For green Small and Growing Businesses (SGBs), access to finance is one of the key constraints in scaling innovative business models. Investors – even those with the intention and mandate to support smaller deals – consider these early stage businesses to be risky. The Green Outcomes Fund (GOF) is a first of its kind structure to address this exact issue. Designed by the World Bank Group’s Climate Technology Programme, together with the University of Cape Town’s Bertha Centre for Social Innovation and Entrepreneurship, GreenCape and WWF-South Africa, the GOF incentivises local South African fund managers to increase investment in green SGBs by paying for green outcomes achieved by their investees, such as job creation, climate mitigation and improved water and waste management. By monetising impact, the GOF is able to mitigate the high costs and risks associated with these investments, thereby contributing to the development of the green economy.
The GOF represents the first blended finance model focused exclusively on green business outcomes, and is an example of impact investing in action – defined by the Global Impact Investing Network (GIIN) as “investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.”
The term was officially coined in 2007 by the Rockefeller Foundation, and since then the industry has grown in leaps and bounds globally. With a growing recognition of the power of investment capital to address pressing social and environmental challenges, impact investing has attracted the attention of an increasing number of investors of all types from all over the world. Today, GIIN research shows that there are more than 1,340 active impact investing organisations across the world who collectively manage $502bn in assets under management, intended to bring about positive change.
Locally, impact investing is still nascent, but showing increased levels of activity and growth. According to the latest figures from the Landscape for Impact Investing in Southern Africa Report, South Africa is the largest market for impact investing within the region, with more than $14.4bn being disbursed as of the end of 2018.
Where impact investing is unique is that it sits in the middle of commercially sustainable models on the one hand, and the nonprofit world focused on effecting positive social change, on the other. Many (and arguably most) social problems lend themselves to a nonprofit approach, whilst others call for a commercial approach or even a combination of the two. A competent social investor understands this reality and uses the variety of approaches at his or her disposal to maximise social impact in any given situation.
While a growing body of evidence demonstrates that investors can drive positive social change and achieve market-related commercial (or concessionary if so desired) returns at the same time, there are a number of challenges that exist, particularly locally.
Of these, regulation is perhaps the biggest barrier, and the one requiring the most attention. The fact remains that whether you are a social enterprise or an impact investor, the current legislation and regulatory environment remains constraining and not conducive to growth. On the social enterprise side, organisations that want to play in this space generally have to set up hybrid structures – both a nonprofit as well as a for-profit entity – to access different types of capital. This adds unnecessary bureaucratic complexities.
On the investor side, there are several possible vehicles through which one can invest. These include but are not limited to a Public Benefit Organisation (PBO) trust, a Small Business Funding Entity (SBFE), a nonprofit company, a 12J Venture Capital Company (12J) or a Special Purpose Vehicle. While an investor may be able to make it work with any one of these entities, none of them is designed to generate maximum (dual) returns when it comes to the impact investment space. For example, vague legislation and a lack of regulatory clarity clouds effective impact investment through PBO trusts and SBFEs, while nonprofit companies (without PBO status) offer limited tax benefits for investors. 12Js were setup five to seven years ago to support small businesses through a venture capital approach, and when legislation was changed to make these vehicles 100% tax deductible, their numbers exploded. This is a great example of legislation unlocking investment potential, but the 12J regime has no specific incentives or additional benefits to invest in social enterprises. Likewise, a Special Purpose Vehicle has no tax benefits or specific thinking around driving impact.
If these challenges are not solved, impact investing in South Africa will not thrive. However, seeds have been planted with the formation of the local National Taskforce for Impact Investing in 2018. This forms part of the Global Steering Group on Impact Investing, consisting of 21 countries that have set up similar taskforces around the world. The taskforce consists of high-level representation from business, government, civil society and academia, and aims to drive the establishment of a conducive, effective impact investing ecosystem in the country. This step is the first in a long game, but an absolutely essential one at that.
Besides regulatory issues, it is also imperative to address the need for stronger intermediary services between investors looking to deploy capital and social enterprises looking to receive it. As there are relatively few local examples of successful impact investment projects, these two players need to be brought together in a co-ordinated way to facilitate connections and partnerships. Added to this, when charting unknown territories, it is critical to have pioneers onboard who are willing to take risks and learn as they go. In the often gloomy waters of impact investing, this requires a combination of pioneering social enterprises, risk-taking entrepreneurs and revolutionary policymakers to turn things on their head as and when needed.
Impact investing brings together two very different mindsets. One is the forprofit or business mindset that focuses on profit creation, and as a result often views nonprofit organisations as mere ‘charitable’ entities. Nonprofits, on the other hand, often believe that capitalism is inherently problematic, and that ‘doing social good’ should not be commercially motivated in any way. We must find the middle ground between these two camps and form unlikely alliances in order to bring about social change in a way that leverages the awesome power and potential of everyone who is committed to improving South Africa.
