Industry Insights

Is impact investing more important than most realise?

By definition, impact investing – in businesses and projects that have a positive social impact – is good for society.

But, it’s not generally appreciated that it can – and will have to – play an increasingly important role in improving lives in areas where for decades, people have looked to governments to provide.

For many years governments around the world have been living beyond their means, with expenditure exceeding revenue year after year. Take the US. There, no government has posted an annual budget surplus since 2001, when the federal debt was only US$6.9trn, which represented 54% of Gross Domestic Product (GDP). Today, it has ballooned to roughly the US$20trn mark, which represents 107% of GDP.

Not that the US is alone in this. All over the world governments have been addicted to borrowing, which allows them the political benefits of spending without the political costs of taxing. The result of that addiction is that it has been estimated total world government debt now stands at US$63trn.

This is not sustainable. Take Greece for example - according to an IMF report quoted by Bloomberg, on a baseline scenario, Greece’s government debt will reach 275% of its GDP by 2060, when its financing needs – paying the interest on that debt - will represent 62% of GDP.

Admittedly, Greece is an extreme case but many other countries could easily slip into the same dire situation. Debt as a percentage of GDP increased in 34 of 43 countries between 2006 and 2016. In the world’s seven major advanced economies, the G7, debt as a share of GDP increased by an average of 22.2% between 2008 and 2011. As of 2016, Germany was the only G7 country that had scaled its debt-to-GDP ratio back to pre-recession levels. Also, six countries saw their debt as a share of GDP increase by more than 50% between 2006 and 2016.

Sadly, the situation is likely to get worse before it gets better. At the start of this year, credit rating firm S&P Global estimated that governments around the world would borrow roughly US$7.4 trillion this year, pushing their overall debt total to a record level for the third year in a row. In the US, President Trump has announced massive tax cuts in combination with an increase in federal spending and consequently the US government is issuing more bonds into the debt market. The substantial decrease in tax revenue is expected to cost the US treasury US$1.9trn over the next decade.

There must be cuts

Eventually, borrowing governments run out of road. In the case of Greece this has already happened, for others it is happening or is about to. In the UK, austerity in the wake of the 2008 crash has been the theme, even though government has persisted in spending more than it receives. But even the struggle to get public finances under control has meant a cutback in many public services, and genuine hardship.

According to research by the Resolution Foundation thinktank, UK spending changes from April to save around £2.5bn will dent the incomes of about 11 million families losing an average of £190 this year alone. This goes hand-in-hand with well publicised cuts in services such as police, prisons and legal aid.

This is not a phenomenon peculiar to the UK. For example, Macron came to power in France with a programme of public spending cuts, but its effects will be most acute among vulnerable people in the developing world. This summer in Malaysia a new government came to power saying that national debt, which amounts to 80% of GDP, was a problem that had to be tackled. Already the government has shelved some big projects and more are likely to follow. Some agencies have been closed down and many contracts have been terminated.

Read more: impact investing: targeting a financial return and making a real difference

This is being repeated around the developing world. Arnab Nath, macroeconomic analyst at GlobalData, has said: ‘‘Rising interest payments on exploding levels of public debt could force many governments to reduce spending on priority areas such as infrastructure, health and education significantly impacting their economic growth which could actually force some governments to declare bankruptcy.’’

There are whole swathes of life where governments will no longer be able to afford to provide services and in poorer countries this will literally be a matter of life and death for millions. Even in richer countries, while governments will still provide basic services such as health and education, they will be less likely to have the cash to explore alternative green energy sources or plastic recycling.

Increasingly this is something that investors realise - and which they can directly tackle.

Impact investors to the rescue

According to new research published by Triodos Bank, most investors believe it’s businesses rather than the government that have the power to solve many of the biggest challenges facing the world today. Nearly three-quarters of those surveyed for the research say companies can create positive social and environmental change, while 50% believe the state seems powerless to change society for the better.

This is not necessarily a bad thing. Governments are often not the most efficient providers of services and they all too frequently lack the agility and the market imposed disciplines achievable - and enjoyed - by private businesses.

Furthermore, the record of impact investments is not only that they can effectively meet social needs but that they can also give their investors a decent return on their capital. A survey by the Global Impact Investing Network (GIIN) and JPMorgan found that 55% of impact investment opportunities result in competitive, market rate returns. The survey also revealed that portfolio performance for impact investments overwhelmingly met or exceeded investor expectations in terms of both financial goals and social or environmental impact.

Impact investing will increasingly be seen to have a crucially important play in improving individual lives and society in areas where cash-strapped governments are having to take a back seat, whether this in providing training for skilled employment in the West, or in helping to provide children with a basic secondary education in Africa.

And this is something that as time goes by, more and more investors want to get involved.

Indirectly making a genuine impact

It’s important to highlight impact-focused investors aren’t going to completely stop global, economic problems. They're unlikely to be able to immediately stop local, social ones either.

But they can definitely play a role. They undoubtedly can be involved in tackling the issues, and ultimately drive wider change.

Take the UK housing market as an example. It’s well documented that we have a housing crisis. People are struggling to get onto the housing market, which is having a number of social and economical repercussions.

Now one investor can’t build enough homes to supply the entire demand in even a small region. It’s simply not achievable. However, opportunities exist today for investors to become involved on a joint venture basis with experienced house builders who obviously have the knowledge, experience and resources to build homes on a much larger scale than an individual could.

By investing into such opportunities, you can be part of a force that’s tackling the housing crisis. You may not be on-site laying bricks yourself, but you’re undoubtedly part of the problem-solving process.

Read more: with the UK in the midst of a housing crisis, property investing is a must

Similarly, investors into companies focused on live, global issues can both immediately and continually have an impact.

Look at Intelligence Fusion as an example. Providing situational awareness to companies right around the world, these companies are using the information provided to protect their people and assets. Not only does this make individual lives safer, but it could influence financial aspects - costs of products could reduce as previously unsafe channels open up, helping to make businesses more profitable, accelerating growth which consequently affects job creation and as a result, the lives of many.

And having raised two rounds of investment to date on GrowthFunders, investors have had the opportunity to be part of the Intelligence Fusion journey and see their financial involvement make a real difference.

We can all make a difference

There are issues in the world that happen outside of our control as individuals. Some of these will resolve themselves quickly, whilst others will be here for years to come. There are many that can’t be fully solved, but instead need to be actively managed.

As individuals, we can’t often tackle them directly in a noticeable away - but that doesn’t mean we can’t make an impact. Opportunities exist - arguably more than ever today - for us to become involved in businesses and projects where we can see our financial investment make an impact.

We can all make a difference, and as investors, we should at the very least consider the possibility of impact driven opportunities as part of our portfolios. Some would say there are just too many issues to solve to not consider being involved.

Driving Growth.
Creating Value.
Delivering Impact.

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.