What is and what isn’t impact investing?

The Global Impact Investing Network’s (GIIN) definition of impact investing is probably the
default definition: “Investments made into companies, organisations and funds with the
intention to generate measurable social and environmental impact alongside a financial
return”.
Another i-word — intentionality — has become synonymous with impact investing. Meaning
that impact shouldn’t just be accidental to an impact investment. It must be a stated goal.
But even impact investing takes on many forms and faces. So much so that a recurring
criticism directed at impact investing is that its definition is too broad, making it a headache for
those seeking to measure it — what is the dollar or rand value of global impact investment, for
instance, or what are its measurable impacts? Answers to these questions are critical. How
else do you convince investors to put their money into any such venture or fund? As one
analysis puts it, “Impact is both harder to define and to measure than financial returns are;
impact is subjective and idiosyncratic”.
Another critique of impact investment is a rhetorical one — what if an investment with none of
impact investing’s intentionality can achieve the same social or environmental impact? Does
it qualify as impact investment?
Which is why some have argued that the GIIN’s definition was and remains purposefully broad.
That impact investment is meant to be more principle than investment type or class. “By
including a diversity of themes and geographies… and actors, from foundations to pension
funds, the GIIN sought to position impact investing as an increasingly widespread practice,”
argues one paper.

Getting inventive in Africa

That broad definition expands what’s possible in the impact investing space in Africa.
Historically, it’s been pointed out, investments fell into two broad types — those made by
“fiduciary investors” whose only objective was to maximise financial returns; and those made
by philanthropic donors, willing to forego financial gain in pursuit of social or environmental
objectives. The twain never met, until the emergence of impact investment’s forebear, socially
responsible investing (SRI) — even if the focus of SRI was more on ethical investment and
steering clear of questionable companies or products, like cigarettes and weapons.
But SRI lay the groundwork for impact investment. As it did for a host of innovative financial
instruments and blended finance approaches. Blended finance, as the case of the Ci-Gaba
Fund of Funds illustrates, can play a crucial role in impact investing, particularly in the context
of African markets as it allows access to larger pots of capital. It allows investors with different
objectives — so fiduciary and philanthropic investors — to invest in the same projects. As the
GIIN succinctly puts it: “One investor can pursue market rate returns, while the other can
provide sub-market rate returns in exchange for social or environmental impact.”

Finally, going local

The consensus is that innovations like blended finance remain vastly under-utilised. But
interest is growing, especially in Africa. Consider the buzz around the 2
nd Blended Finance
Africa (BFA) conference, drawing financial players from across the spectrum and globe, taking
place in London at the end of May 2024.
But if the aim of the above event is in part to secure greater foreign direct investment, there is
also a movement to reduce dependence on external capital. We are witnessing a growing
trend of locally-led impact investment where local entrepreneurs, investors, and organisations
in Africa are taking the lead in creating, funding, and scaling impact-driven businesses and
initiatives.
One of the key characteristics of locally-led impact investing is that such impact investors have
a deep understanding of local cultures, markets, and social dynamics. This allows them to
create solutions that are culturally relevant. What’s more, these investors are more likely to
recognise opportunities or changing dynamics, making it possible for them to adapt with
greater agility. Their day-to-day experiences, their networks and their proximity give them the
upper hand.
Another obvious advantage would be that local investors may reinvest profits into the
community, creating a virtuous cycle of growth and impact.
Locally-led impact investments also circumvent the kinds of challenges highlighted in a
report by The Bridgespan Group, which points out that fund managers in sub-Saharan Africa
oversee just 2% of the approximately $1.2 trillion in impact assets managed globally in 2022.
In fact, based on interviews with 25 African stakeholders, the report finds that “The ‘impact’
label deters, rather than spurs, investor engagement with African [general partners].”
But we have lodestars to set our locally-led impact investing compasses to. The 2021 report
Landscape of Climate Finance in Kenya by the Climate Policy Initiative (CPI) showed that the
country would need about $40 billion to meet its mitigation and adaptation goals for 2030. In
response, it has set about blending public, philanthropic, and private funds to raise that money.
As one climate-finance expert recently said, “This collaborative effort can serve as a model for
other nations, demonstrating how blended finance can bridge the gap between climate
ambitions and the realities of financial constraints.”