Impact investment: Powerful tool for pension funds
THERE is a growing trend for pension funds to strategically invest in order to achieve their corporate societal engagement strategy. Impact investment, which support social change while making a financial return has become a powerful tool for institutions such as pension funds as well as insurance companies and corporates.
Impact investment, a term coined in 2007, is an approach in which, financial assets are invested with two objectives in mind: The first being to achieve a financial return while the second is to achieve a specific or deliberate, positive and measurable impact on society or the natural environment.
This measurable impact is usually in the form of developmental outcomes, which communities and greater society can benefit from.
Examples of such outcomes include food security, access to affordable housing, electricity, water and sanitation, health-care as well infrastructure (social and economic), which will improve the standards of living for those who are underserved or have limited access these services.
This is known as the double dividend of impact investment. It’s an opportunity to achieve investment returns while solving social as well as environmental challenges faced by pension members in society.
Azanae Group, an SA based independent consulting firm focused on responsible investment training and consulting to institutional investors such as pension funds, founder Xolisa Dhlamini, said pension funds needed to develop impact investment policies incorporating impact investment objectives and principle in their investment policy statements.
“Pension funds can invest in these by taking advantage of their allowable asset allocation to prescribed assets, unquoted shares, and other as determined by IPEC,” said Mr Dhlamini.
“The funds can invest directly in unlisted companies or utilities within agriculture, renewable energy, healthcare sectors for instance.”
In Zimbabwe, there are still very few impact investment firms such as Vakayi Capital and Takura Capital.
Pension funds can, therefore engage and develop mandates with fund managers to invest in impact areas of their preference according to their own investment policy statements.
“They can also co-invest with other likeminded pension funds in projects from prescribed institutions aligned to their desired impact. For instance, it can be in renewable energy projects, agro-processing, industrialisation in underdeveloped areas of the country.”
Given that Zimbabwe has a large informal economy, investing in economic infrastructure could assist entrepreneurs and Small to Medium Enterprises grow in scale and create greater job opportunities.
It could allow SME’s in the informal sector to gain better access to markets and potentially grow to enter the formal sector, thereby increasing the amount of investable organizations for the same pension funds in the capital markets.
In addition, investing in informal small-scale farmers and agro-processing businesses could also help in addressing food security and value addition goals under the ZimAsset.
“Agro-processing can provide good investment returns and create more income-generation opportunities for the largely informal economy; allowing more people to earn a living and contribute to growing national savings for economic growth,” he said.
Impact investment is a growing investment practice in Sub-Saharan Africa. A study by the Bertha Centre, a specialised unit within the University of Cape Town Graduate School of Business found that the popular impact investments targeted in East , West and Southern Africa are investments in Infrastructure (social and economic), renewable energy, SME’s , agriculture, health-care and inclusive financial services.
It also reveals that impact investments across these regions is largely through unlisted or unquoted investment instruments and venture capital, which is advantageous for the development of capital markets and exposure to sectors which may not available in stock exchanges.
Impact investments are dominated by international impact investors from outside the continent.
This means impact investors from outside of Africa are finding impact investment opportunities which many local investors, such as pension funds, could be benefiting from. Another noteworthy finding of the study is that only an estimated 7 percent of commercial managed assets in the countries studied are dedicated to impact investments with some pension assets in that portion.
Private sector pension assets, however, are missing from the action because the small portion of pension assets in impact investments is largely contributed public or national pensions such as Government Employees Pension Fund in South Africa, Government Institution Pension Funds in Namibia or National Pension Scheme Authority in Zambia.