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Innovative financing and social impact investing

08/01/2018

Public resources alone are not enough to tackle the world’s most pressing challenges.

Impact investing – private capital investments that generate social or environmental benefits while also turning a profit – could fill some of that gap.

Impact investors are increasingly committed to achieving the UN Sustainable Development Goals (SDGs) – from ending poverty and hunger by 2030 to reducing inequalities and preserving the health of the planet.

While the global community managed to halve poverty by 2015, “reducing the other half will be more complex with a longer list of issues to address,” said Erkan Ozcelik, an economist in FAO Investment Centre.

One particular challenge is rapid population growth and the subsequent youth bulge. In sub-Saharan Africa, the working age population is expected to double by 2050 – even sooner in some parts.

“Young people in rural areas aren’t necessarily interested in putting the same toil, sweat and tears into working the land as their parents did. For many, agriculture isn’t glamorous or appealing, and their first choice may be to move to the cities,” Ozcelik said.

“That’s why it is important to create new jobs in agriculture, not just in farming but throughout the entire supply chain, in agro-processing and service provision. This is an area where the private sector can really be tapped.”

Ecosystem approach

During FAO’s Investment Days 2017, several private sector investors seeking to have an economic and social impact on rural transformation shared their experiences.

One institution is PAMIGA – the Participatory Microfinance Group for Africa. PAMIGA is working to unlock the economic potential in rural sub-Saharan Africa through better access to innovative financial and technical services, especially related to clean energy and water.

Renée Chao-Béroff, PAMIGA’s general manager, explained that access to microfinance alone is not enough to build impact.

“To have a direct impact on the lives and incomes of rural households, you really need to have an ecosystem approach to investment, where you work with a series of players – farmers’ groups, service providers, including those who provide water and solar energy to farmers, processors, buyers, distributors,” she said.

They need access to all types of finance, including short-term working capital, long-term asset building capital and equity at the early stages to invest in their growth. Complementarity between the different financial providers is crucial, as is technical assistance to build the infrastructure.

 “At PAMIGA, we created various impact investment vehicles to address the different needs of all these players within the impact ecosystem,” she added.

Inclusive growth

Another institution is the Swiss-based ResponsAbility, one of the leading asset managers in development.

With a portfolio of USD 3.2 billion, mostly from private investors, ResponsAbility is investing in 500 companies in about 100 emerging and developing countries in the areas of microfinance, energy and agriculture.

Through both equity and debt financing, they target inclusive businesses that contribute to six impact areas stemming from the SDGs – from improved well-being and decent employment to better access to markets and healthy ecosystems.

“We are reaching millions of low-income people and farmers and hundreds of small and medium-sized companies with affordable products and services, clean energy and access to capital,” said Coralie David, Senior Research Analyst for Agriculture at ResponsAbility.

Blended finance

The recently launched Yield Uganda Investment Fund is a good example of how public and private sector investors are partnering to provide capital –a blend of private equity and grants – to small and medium-sized agribusinesses in Uganda.

Pearl Capital Partners, an agribusiness private equity manager focused on eastern and southern Africa, is overseeing the Fund, and the European Union, through IFAD, is the Fund’s anchor investor.

“The companies selected to receive funds have excellent potential to generate attractive financial returns while also improving the livelihoods of rural households, creating jobs, ensuring food security and contributing to Uganda’s economy,” said Wanjohi Ndagu, Partner and Investment Director at Pearl Capital Partners.

Growing market

According to a survey by the Global Impact Investment Network, impact assets in 2016 totaled more than USD 77 billion.

And the market has strong potential for growth, especially with the rise of socially and environmentally responsible investment. But impact investment is still relatively new.

The challenge is to leverage such private sector resources to complement public investments in order to sustainably address complex global issues.

“The money is there, but good quality opportunities aren’t, so the private sector is biding its time. But this can serve as a rallying call to get people focused on this potential and thinking about the role that public sector investment can play to help move this forward,” Ozcelik said.

This article is part of a series to share the latest thinking and learning on innovations in agriculture from FAO Investment Days 2017.