LAYING THE FOUNDATIONS

Investors are not the sole players driving a sustainable agenda: government policies are crucial, too

In recent decades business and social leaders have come to appreciate that profit is not the beall and end-all. After all, what is the point of extracting huge value if society and the community are crumbling? This view underpins the philosophy of the sustainable investing movement.

The power wielded by investors has given rise to the terms “impact investing” and “ethical investing”.

Unlike environmental, social and governance investing and corporate socially responsible investing, which have generated concerns about greenwashing and box ticking, the explicit purpose of impact finance is to take the economy, society and the environment to a better place while delivering concrete benefits to shareholders, capital allocators and capital providers.

This is a tall order for win-win outcomes that cannot be laid at the feet of investors alone. While capital can influence the direction in which companies and countries choose to transition, investors are not the sole players driving a sustainable agenda. Success hinges on political will.

Laying the sustainable groundwork

There are some compelling examples of entire countries that have transitioned impressively thanks to an enabling environment.

Costa Rica in the 1990s ranked as a poor and extractive agricultural economy with the lowest per capita income in Central America. Today it is a middleincome country with the highest standard of living in the region. Unemployment has dropped from 25% to 5%, and, as a manufacturing cluster developed, Costa Rica began exporting products into global value chains and developing services sectors. Participation by women in the economy ballooned.

There are a few important ingredients in Costa Rica’s story, starting in 1948, when the standing army was abolished. The funds released from the military budget were funnelled into primary health care and basic education. The country also extracted core value from its strategic partnership with key private investor Intel, the US chip manufacturer, and it worked with bodies such as the World Bank.

A trickier example is Chile. A stressed military transition under Gen Augusto Pinochet does not stand up to scrutiny in its social impact, but in two decades the economy stabilised its financial system and modernised its important mining sector, which provided the basis for growth in its industrial platform and in employment and incomes. This spilled over into new sectors, which has reduced the country’s high copper dependency by building wine, fish, financial services, air transport and fresh fruit export industries.

Several noteworthy policy changes shifted the balance of power. A stabilisation fund was established to protect the country’s revenues in the event of falling commodity prices. A rainy-day fund was created which continues to provide a fiscal cushion during tough economic times. Instituting a Tobin Tax — to dampen speculative financial inflows by providing incentives for moving “hot” foreign capital into more stable, long-term investments — was also key.

Together, these policies transformed a volatile economy into an investor-friendly destination with stronger social fabric and industrial resilience.

However, many of Chile’s people were left behind during this time, leading to social unrest. The country is now starting a new period under Gabriel Boric’s leftleaning government and as a result the future of many of these transformations is unclear.

Yet even amid policy uncertainty there is always space for agile businesses and impact investors to steer a course towards win-win outcomes. It’s a lot harder, but innovation and disruption are always possible.

The power to pivot

Just consider the biggest mortgage originator in the

US, Rocket Mortgage. At worst a lending organisation can be predatory and extractive, but Rocket Mortgage has shown it is possible to change the behaviour of a lending organisation completely into something collaborative and inclusive but still profitable. The originator uses data analytics to identify changes in consumer behaviour that might indicate financial fragility. It then works with clients to support them rather than waiting until they stumble under the weight of financial stress.

In SA the Renewable Energy Independent Power Producer Procurement (REIPPP) programme has been characterised as “the most successful public-private partnership in Africa in the past 20 years”, in a 2014 World Bank assessment.

Since 2011 the REIPPP has pulled in more than R209bn in investment from the private sector, created jobs and local community opportunities, reduced carbon emissions, and, due to increased competition, dramatically brought down the cost of solar and wind energy. Despite delays in rolling out the fifth round of proposals, investors continue to wait in the wings for an opening in this transformative win-win policy setting.

In all these examples sustainable transformation is a complex mixture of addressing social needs, using innovation to tackle challenges, instituting intelligent policies and extracting value from core partnerships.

The main contributors have largely been the big, booming voices of business and government, but increasingly, impact investors are having an important role to play in amplifying the voices of individuals and communities.

This could shift the current power dynamic and drive the uptake of sustainable principles globally.

The purpose of impact finance is to take the economy, society and the environment to a better place

Saville is an investment specialist at Genera Capital and professor at Gibs