The unprecedented civil unrest in Chile towards the end of 2019 was driven by inequality and had a severe knock-on effect on that country’s economy. Where Chile has a Gini coefficient of .48, SA remains the most unequal country in the world with a Gini coefficient of .63. The higher — not the better.
It’s a number that increasingly demands action. With the GSG Impact Summit to be hosted in SA this coming spring — the biggest impact-investing event on African soil to date — it’s an opportune moment to accelerate the positive social and environmental impact of finance and business.
This increasingly seems possible; there is an urgency around tackling poverty, inequality and unemployment among traditional investors, government, and other key, private sector players. It’s no longer uncommon to hear talk of “impact intentionality” and “impact measurement’ in the mainstream financial sector. Intentionality, as positive impact should not be accidental, and measurability as you ‘can’t manage what you can’t measure”.
Broadly defined as investments made with the intention to generate positive, measurable social and environmental impacts alongside a financial return (as per the Global Impact Investing Network), impact investing has been gathering momentum in SA — although there is some distance still to travel. According to the most recent African investing for impact Barometer, SA leads the continent in terms of having the largest amount of assets invested for impact ($399.54bn), but that this is still only a small fraction of available assets in the country.
The bulk of these assets reside with the country’s pension funds. At the end of 2016, the total value of retirement funds in SA was estimated at more than R4-trillion. That is a significant pool of capital that could contribute towards reducing poverty and creating jobs. While there are some good examples of pension funds starting to embrace impact investing, for example, the asset owners forum convened through Batseta, few of the largest pension funds are considering long-term investments into the real economy.
Part of the reason for this may be that impact investing remains new to the market. Also, there is a relatively widespread misconception that impact investing can mean taking a hit on returns. But, says Ndabe Mkhize, chief investment officer at the Eskom Pension and Provident Fund (EPPF), “the two are not mutually exclusive”.
For instance, investments in township and rural shopping centres in lower-income areas have had a positive impact on society and have been stellar performers in an environment of low returns from listed markets.
Failing to take the risks of climate change and rampant inequality into consideration when making investment decisions, is increasingly being called into question
Speaking at the Impact Investment Forum in Johannesburg towards the end of last year, Mkhize said that the EPPF is increasingly talking about intentionality and measurability — and that this approach should be embedded in the mandates of all pension funds. When the larger players — both public and private — signal their commitment to impact investing, it will go a long way towards convincing others to start on this path.
The EPPF is not an outlier. It represents a global shift towards impact investing by pension and provident funds. Far from being seen as the riskier option, failing to take the risks of climate change and rampant inequality into consideration when making investment decisions, is increasingly being called into question.
In Australia, for example, state-run retirement funds, which are estimated to own an average of about 14% of every S&P/ASX 200-listed company, are going against government policy to use their financial might to push for environmental, social and governance (ESG) responsibility in big business.
Norway’s colossal wealth fund announced last year that it would dump about $7.bn worth of shares in oil and gas production and exploration companies, while the Government Pension Investment Fund in Japan — the world’s largest — requires asset managers to integrate ESG into investment analysis.
Jobs Fund
In SA, the National Treasury’s Jobs Fund is a small but significant example of what can happen when government and the private sector come together to share risk and drive results. Najwah Allie-Edries, kead of the Jobs Fund, says that the fund reduces the risk to asset owners making impact investments by, for instance, providing guarantees for early stage financing for innovative, job-creating small and medium enterprises (SMEs) in key sectors of the economy.
SMEs are largely underserviced by traditional financiers as they are considered high risk, and yet they are a vital part of the economy, Allie-Edries argues. SMEs contribute some 35%-50% of SA’s GDP and more than 60% of new jobs in the informal sector are in the SME space, so finding ways to galvanise funding for this sector is key in the fight against poverty, unemployment and inequality.
The Infrastructure Fund, first announced in 2018 with the government setting aside R100bn in seed funding, is seeking to take a similarly innovative approach to boost construction and prioritise water infrastructure, roads, and student accommodation as a catalyst for further investment. Simultaneously, the Public Investment Corporation (PIC) launched the Project Development Partnership Fund, an impact-investing fund that focuses on investing in companies that solve socio-economic challenges.
One of the key questions is to identify how to de-risk impact investing by bringing together different pools of capital and incentivise significant players, such as pension funds, to increasingly take part in building an impact-investing sector.
To effectively tackle widespread inequality and climate breakdown, it is critical that government and the private sector, as well as civil society, small business, labour and individual investors, are engaged and collaborate — and existing financing mechanisms will need to be adapted and stretched.
The cost of not doing anything — as the situation in Chile has shown us — might be greater than the potential cost these new approaches may entail. We need to find reliable ways to make sure that every rand invested in SA is having multiplier effects, helping build a country in which everybody wins.
At the GSG Summit in Johannesburg this year, the eyes of the world will be on SA to position itself as a leader in building inclusive markets. We have six more months to put our best foot forward.
• Henriksen is innovative finance lead at the UCT Graduate School of Business’s Bertha Centre for Social Innovation and Entrepreneurship.
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