WHY IMPACT MATTERS

Globally the appetite for impact investing is seemingly growing, with some investors eager to show that they are broadly a force for good. TOMORROW spoke to Elias Masilela, Director and Chairman at DNA Economics and a commissioner on the National Planning Commission, on his views about impact investing in South Africa today.

In South Africa impact investing has gained some interest as an approach to investment that aims to achieve both financial returns and social or environmental goals. In Elias’s view however, despite greater investor appetite, the market is far from reaching its potential – the ‘tipping point’ in the global nomenclature.

“As much as interest has been recorded, it has not been enough. The interest that seems to have been recorded is largely academic. People have not yet put their money where their mouths are.”

Elias believes that part of this slow uptake has to do with central principles. “One of the fundamental bases of impact investing is that you need to reorder your objective function. Start off with defining what positive impact or change you want to make in society. This should come before the pursuit of commercial gain.” This may seem a contrary approach for business. However, there are companies that have been built on this foundation. An example is Tata, the automotive manufacturer.

“Tata is a leading example. When they went into business their objective was to do what the other multinationals were not doing in India. Unlike these other conglomerates, they went into business to solve an Indian problem - to produce cars suited for the average Indian. In a Tata boardroom, they walk in and ask themselves: ‘What are we trying to solve for?’ Once they have established that, then they can look at how they will optimise financial return out of it. When they went into software manufacturing, they went into that market for the same reason – to solve for an Indian market. Their global play is purely stemming from this philosophy. “My definition of impact investing is: ‘what is the positive impact I want to have on humanity?’ If you do not ask yourself that question, you are not truly impact investing, you are having that social impact by accident, it was not your primary intent.” When asked what was stopping so many in business from thinking this way, Elias pointed to two factors: short-termism and narrow-mindedness. “We seem to think the role of business is purely to maximise profits at all costs. The Global Financial Crisis we are still trying to get out of today, was produced by greed and shorttermism, yet we still do not learn.” Now, although admittedly still small, impact investing has the potential to increase in scale, and thereby contribute to addressing our country’s many challenge. As Elias mentions, “the larger pension funds and sovereign wealth funds in other parts of the world are already thinking about it and acting on it.”

There is a role for everyone in impact investing. For asset managers, Elias believes a shift in mindset is still required. “If one believes the investment mandate comes from the asset owners, then it is important for the asset owners to understand their systemic role and responsibility in the economy. Trustees need to be better educated to understand the opportunities as well as the risks. In particular, how they manage these risks for optimum return. Ultimately asset managers and owners should be bound by the same beliefs, for them to operate in synchronisis.” Elias challenges asset managers to do more. “Managers have the intellectual capital to change mindsets – for good. Over reliance on risk averse and stereo-typic advisers is one of our biggest Achilles heels.” In summary, Elias highlights four statements that encapsulate the DNA of impact investing going forward, which are what he calls fundamental beliefs of impact investors, as espoused by the Global Steering Group:

  1. People do not want charity, they want opportunity.
  2. The capitalism that we have now will not serve us well in the long term. Here we talk about replacing the invisible hand with the invisible heart, so as to guide the way we deploy capital in a responsible way.
  3. Looking at profit for a higher purpose. To the question of whether impact investing has proven to address the challenges this country face, Elias says: “The answer is yes, but we need more volume, and more determination. Let me speak about the Developmental Investment Policy of the GEPF (Government Employee Pension Fund). If we had applied it properly with the requisite volume and the right intent – especially with the GEPF being the significant player it is in the economy – we should have made an effective dent by now. When the policy was set up, it was observed that the relationship between the performance of the fund and the economy was uni-directional: always from the economy to the fund and not the other way around. This was simply so because at that point the fund was invested only in the listed space. And if you want to make real impact you should look towards the unlisted space – the development space, the infrastructure space – which is where the GEPF has been looking.”
  4. We need to measure our impact, to be authentic and believed by those we are impacting. While not all impact investments will have an equal impact, they will be complementary and accretive – improving the prospects for achieving our collective goals. “We must appreciate that we have been in this malaise for far too long – we cannot delay. As allocators of capital, we need to emphasise urgency! For low hanging fruit, we need to look at infrastructure. Although infrastructure is by nature premised on a long-term horizon, it has very immediate returns – immediate contribution to growth, employment creation, skills development and hopefully private sector capital crowding in – if done right. Whilst these investments can contribute to growth on day one, the benefits do not die on day two.”

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