Impact investing must reside at the heart of a business
Environmental, social and governance (ESG) principles drive impact investing and are essential to building sustainable, inclusive businesses of the future. However, creating positive, meaningful impact necessitates that the authentic intention espoused by impact investing rests at the heart of the value system of a business. Real impact is only possible when impact investing is a raison d’etre of the business.
Impact investing and achieving the UN sustainable development goals (SDGs) are double whammies in that businesses can simultaneously uplift societies and make substantial returns on investments. The two are not mutually exclusive but businesses must resist the temptation of turning responsible governance into a tick box exercise. Being responsible in corporate operations in a world of economic and climatic turmoil is not only smart, but arguably the sweet spot for long-term success.
The real value of ESG investing, then, depends on whether companies will drive real change for the common good or merely push out shiny reports void of substance as they achieve goals without effecting much change. Rather, investment flows that follow ESG principles must be realistic, measurable, collaborative and actionable, yielding a return on investment and making a difference for generations to come.
Further, it must be recognised that every nation battles its own economic demons, which means prioritising SDGs in their own way to meet their unique challenges. In South Africa, youth unemployment and equality in standards of living need priority. We cannot chase the popular global trends, kowtowing to First World nations and falling in line with their most pressing needs, which may be polar opposites to our own.
People in South Africa need work and equal opportunity, both of which can be tackled by deploying venture capital into small businesses through smart partnerships and building the nation’s ‘missing middle’.
Approach
Small-business investment is the most practical and effective means to address most of the issues faced in South Africa. A strong portion of SDGs relevant to the South African landscape can be realised through small-business investment and development, the engines that drive economic growth.
Small business creates decent work, and has a multiplier effect when it comes to job creation, accelerating economic growth and achieving Global Goal #8. Decent work leads to Goal #1 – eradicate poverty – which leads to ‘Zero Hunger’ (Goal #2) and creating sensible partnerships of equality (Goal #2 and Goal #17).
It’s apparent that the UN’s SDGs will elude us without investment into small businesses. Through essential operations, financial commitments, employment, consumer-facing platforms and puissant influence, companies are critical to accelerating SDG achievement, knocking them down in clusters.
Some business owners and managers believe impact investing means sacrificing equitable financial returns for doing good. Consequently it is perceived as a cost. That is an old school of thought and not the best investment strategy.
According to a recent survey nearly half of ESG investors in the USA said they would take a 10% loss over a five-year period to invest in businesses that ‘align exceptionally against ESG standards’. This stance is based on the fact that handsome long-term returns on investment can be realised when doing good is at the heart of a business.
Social impact
Above all, South African businesses need greater social impact.
The ‘social’ of ESG principles examines the management of business relationships with employees, suppliers, customers and surrounding communities. Coupled with this is proper governance, examining business leadership, executive pay, audits, internal controls and shareholder rights.
By objectively reviewing these criteria investors gain valuable insight into the heart and soul of a business. These attributes are a starting point to finding businesses with values that will have a significant impact on South Africa.
Addressing climate change (part of the ‘environmental’ of ESG) is essential, but Africa contributes only 3% of global Carbon emissions, with the G20 nations being responsible for 80%. The primary focus for solving climate issues must be small-business development.
If we build green-sector businesses, employment gets a boost, climate disasters get tackled and the economy grows, undergirded by innovation and healthy competition. Furthermore, South Africa has all the ingredients to be a global exporter of clean energy.
Institutional support for venture capital is showing promising signs of significant growth. These days, it’s less the case that insufficient information exists and more about whether mandates for investment into venture capital exist. Venture capitalists in South Africa are generating sustainable risk-adjusted returns, and the appeal by the private equity market in venture capital assets proves the investment case for direct investment from institutions into new ventures.
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