to admit that the impact discussion has not been pertinent, bearing in mind how critical the investor is to the realization of the entrepreneur’s goals. The entrepreneur needs to understand what the investor is looking and discuss how to ensure that both parties are aligned at the point of investment. A thing entrepreneurs could do is to agree on various metrics with a time based implementation plan. The most important thing after all is to ensure that the tail is not wagging the dog but that the two are in sync.

Authored by: Stephen Gugu