Impact investing, investments made into companies and organisations with the intention of generating a beneficial social or impact alongside a financial return, is of growing importance in South Africa.
This is because it helps create jobs, build affordable housing, provide access to finance for small business, banks the unbanked and bolsters public transport.
But how does it work?
The key is access to investor capital and a willingness to make different capital allocation decisions.
South Africa is blessed with a strong savings pool through its pension funds and investment schemes. Considering all registered local retail collective investment schemes as well as pension funds and institutional investment funds, asset holdings are calculated at R2.250 trillion as at 31 December 2017. With the right direction and impetus, such as the guiding principles set out in Regulation 28 for pension fund trustees to align their investment mandates with the country’s development agenda, more of these funds can be invested impactfully.
Opportunities for investment which could drive economic growth and have the added impact of job creation include: agriculture and agri-processing; manufacturing (food processing, textile and furniture manufacture) and tourism. South Africa also has challenges in health and education that hamper its success as a nation and further investment in these sectors could contribute to the country’s prosperity.
But the instinct to invest impactfully is often relegated when pension fund trustees have to make difficult capital allocation decisions. Concerns such as performance trade-offs, intolerable risk and reduced liquidity, among others are frequently raised as the reasons for favouring tested investment strategies with historical track records that provide comfort.
However, an increasing body of research both internationally and in South Africa indicates that these concerns seem to be without foundation.
The Global Impact Investing Network’s recent research on the performance of impact investing funds indicates that they perform favourably in comparison with their peers within a given asset class. Similarly, longitudinal studies of SRI (Socially Responsible Investing) funds indicate that performance is not compromised in comparison with similar funds that do not use a SRI lens.
Trustees then need to listen to pension fund members who ask: “When I retire, will I have money to spend? Will I have running water, decent transport and a clinic to attend when I am ill? Has the growth of my pension fund been at the expense of the world I want to retire to?”
Investing for impact strategies offer exactly this opportunity.
Encouragingly, the recently launched 5th edition of the annual African Investing for Impact Barometer indicates that there are a growing number of investment funds that are using these strategies with some 761 in South Africa alone. Nearly $400 billion of assets in Southern Africa are allocated to one or more strategy that can be broadly called impact investing – be that an ESG (Environmental, Social and Governance) overlay, investor engagement, screening strategies and sustainably themed investments.
The idea of investing for impact should be more broadly welcomed in the context of South Africa which carries a significant legacy of pressing social and economic challenges.
Like many countries in the developing world, South Africa encounters multiple challenges but three are predominant: inequality, unemployment and poverty. Mainstream traditional investors have a unique opportunity to respond to this triple constraint, at the very least to manage systemic risk of not doing so.
South Africa’s colonial history systematically separated black people from the resources that they needed for advancement. Most specifically, the ability to acquire or own valuable tangible assets such as land, property and equity. Social exclusion under apartheid still has a lingering impact today. We are one of the most consistently unequal countries in the world with a Gini coefficient of 0.660. About 26.7% of the workforce is unemployed. Black people between the ages of 18 – 34 years are worst affected with 38.6% of this age group unemployed. And 55.5% of South Africans live below the poverty line. The prospect of economic growth much greater than 1% seems improbable when it is estimated that 3% growth is needed to sustain job creation.
The country’s National Development Plan (NDP) sets out an articulate vision to aim for by 2030 with key priorities including: increasing employment through faster economic growth; improving the quality of education, skills development and innovation; and building the capability of state departments to deliver on its developmental and transformative commitments. Despite a bold NDP, delivery has not met the needs of the previously marginalised communities.
Therefore, new ways of investing South Africa's savings need to be found to support sustainable market based solutions for these challenges. It seems that to reduce poverty, unemployment and inequality of black South Africans, a multi-pronged approach is required; from an articulate plan to specific policy interventions, economic investment and importantly, impact investing.
South Africa’s investment community needs to take up this investing challenge.