Inclusive Growth Entails Business Reform

The World Economic Forum’s (WEF) recent report, ‘From the Margins to the Mainstream’, provides a valuable window into the state of impact investing the diversity that exists within this sector and its potential to transform African development. Impact investing overall could benefit from greater discipline in metrics, results reporting and risk reduction, the report suggests. It also hints at a pressing need to re-examine, and perhaps even overhaul our notions of the scale and potential of impact investing.

As the document points out, impact investing is not an asset class it is an investing approach – one which intends to generate measurable social and environmental impacts as well as a financial return. I would go further and say that traditional definitions of impact investing are too narrow as far as Africa is concerned.

The African private sector has the power to transform the continent through long-term investments that create both economic prosperity and social wealth. The said report is an important step forward, identifying incremental improvements that can be made to expand the scale of impact investing. Yet it does not go far enough.

Impact investing is still a small sector. Available data points out that to reach one percent of total globally managed assets by 2020, impact investing would have to grow 59pc annually.

To reach two percent of total managed assets, impact investing would have to grow 69pc annually until 2020. The report puts this feat in perspective by noting that sustainable investing in the US grew at only 11pc annually between 1995 and 2012.

It is highly unlikely that the sector will attract enough investors to reach 59pc or 69pc annual growth. Yet, even if one could reach that growth rate, limiting ourselves to one to two percent of globally invested assets means that impact investing will never reach the scale required to help the tens of millions of people currently in poverty in Africa. We, therefore, need to increase the scale and criteria for eligibility of the impact investing movement to come closer to achieving the results we all seek.

The pioneer report does distinguish between “impact investing” as a strategy and “impactful investments”, which is the more radical approach that Africa needs, in both scope and intent – an approach that demands that the other 99pc of investments also be value-adding, wealth-creating, and socially impactful. This stance encourages all investors to be impact-focused at scale and to conduct all their investment decisions and operations from that perspective.

To achieve results at the scale required for Africa’s current needs, we must aim for a complete transformation of the way business, investing and philanthropy are conducted at every level of the economic ladder, from the smallest entrepreneurs to the largest multinationals.

If one is to buy the report, intentionality matters and enterprises focused purely on profit do not qualify as impact investments. But this flies in the face of reality.

In Africa, the majority of entrepreneurs creating social impact did so from a finance-first perspective that happened to address social needs. According to a recent PricewaterhouseCoopers study, the major divergence between how African executives spent their time compared to executives elsewhere in the world was that 75pc of them were focused on increasing their corporate contribution to poverty reduction, versus a global average of only 42pc. Creating social impact is fast becoming part of doing business in Africa.

Thus, creating a dichotomy which states that impact enterprise must have a strategic dual financial and social intent will limit the ability of impact investing to bring wide-scale benefits to Africa. The distinction may make sense for outside investors coming into Africa, but it largely excludes home-grown entrepreneurs from achieving recognition for the social impact being created.

As a result, those entrepreneurs may also be excluded from consideration by impact investment funds and philanthropies – in spite of the fact that such bootstrapping, profit-oriented enterprises are exactly the kinds of businesses that have the greatest impact on employment, social wealth, and local economic growth.

Africa’s mobile phone revolution has developed a vibrant mobile banking revolution, allowing the finance sector to ‘leapfrog’ infrastructural constraints and reach millions of unbanked citizens. Here, too, we can set the pace for a ‘leapfrogged’ version of capitalism with an inbuilt dual intent.

We need nothing less than a total transformation of the way business and investing are done a new approach that can help spark sustainable and inclusive growth, not just in Africa, but throughout the world.

Wiebe Boer Wiebe Boer Is the Chief Executive Officer (CEO) of the Tony Elumelu Foundation. This Commentary First Appeared On This Is Africa.

Source : Addis Fortune

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