The world is undergoing a fundamental shift in the way it views businesses as consumers are growing ever more aware of the impacts businesses have on their environment and in their society. Climate change, poverty, inequality, prosperity, peace, access to basic utilities, work and education among many other issues has pushed the UN’s formation of the sustainable development goals (SDGs) with the goal to provide a greater future for everyone on the plan. In response governments have also pledged to achieving the goals of bringing basic human rights to their nations.
FIGURE: Impact Investing Themes and links to SDGs / SOURCE: AXA Investment Managers
The movement has grown to the extent of impacting bottom lines of various companies as studies show more consumers are likely to buy products from sustainable companies [1]. A review of more than 2,000 studies has also shown strong correlation between performance of environmental, social and governance (ESG) funds and positive investment returns [1]. And as a result, many businesses have begun undertaking initiatives to meet the challenging demands of various stakeholders in having a more responsible approach to doing business most popularly framed over the years under ESG criteria. However, to date, till the publishing of Nine Operating Principles for Impact Management by the International Finance Corporation, there were no agreeable definitions/principles to what constitutes impact investing.
According the IFC impacting investing are investments made into companies, organizations, vehicles and funds with the intent to contribute to measurable positive social, economic and environmental impact alongside financial returns [2]. This means incorporating the principles of people, profit and planet as well as ESG risks to the respective investment strategy.
The Market for Impact Investing
According to a report by Bain, around 80% of global investors state they have a greater focus on sustainability and some of the world’s largest private equity funds are divesting assets that don’t meet environmental or social investing guidelines [1]. The rush for impact investing is changing the way people invest as more look to achieve greater returns in the long run while having positive secondary impacts instead of short term gains. By 2018, over 2,000 fund managers who signed the UN Principles for Responsible Investment saw their $82 trillion in assets increase by a compound annual rate of 19% from 2013-2018 [1] showing that the consideration of ESG risks and opportunities have paid off far greater than top mutual funds (Fidelity Contrafund – 16.85%). However, unlike socially responsible investing which passively screens companies for investments, impact investing actively seeks companies that have the potential to create positive economic, social and environmental results. In contrast, to date, the amount in impact investment funds rose to $228 bn by 2018 [5].
Impacts Investing in Bangladesh
Despite the recent political volatility due to elections, political stability is expected in the future due to long term trends in economic growth, and FDI inflows. In FY19, the economy is set to grow at around 8% and investments in FY18 hit a record high crossing 31% GDP. Currently the impact investing industry is still in infancy but picking up pace with investors mainly targeting businesses with a focus on the impact that operate in sectors expected to add value to the economy and create new job opportunities.
By 2014, Development Finance Institutions (DFIs) and other impact investors had deployed over $830 mn and $120 mn to date [6]. Bangladesh is estimated to currently host over 164 million with a population largely skewed towards the younger generations, giving it a large potential consumer and labor market. It’s estimated that by 2022 almost 126 mn will be economically active [6]. And although many strides have been made since the past, inequalities have been only growing wider, due to the absence of a structural change in the economy despite high growth. The majority of Impact Investments from DFIs are made through debt due to risk aversion and regulatory barriers, on the other hand non-DFIs are mainly structure with equity.
SOURCE: The Landscape for Impact Investing in South Asia – GIIN
The majority of recipients of funds are mature companies due to their ability to absorb the minimum level of investment required and meet operating criteria of investors. As a result, venture and growth stage funding represents the largest gaps to capital for deploying impact capital as their operating risks and ability to absorb larger capital are less significant. The majority of deals for venture capital and growth stage funding as a result come from non-DFIs who have less stringent requirements. Most of the impact investing capital recipients are high growth sectors in the country such as ICT, manufacturing, and energy. The reason behind which is due to their potential to provide higher financial returns, meet impact goals, and generate jobs and stimulate growth in the country.
SOURCE: The Landscape for Impact Investing in South Asia – GIIN
Way Forward
The impact investing landscape in Bangladesh has evolved significantly from the past. And now with the publishing of the UN’s Principles for Impact Management a clear framework is present for managing impact investments, providing the industry with clearer boundaries as most impact investors cited in a report by GIIN state the measurement of impact metrics as a secondary without clearly defined metrics or report results anecdotally, taking the impact out of investing. It’s expected in the near future as the industry grows, most funds will be available to SMEs who have less ability to take large loans but can create greater positive changes in the country as larger companies receiving the funds have a limit to their ability to localize operations and create more widespread impact throughout the country.
Mohammed Shehab, Junior Associate at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]
Bibliography
- [1] Private Equity Investors Embrace Impacting Investing – Bain & Company
- [2] What is impact investing? – IFC, World Bank Group
- [3] What is the Difference Between Impact Investing and Socially Responsible Investing? – TriLinc Global
- [4] What is ESG Investing? – ADEC ESG Solutions
- [5] Impact investing, make good intentions pay – Financial Times
- [6] The Landscape for Impact Investing in South Asia – Global Impact Investing Network
