Defining impact by destination…
A significant component of impact investment’s raisson d’etre is the promotion of economic development. But not just any investment qualifies as impact investment by contributing to economic development- an oil rig or a tobacco company can catalyze demonstrable GDP growth and job creation but are rarely classified as impact investments.
The distinction is, of course, the triggering of inclusive GDP growth and job creation, especially for those who need it most.
So inclusiveness has always been and will increasingly be positioned as fundamental to impact investment and measurement, especially in emerging markets.
Gender as a first wave
Gender lens investing has given us tools to target, measure and improve gender inclusiveness and women’s empowerment through multiple tools.
Gender lens investing refers to use of any and all of the following within investment:
- Demonstrating gender equality throughout the value chain
- Founded or run by women entrepreneurs
- Offering products and services which have a positive impact on women and girls
- Working to dismantle structural gender inequality
- Addressing urgent human rights or social justice issues
- Women as investors
By defining and disaggregating the ways investments empower women, beyond the very rudimentary criteria of solely investing in women, gender lens investing is helping to create frameworks and tools for the industry as a whole. These tools can potentially exceed the lens of gender alone and transform the impact investment industry.
Gender lens investment as a performance driver
· There is an evidence base that supports gender lens impact investment as a driver for improved financial and social returns.
- Large Market size of women entrepreneurs: 70 percent of formal women-owned SMEs in developing countries are either directly/ indirectly excluded by financial institutions or are unable to access financial services with adequate terms for their needs. This translates into a capital deficit to formal women-owned SMEs of at least US$287 billion annually
- Higher Investee performance: A global survey of almost 22,000 firms from 91 countries. Conducted by Peterson Institute for International economics, demonstrated correlation women’s representation in corporate leadership with improved firm performance
- And even higher investee performance: In a study of the Fortune 500, companies in the highest percentile, in terms of female board representation, outperformed those in the lowest percentile by 53% higher return on equity, 42% higher return on sales, and 66% higher return on invested capital
- Ripple effects from feminized poverty: Women are the disproportionate majority of humans living on less than $1.25 a day, a phenomena know as feminized poverty. Because poverty is also correlated with greater vulnerability across sanitation, health, education and even physical safety, investing in women yields significant ripple affects across other social indicator.
- Greater indirect social investments with women’s economic growth: Women invest a higher share of earnings (up to 90%) into their children and families, especially their health and education, compared to men (~30-40% of earnings). Thus, investments that improve female earning power have more firepower to improve social indicators for a generation, not just the income-earner.
- Cross-cutting economic development: Advancing women’s economic empowerment, and above all creating equity in their work and income, could add ass much as $28 trillion, or 26 percent, to global annual GDP by 2025. Even better, this GDP growth would cut across regions (urban vs. rural) and sectors (agricultural vs. industry vs. services)- potentially the most inclusive growth seen yet.
Gender lens investment has thus proven its relevance to social and financial performance- but we still need to go further to achieve our goals.
From Gender Lens to Inclusive Design: Demand Side
We need to be as intentional with our inclusiveness, as we are with our impact- because the two are obviously linked. But inclusiveness goes beyond gender.
A recent survey of startup investment in East Africa found that ~90% of the ventures funded were linked in having founders or co-founders from America or Europe– for social ventures serving East Africa.
If we want impact at scale, we rarely achieve it by only investing in products that are only accessible or marketed to college-educated white males in top-tier cities in the USA. In impact investment, we typically focus on scalable companies, where scale is potential for large footprints in vulnerable communities in the US/Europe and/or developing countries. Just like no academic degree or finance experience can replace of sector knowledge in an investment committee, local market knowledge and direct experience with the consumers/beneficiaries can be critical to doing deals with excellent social and financial return.
One part of addressing this market knowledge is engagement with local community. For example, the IFC and Center for Sustainability Studies from the Getulio Vargas Foundation have collaborated to engineer Amazon Guidelines for large-scale investments. Two of the initiative’s study groups were focused in vulnerable groups (including women, children, adolescents, indigenous and traditional groups), and highlighted the importance of consulting with and providing input from these groups into business models that will receive impact investment in their area. These guidelines will form the basis for a forthcoming impact investment platform that will be introduced by IFC and ProNatura in 2018.”
A step further is actively working to build portfolios of under-represented entrepreneurs, given that they represent the majority of the market in many places. For example, Affiniti focuses on women founders and entrepreneurs of color, which collectively represent about 70% of entrepreneurs in the US and receive 10% of venture capital. Backstage Capital is doing the same. However, at the time of publication, we had not identified any operational international impact investment funds explicitly making demographic representativeness, beyond gender, part of their impact strategy.
From Gender Lens to Inclusive Impact: Supply Side
A step even further is addressing not only the demand side, but also the supply side. This means trying to ensure our deals represent the communities/populations we aim to serve, by building our teams to also be more inclusive of relevant backgrounds.
Here in the UK, a Big Society Capital survey analyzed 233 responses from individuals working in social investment in 2017 to examine representativeness on the supply side. As far as gender, some gains have been made, with women representing 47% of staff, 52% of management teams, yet only 38% of Boards of Directors/Trustees. While there is 23% Black, Asian and Minority Ethnic (BAME) representation in the sector, there is a significant dip in transitions to management roles with just 9% representation- far below the national average of 14%. In the social sector more widely, only 6.3% of Trustees are from BAME backgrounds.
This question is key because the prevalence of individuals from a relatively un-diverse background intermediating and making investment decisions risks failing to recognize the value of lived experience in generating innovative and effective programs, something which may in turn limit the emergence of even better social innovations.
Because what happens to our market knowledge and insight if our investment teams lack people from those vulnerable communities and developing countries?
In a way this is no different than asking whether all-male investment teams will inadequately evaluate deals for products/services sold to women consumers?
In some cases, they will. But in other cases, for example, when it comes assessing the social value of menstrual pads in rural Africa, there’s a tacit understanding of the product that the average male investment banker may lack.
It also opens the sector to unconscious biases, where those charities and social entrepreneurs with polished, university-educated, professional services-informed staff are given outweighed support from social investment firms, relative to those rooted in the community.
That’s why in 2017, the Diversity Forum, was created to explore diversity, equity and inclusion within the social finance sector. It has thus far united leading impact investors from around the UK, and is the first to appoint diversity champions within leading funds, as well as commission research about the current state and implications of diversity in the industry. Although it will hopefully be replicated across the pond and world, it is just a first step in building coalitions and knowledge.
Truly intentional inclusiveness will mean tackling both the demand side and supply side of democratizing impact investment, to ideally have better pipelines, better deals and better investment teams for our financial and social goals. And this is once again just another first step in in refining our nascent, yet quickly growing, impact investment industry to live up to its ideals.
Tara Sabre Collier is the Co-Founder of Affiniti VC, a multimillion dollar VC fund and fintech platform focused on backing under-represented founders in the US, UK and the African Diaspora, as well as a strategist for various impact investment funds globally. She earned her MBA as a Skoll Scholar at Oxford University, as well as as Masters in International Public/Non-profit Management & Policy from New York University.
Bonnie Chiu is the Managing Director of The Social Investment Consultancy, the Coordinator of Women in Social Finance, and Co-Founder of Diversity Forum. She holds a MSc International Relations at the London School of Economics (LSE), and has just been listed as a Forbes 30 Under 30 Social Entrepreneur in Europe.