To Build A Sustainable Future, Impact Investing Needs To Be Brought Into The Forefront
It goes without saying that bringing impact investing to the forefront would provide a new power and push to achieve the UN Sustainable Development Goals.
“Day by day, what you choose, what you think, and what you do is who you become.” Heraclitus, Philosopher (c. 535 B.C. - 475 B.C.)
Impact investing is a term that is being thrown around globally, as a notion that one needs to become responsible through all waves of life. For many years, however, the idea of being philanthropic and the world of investments were seen as two separate disciplines. As noted by Rockefeller Foundation, “one champions social change, the other financial gain.” The very idea that the two approaches could be integrated in the same transaction- in essence, delivering a financial return, whilst also doing good- struck most philanthropists and investors as being far-fetched.
Thankfully, this is no longer the case, and the rise of the responsible investor is upon us, both here in the UAE and across all other continents. A recent UBS report noted that UAE investors are very active in philanthropy, with 92% saying they believe it is their responsibility to give back, and that making an impact is more significant than having money.
What impact investing seeks is to generate deals with a focus on social and environmental benefits which is forever growing in popularity. Throughout my professional career, a question many investors continue to ask is “if impact investing is good for me?” The social awareness is evident, we are becoming global citizens, and we feel accountable; however, in terms of investment prosperity, the question of it being a viable strategy is still questioned. I agree: impact investing can be daunting, because it requires, one, financial acumen, and, two, philanthropic issue expertise, a rare combination.
Irrespective of this thought, the field seems to offer great potential across the GCC and beyond. Virtually, any philanthropic issue has an impact investment opportunity associated with it, and virtually every asset class used in a traditional investment portfolio has an impact equivalent. Essentially there is an impact “wrapper” across the majority of asset classes; however, we need to delve deeper than this, and ensure investors are aware of deeper indicators of measuring their impact. In an age when social entrepreneurs, rising innovations across technology, and global connectivity have created a universal movement that allows us to redefine the potential to improve people’s lives, impact investing seems an ideal vehicle for linking the power of markets with the passion to do good.
So, going back to the question of our responsible investors: will impact investing be a good fit for them and their investment mandate? As with any investment analysis, I encourage investors to address the pros and cons ahead of being attracted to impact investing. Further to the research curated by Rockefeller Foundation coupled with my own observations, the key benefits can be broken into three elements:
1. RETURN OF INVESTMENT
The general understanding of impact investing globally is it allows the investor to reinvest the initial capital in another socially beneficial project or organization. Even a simple return of principal creates philanthropic leverage unattainable through normal grant making.
2. INVESTORS ARE NOT WORKING AGAINST THEMSELVES
When investments are in line with philanthropic values, investors are less likely to find themselves in a difficult position of holding public ownership in companies that actively undermine their grant making strategy.
3. POTENTIAL TO LEVERAGE OTHER INVESTMENTS
Impact investing can provide a bridge between capital markets and philanthropy, and, at the same time, create new ways of sharing the risks and rewards- by using loan guarantees, for example.
In theory, the pros can be extremely enticing for an investor, but there are still a few key challenges to be addressed, with the aim of trying to overcome these, due to the rise of impact investing. The three key difficulties for an investor are:
1. INSUFFICIENT RATING, BENCHMARKS, AND IMPACT MEASUREMENT
This is a key debate I have had on several occasions: how do we “measure impact?” The impact investing industry is working on standards for investment performances; however, there is yet to be a full set of reliable tools to guide impact investing, particularly as it relates to social and environmental returns. A global index is yet to be created that allows investors and social entrepreneurs to really measure tangible outcomes of the given investment. This isn’t to say there are not frameworks in place- for example, The Global Impact Investing Network (GIIN) coordinates the emerging world around metrics.
2. LACK OF DEAL FLOW
Since impact investing, as an industry, is relatively “new,” the supply of investment opportunities offering impact, scale, and financial return often falls short of demand. As a result, for many impact-driven investors, there can be a growing frustration in finding the deals that fit both in their investment mandate, as well as their philanthropic positioning.
3. INVESTMENTS CAN CARRY SIGNIFICANT RISK
As with traditional investment models, impact investing comes with various levels and types of risk. For example, some social enterprises seeking impact investment may operate in high-risk markets, where a business faces key challenges of creating infrastructure as well as provide a service. In such cases, the ratio between the cost of due diligence and the investment itself is often high.
Now, it goes without saying that the given challenges are solvable, and these also give an opportunity for the social entrepreneur to consider these challenges, and frame their investment structure to address the lack of measurement, take full advantage of the growing demand, and address market risks from the offset. Beyond the rise of the responsible investor, I am fortunate to have been exposed to key ventures across the UAE that are driven by impact- one of these is Artelus, which is a software house using artificial intelligence to provide screening solutions for billions of people around the world who don’t have access to primary healthcare. There are also other examples across the UAE, to highlight at a commercial level, of businesses that are driven and focused on impact as their forefront of their structure, such as Access Power, Global Investment Bank, Evolvin’ Women, Girls Do Good, which cover key industries like power, healthcare, investment banking, hospitality, and education. All of these enterprises are homegrown, with a very global perspective on impact, that started here in the UAE, and now reach every corner of the globe, including high-risk emerging markets.
Clearly, our enterprises in the region are increasingly focused on impact, and as are the investors across the region. According to the recent study by Investor Watch by UBS Global Wealth Management quoted earlier, high net worth (HNW) investors from the UAE are compelled to commit resources to sustainable and impact-driven investments. The study was conducted among more than 5,000 HNW investors across 10 markets such as Brazil, China, Germany, Hong Kong, Italy, Singapore, Switzerland, UAE, United Kingdom, and United States with at least US$1 million in investable assets (excluding property), and it found that the highest rates of adoption in sustainable investing was found in the UAE.
It goes without saying that bringing impact investing to the forefront would provide a new power and push to achieve the UN Sustainable Development Goals. The cost to meet the goals is steep, and, as such, often questioned on its achievability- to quote, we need $7 trillion annually, including $4 trillion for emerging markets alone. We must therefore be creative in mobilizing private capital. Impact investing has the potential to raise trillions to address the world’s most pressing development needs, which is being addressed across the UAE and beyond, allowing us to prevent and mitigate issues ranging from climate change to delivering the education and health services needed for lasting prosperity. As we get set for the new year, I look forward to continuing my journey in the UAE and being amongst responsible investors who are driven to make both a local and global impact.
Zahara Malik is co-founder and CEO of Grosvenor Capital (GroCap), a boutique advisory company headquartered in the UAE which focuses on providing clients with business strategies, capital introduction and advisory services across the GCC, Africa and beyond.
Malik has a track record of working with successful entrepreneurs and prominent figures, including royal dignitaries, heads of state, ministers, UHNWI, family offices and executives. She has built substantial experience of working in emerging and frontier markets as an investment specialist holding senior positions at Access Power, Global Investment Bank, Invest Africa and Sunbird Group.
Furthermore, Malik has worked on key philanthropy and impact campaigns with HRH The Prince of Wales, The Princes Trust and Mosaic International network. She formally chaired The Princes Trust Junior Associated Program, and is currently a trustee of Jaago Foundation, where she opened her first school in Chittagong, as well as Chief of Amplification for Girls Do Good.
Malik was also a finalist for the “Rising Star” category in 2017 for the prestigious British Muslim Awards. Malik holds a MSc in global governance from UCL, and has become a published researcher after earning a distinction in her master’s dissertation on the global issues surrounding water wars and the impact of shale gas production across the US and China.