Co-author: Mike McCreless, Executive Director, Impact Frontiers
5 min read
Amidst a global unprecedented economic and health crisis are unique opportunities for private debt investing to create significant social impact. There is a pivotal opportunity for institutional and private investors, who are increasingly seeking investments aligned with their social objectives or the UN Sustainable Development Goals (SDGs), to bridge financing gaps. With sustainable investing set to increase to 95% of global assets by 2030[1], and an expected wealth transfer of $68 trillion to the more socially conscious millennial generation over the coming years[2], the investment appetite to create positive change whilst being financially beneficial has never been higher.
However, a key question that surrounds ESG and impact investments is ‘what difference is my investment actually making?’. There is an imperative need for better integration of sustainability and impact data to reflect the outcomes on beneficiaries and meet client expectations. The practice of impact measurement, where social and development outcomes are measured and tracked as part of the investment process, is a key enabler in closing this gap and ensuring capital is reaching – and benefitting – the target segments of the population.
A credible and robust impact measurement system, comprising the tools required to assess and report the impact of investments, would provide assurance to investors and asset allocators they are achieving their stated impact objectives, and drive more catalytic capital towards development goals.
How can impact measurement support post-pandemic sector recovery?
A key sector that has been disproportionately impacted by Covid is the micro, small and medium-sized enterprise (MSME) sector. A powerful, but often-overlooked driver of economic growth, MSMEs provide up to 60% of GDP contribution and 90% of employment across emerging markets in Asia[3].
However, an acute lack of access to affordable financial capital hinders their ability to participate in and contribute to long-term economic growth. An alarming report from the World Bank[4] indicates that approximately 70% of MSMEs in emerging markets lack access to credit and basic financial services. This has created a financing gap of over $2.7 trillion[5] in the Asia Pacific region alone. They are hindered by a lack of collateral, financial records and a credit score, rendering them unable to upgrade, innovate or expand, leaving them at the base of the pyramid.
These businesses, often run as a family operation or by young entrepreneurs, provide a critical means of livelihood, security and social development opportunities. While some of these enterprises are economically viable, most of them eke out a minimum subsistence. Without access to formal financial services, they are excluded from economic growth and its benefits.
Expanding financial solutions for these vulnerable groups is critical to their post-pandemic recovery. It would enable them to become professional, productive and profitable, encouraging sustainable inclusive growth for low-income populations, and facilitating upward mobility to bridge socio-economic divides in the wider region.
Introducing impact measurement to investments directed at alleviating this financing gap would bring greater accountability to the sector and could speed up economic and social recovery. Credible and transparent impact measurement brings visibility to how and where investments are having a positive impact on livelihoods and contributing to social development. For example, did providing affordable financing allow an MSME to pay its employees’ wages, invest in employee training or education, or purchase new technology to improve productivity? Or, in fact, did the financing not lead to any economic or societal benefits? Without traceability in the financing chain, investments are often mis-directed or mis-represented in terms of impact, leading to the persistence of socio-economic inequality.
How can investment firms and asset allocators help close this gap?
Investment firms such as GreenArc Capital, an impact investment fintech specialising in private debt markets, have become more attuned to the need for credible and transparent impact analysis. This can help financial institutions and investors understand the impact of investments to inform and facilitate more impactful decision making.
With the objective of developing a best-in-breed impact measurement and reporting framework, GreenArc joined the Impact Frontiers Programme offered in Asia through AVPN, as part of a global effort led by the Impact Management Project. The framework integrates impact holistically and quantitatively with financial risk and return in investment by developing an impact score for debt investments. Based on the potential impact of financing a beneficiary’s livelihood, the score summarises the context behind a set of indicators, taking into account socio-economic and development factors, and provides a rating on the capacity of an investment to generate positive impact.
Amongst the many ways of reporting impact, GreenArc chose to follow the route of an impact score to provide a framework for comparison and consistency for decision making. Their aim is to help investors understand if, where and how impact is created, as well as prioritising investments based on expected impact alongside expected risk-adjusted financial returns.
Through participating in ecosystem wide efforts such as Impact Frontiers, GreenArc is helping to build a financial sector that drives the UN SDGs and serves social goals across Asia. By providing impact measurement and reporting to both investors and asset allocators, GreenArc aims to bring greater accountability and efficiency to private debt investing, ensuring capital is directed at fostering true social development.
[1] Deutsche Bank
[2] https://www.forbes.com/sites/jackkelly/2019/10/26/millennials-will-become-richest-generation-in-american-history-as-baby-boomers-transfer-over-their-wealth/?sh=3b719cb86c4b
[3] IFC, SME Finance
[4] MSME Finance Gap, World Bank
[5] SMEs in Developing Asia, Asian Development Bank
