By Maximilian Martin
Every year since the last financial crisis, investors have proclaimed a watershed moment for the impact investing movement.
If impact is to become the third dimension against which we screen every investment—next to risk and return—it’s just like the treadmill in the gym: It’s about running fast enough, and long enough. Fortunately, we have four opportunities to source massive amounts of fresh investments across different asset classes and geographies to make 2016 count.
Many developing-country capital markets are utterly inefficient. Weak corporate governance, depressed domestic demand, and high political risk create barriers to foreign private investment on a major scale. There is a silver lining, though. In advance of COP21, 187 countries—representing 97 percent of global greenhouse gas emissions—handed in so-called “intended nationally determined contributions.” They describe the post-2020 climate actions that countries intend to undertake under the new climate accord. According to the International Energy Agency, executing them would require that the global energy sector invest $13.5 trillion in energy efficiency and low-carbon technologies from 2015 to 2030, or 40 percent of total energy sector investment. Today, it’s often the multilateral banks that finance clean energy or other infrastructure in emerging and frontier markets. The Asian Development Bank, for example, invested $75 million in Bangladesh’s Bibiyana II power plant, which aims to help reduce shortfalls in the country’s power supply, while also cutting greenhouse gas emissions. As countries look for new ways of financing the execution of their climate pledges, tiered capital structures can enlarge the capital pool, where bilateral and multilateral donors take the greatest risk, and impact investors take some risk in exchange for high impact. Breathing new life into public-private partnership strategies, together they can be catalytic in bringing much-needed classical private equity, as well as infrastructure investors and their expertise, to the table.
The power of digital is the talk of town. Scared of newcomers, banks are rethinking their business models and investing in FinTech—technology used in financial institutions’ back, middle, and front office functions to dramatically improve their business models and value creation processes. Democratizing access to capital via crowdfunding is similarly unleashing disruptive creativity. Take firms such as CodersTrust, a Danish startup integrating FinTech, EdTech, and WorkTech to help young people in the developing world upgrade their IT skills via student loans, education, mentoring, and freelance jobs. This enables students to participate in the fast-growing online IT labor market and helps fill the growing online programming gap—all while creating $2-an-hour programming jobs in countries such as Bangladesh, where 40 percent of the population does not even make $2 a day. By funding digital businesses that build financial inclusion and affordable service provision, impact investors can get a foot into the financial services door. By helping build such “digital supply chains,” they can enable men and women in emerging markets to achieve a step change in their income or purchasing power.
The Zuckerberg pledge to give back by using tools of modern finance other than grants and growing excitement around the possibilities created by digital currencies will no doubt lead to another peak in impact investing enthusiasm in 2016. Let us make sure that we investors also focus on some of the heavy-duty work of improving the social and environmental performance of firms in emerging markets—where millions of people work very hard for a living—and contribute to making the energy transition a success.
Published by Stanford Social Innovation Review