By Florian Kemmerich, Managing Partner at Bamboo Capital Partners
The world needs healing now more than ever. This is not wholly related to the pandemic either. Before COVID-19, we were witnessing high rates of unemployment, a lack of basic amenities, and a dearth of basic healthcare services in many developing countries.
There is a major need for significant investment in many sectors to improve the lives of millions, if not billions of people across the world. But investors do not need to sacrifice profit in the name of helping the poor. With their capital, they can have a direct impact while enjoying strong returns on their investment.
Gone are the days when only governments and public financial bodies were the major contributors to projects with a social or environmental purpose. Today, more and more investors are putting their money in businesses for financial gains and to do good – a phenomenon known as impact investment.
According to a study of the Swiss Sustainable Investment Market in 2019, impact investments intend to generate a measurable, beneficial social and environmental impact alongside a financial return. In Switzerland, it represents two percent of sustainable assets, which at first may seem low, but impact investment yields a high social impact and can provide a solution for those who want to invest their money to deliver both financial and social or environmental returns. (see KPMG Clarity on Sustainable Finance)
Impact investment is about taking risks and investing early in underserved areas or geographies to generate positive impact. Traditional investing models are heavy – they require a lot of people and processes – this makes the administration of big funds complex, slow, and more expensive to manage.
The “blended finance” approach to impact investment solves these problems by introducing catalytic first-loss capital to act as a layer of protection. First-loss investors are primarily focused on a specific “theory of change” – the cause they are seeking to invest in – to scale impact. They often seek to invest in opportunities which contribute towards achieving the UN Sustainable Development Goals. They seek a sustained catalytic effect of their grants on the impact of their investments and their potential to improve people’s lives.
At this point, it is worth noting that there are multiple ways to generate impact. For instance, investing in businesses to create economic inclusion in areas where unemployment is prevalent is one major problem impact investors seek to solve. Another theory of change is poverty uplift with the investment in access and affordability of basic services, like banking, energy, healthcare, and education.
Investing in businesses that provide products to serve the needs of low- to middle-income customers will help them scale and improve more lives. A good example would be an investment in the production and distribution of clean water in areas where it is scarce, or in solar energy systems in off-grid communities. Furthermore, investing in businesses that can leverage technology to provide a better service or quality of product to underserved populations will be vital. This is even more important in times of crisis.
We must remember that the needs of people living in emerging economies are more acute than the developed world. In these regions, investors can use their capital as a tool for change, while reaping a financial reward.
This is, in essence, the core principle of impact investment and one which Florian Kemmerich, Managing Partner at Bamboo Capital Partners, succinctly summarises in his mantra: “impact lives, share profits.”