Deal quality, impact data remain a challenge
Most companies aren’t investment-ready, and others lack reporting frameworks
Impact investing works when institutional investors allocate capital on behalf of clients — namely pension funds or even individual investors — into companies that have a developmental, socially and environmentally beneficial mandate. This is often done in conjunction with government, as an alternative source of funding in addressing developmental goals.
But finding quality underlying companies with viable and profitable business models is not easy, and measurement of impact becomes crucial in reporting back to all stakeholders. Futuregrowth’s sustainable investment practices manager Angelique Kalam says while there is no lack of deal pipeline for investors to access, the problem lies in the quality of deals.
“Most of the time companies seeking funding are not ‘investment ready’ — either they are at too early a stage with an insufficient track record or they are unable to demonstrate sustainable cash flows. The challenge also lies in matching the appropriate funders with companies in the impact sector and aligning their funding requirements, since they differ vastly across the risk spectrum,” she says.
Once the funding has been matched to the opportunity, Kalam says institutional managers are coming under increasing pressure from pension fund clients to be able to report back meaningfully to show boards of trustees that developmental impact has been achieved. “The challenge is access to the underlying impact data and being able to report on the impact of the investments.”
For example, statistics on the number of loans advanced to entrepreneurs in the affordable housing sector to produce rental accommodation may be recorded, but, says Kalam, that may not indicate how many jobs were created by those entrepreneurs, or how many subcontractors were gainfully involved. While job creation is an important economic development goal for government, this is one of the most underreported of all impact statistics, information is often not recorded or not accurate.
Kalam says it is also difficult to measure on-the-ground impact, which can be subjective in discerning between, say, the creation of low-income housing versus holding a listed parastatal bond.
“An investor may want recognition for such a high-impact investment.” Finally, the lack of an agreed reporting framework means lack of clarity can creep into impact reporting, Kalam says.
Suraj Lallchand, director of Fedgroup Ventures, says Fedgroup started its impact investment platform to allow both institutions and individuals access to impact projects, because investors are attracted to opportunities for money to do good. “In the design phase our platform was called impact farming and looked at triple bottom line reporting: people, planet, profit.”
Measurement and reporting soon became an issue in a nascent SA impact sector with no standardisation, he says. “When we went to market last year we found a lot of education still needs to happen. When we look at projects to put on the platform we undertake due diligence to make sure it ticks all three boxes and that we can report on them correctly.”
Heather Jackson, head of impact investing at Ashburton Investments, says if companies like Capitec spotted market gaps and solved problems on commercial terms, it’s not difficult to believe that perceived high-risk business models can actually be solutions to job-creation and more.
Says Lallchand: “One of the insights that we’ve used as impact investors to build compelling products like our job-creation fund has been to be aligned with National Development Plan goals and big government or development finance institution goals. They’re more comfortable to become investors as we build up a track record. The challenge has been our economic circumstances and finding companies that are solving problems with credible, compelling and job-creating business models.
“From an asset manager perspective there’s a shortage of such projects and it takes time to ensure that you find the right projects into which you can deploy capital. Globally there were various metrics and frameworks for measurement available, so we set about getting accreditation from Global Impact Investing Network, the UN Principles for Responsible Investment and the World Wildlife Fund, but there was no consolidation of metrics and standards. We need regulation and framework locally.”
Despite these challenges, Lallchand says Fedgroup Ventures launched its platform in mid-2018 and had raised R50m by the end of the year on three products: solar power installations, blueberries and beehives. “Each ticked all boxes on positive impact through the triple bottom line. We reached a sold-out stage on two projects. There is a lot of pent-up demand.”
Lallchand says one of the greatest benefits of such impact investments is that they do good locally. “These projects have great scope for expansion. We need more producers and projects to come to market. On the renewable energy side, less than 2% of rooftops that can take solar installations have been penetrated, in my opinion. We are also able to tailor the project models to suit the risk aversion of business owners.”
The beehive project, says Lallchand, has lots of expansion potential because two-thirds of honey consumed in SA is imported. “We could put another 100,000 hives into the economy and still be meeting only half of the demand. When we chose projects, we looked at the demand profiles for five to 10 years, and we saw a great future in renewables and honey, to the extent that we first put our own capital into it. Once we were satisfied, we looked at putting in investors’ money.”