By Godson Ikyebi
Impact investment is critical in contemporary development financing considering the trajectory of accessing finance for sustainable socio-economic development. Therefore, impact investors are financiers who take into cognizance the social and environmental impact as well as financial returns from their investments or financiers who invest only in projects designed to address social and environment challenges while making financial returns in the process. The composition of impact investors includes Development Finance Institutions (DFIs), Multilateral Institutions, Other Institutional Investors (Pension, Insurance, Banks), Private Investors, etcetera. This category of investors prioritize how their investments will address societal problems such as poor education, poor health care, unemployment, insecurity, lack of clean energy, environmental degradation, inadequate and poor public infrastructures, poverty and food insecurity for the advancement of sustainable development.
What do impact investors do?
Investments of this nature are key to achieving the sustainable development goals (SDGs) and enhance a broader sustainable socio-economic development. This is because such investments enhance human development, inclusiveness and quality of public infrastructures, job creation, market capability, and sustainable environmental outcomes. These investments can come in the form of foreign direct investment (FDI), a situation whereby impact investors directly finance specific projects or invest in businesses with high impact social and environmental returns for societal benefit. A key example is investment in a tech start up developed to improve education outcomes in underserved communities. Impact investors can also invest through the stock market by buying up equity of businesses which seek to solve social and environmental problems.
This type of investors also invest through the sustainable debt market i.e Green Bond (environmental projects i.e., clean energy), Social Bond (social projects i.e., good roads, quality healthcare and good schools), Sustainability Bond (social and environment i.e., sustainable agriculture), and Blue Bond (Ocean or waterways specific i.e sustainable aquaculture and sustainable waterways transportation). In this case, impact investors finance projects that are designed to address social and environmental challenges through sustainable bonds issued by government or businesses. Examples of such projects include renewable energy projects, sustainable public infrastructural projects (roads, schools, hospitals, etcetera), climate mitigation projects, climate adaptation projects, etcetera. Impact investments are thoroughly evaluated in alignment with defined standards i.e green taxonomy for Green Bonds. It is imperative to note that the investment decisions by impact investors are driven by four characteristics and these are: 1) Deliberate action to contribute to positive social and environmental impact by setting transparent financial and impact goals. 2) The use of empirical evidence (qualitative and quantitative impact data) to make investment decisions. 3) The management of impact performance to enhance investment decision making as it relates to societal impact from investments. 4) Commitment to continuously contribute to the growth of impact investing for sustainable development.
What’s the size of their market?
Globally, impact investing is on the ascendency. This resonates with the fourth characteristics associated with impact investors – which is to continuously contribute to the growth of the sub-sector for sustainable development. According to the International Finance Corporation (IFC) report titled Investing for Impact: The Global Impact Investing Market 2020, the total impact investment was put at US$2.3 trillion in 2020 out of which US$636 billion worth of investments have in place an impact management system that accountably and effectively monitors the impact from the investments. Though the Nigeria impact investment landscape is also shaping up, considering the efforts by the Impact Investor’s Foundation (IIF) in Nigeria and other stakeholders, there is still a huge financing and investment gap that impact investment will be required to address. A 2019 report by the Impact Investor’s Foundation titled Nigeria and Ghana Impact Investing and Policy Landscape Analysis, shows that the total impact investing in Nigeria from 2015-2019 was US$4.7 billion with investment in agriculture, public-to-public lending, energy, etcetera. Of these investments, 95 percent of Development Finance Institutions (DFIs) transactions were debt investments, while 67 percent of non-DFI transactions were equity investments. Clearly, Nigeria is yet to fully explore this sustainable finance option that is globally recognised to guarantee cheaper funds for maximum positive impact and better yields for investors.
Why does Imo State need them?
Accessing funds from institutional investors, private impact investors and sustainable bond issuance will be required by Imo State to unlock the financing deficit of its public infrastructures as it aligns these infrastructures to impact based financing. This is true, considering that the investment and financing landscape is changing to a situation whereby investment considerations and financing are moving from majorly financial returns on investment to outcome and impact-based returns. This presents an opportunity for Imo State to strategically position itself to access such investment opportunities. Imo State’s ability to attract such opportunities will not only guarantee access to cheap funds, but it will also enhance inclusive development of the State as the funds sourced will ensure maximum utilisation in both soft and hard infrastructural development for the benefit of the State and the growth and development of sustainable enterprises. This will help ensure healthy and inclusive socio-economic development, where no one is left behind, which is essential for improved quality of life of the people and an essential tool to boost public trust in government.
How can Imo State explore opportunities from impact investors?
To explore impact investing opportunities for the benefit of its people and its economy, Imo state should first ensure that its development trajectory is in alignment with the core values of impact investing earlier discussed. Therefore, it will be important for Imo State to deliberately articulate a clear sustainable investment framework that will focus on investment that enhances positive societal impact in alignment with the Sustainable Development Goals (SDGs). This will enable the state to clearly identify high social and environmental impact areas that will be attractive to impact investors. To prepare for impact investing, Imo State needs to develop an effective responsibility and accountability process, impact indicators and metrics that will enable the State to manage, measure and communicate the impact created. Therefore, having a qualitative and quantitative understanding of where Imo State stands in relation to its development based on prior investments will go a long way in positioning the State to attract impact investments. In this sense, being able to communicate the social outcomes of investments in the state to impact investors will provide a competitive advantage for the state to access sustainable financing for impact investments. Such communication of impact can be achieved through impact assessment. Impact assessment is important to impact investors and will enhance the capability of Imo State to attract impact investments. According to the G7 Impact Taskforce, “the better we get at measuring impact, the more money will flow into impact investment” [1]. Therefore, effective impact measurement, reporting and management are integral to attracting impact investors.
By impact assessment we mean “the positive and negative, primary and secondary, long-term effects produced by developmental programmes and activities, directly or indirectly, intended or unintended” [2]. The purpose of impact assessment includes to better understand what long-term or sustainable changes have occurred in order to improve the effectiveness of current or future development programmes and activities and to be accountable to stakeholders including investors. For example, impact assessment will enable Imo State to communicate developmental achievements and outcomes to impact investors and enhance the capacity of the state to attract impact investment. Impact assessment provides accountability to impact investors and increases the confidence of these investors, which ultimately opens up opportunities for more investment. Impact assessment can be a critical tool for Imo State government as it positions the state towards attracting impact investors who are keen on investment for sustainable socio-economic development.
[1] Brest, P. (2014) The G8 Task Force Report: Making Impact or Making Believe? Stanford Social Innovation Review. Available from: http://ssir.org/articles/entry/the_g8_task_ force_report_making_impact_or_making_believe
[2] OECD (2010). Glossary of Key Terms in Evaluations and Results-Based Management. OECD, 2002, re-printed in 2010.