Impact investing in frontier markets

Capital provision is crucial to address global challenges related to the UN SDGs, including sustainable agriculture, energy and water systems. Professor Glenn Yago of the Milken Innovation Center recently led a workshop in South Africa to explore the potential of impact investing in this scenario.

Through innovative finance, capital flow can be leveraged to amplify impact. One approach is impact investing, which is now being applied across all asset classes. This promotes a move away from aid reliance to investment and accessing funds in traditional capital markets. Generating positive, measurable social and environmental change alongside financial returns is the core aim of impact investment models. 

 

Impact investing for social solutions

To explore impact investing's potential, the Aspen Network of Development Entrepreneurs (ANDE) and Solidaridad co-hosted an impact investment Learning Lab workshop. It was led by Professor Glenn Yago, Executive Director of the Milken Innovation Center at the Jerusalem Institute. The workshop, which took place in Johannesburg, South Africa, on 28 August 2019, looked at critical issues including:

  • How can impact investing help accelerate social solutions?
  • How can social practitioners design financial solutions that attract capital?
  • How can impact investment projects generate ongoing returns?    

How to build bridges across time and space with financing

Innovative finance in emerging markets

Professor Yago set the tone for the workshop by giving a global perspective on why innovative financing is so important to emerging markets. “As my colleague Myron Scholes puts it, financing can build bridges across time and space,” he said. “So how can we mobilise the technologies to amplify the impact of financial leverage and vice versa?”

 

Aid allowed Africa to achieve inclusive growth through the democratization of capital, helping to build inclusive economies that encourage broad participation. However, the world has changed: developing or frontier markets are now surpassing developed economies in terms of their productivity shares, which has led to the growing interdependence of these economies.  

Impact investing wants to bake new cakes, not re-divide existing onesGlenn Yago, the Milken Innovation Center

However, the funding gap to achieve the UN Sustainable Development Goals (SDGs) is estimated at USD 2.5 trillion, leaving key challenges around food, energy and water unaddressed. “Traditional funding sources cannot keep up with this need,” said Yago, “obliging markets to address issues around financial repression and inequality in accessing capital.”

 

Transparency is key

Impact investing champions transactions for social good, built on trust and transparency. The latter is critical to enabling financial inclusion; achieving real economic growth with participation from all sectors of society.  

 

Capital market flows are being encouraged to adopt a capital structure design that compliments the more nuanced metrics of social impact projects. At the same time, social projects are changing their project (programme design) and capital structure elements (revenue models) to satisfy the return and reporting expectations of a new class of investor.

The value of blended finance

The workshop's primary focus was how to set-up and manage effective impact investment funds and apply innovative financing models to achieve real change. The 32 delegates brought in financial cases they were working on to help them examine different financial models. “This meant we could to apply new insights immediately, said Refilwe Belebesi of Grip Capital. “I learned there is a proven financial thesis to attract and blend capital.”

 

Professor Yago believes technical assistance and leverage grants still play a crucial role in emerging markets as long as there is a viable development model. Official development assistance and technical assistance can support impact investment to address gaps at each stage of a social project’s development process. “With impact investing and innovative finance we are looking to increase the pie, he said. We want to bake new cakes, not just re-divide the existing ones.”

 

Learn more about our impact investment programme

 

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