Impact investments: An emerging asset class

ACCORDING to J.P. Morgan, impact investments are those that are intended at creating positive impact beyond financial return. As such, impact investments require the management of social and environmental performance in addition to financial risk and return.

ACCORDING to J.P. Morgan, impact investments are those that are intended at creating positive impact beyond financial return. As such, impact investments require the management of social and environmental performance in addition to financial risk and return.

There is need to distinguish impact investments from the more mature field of socially responsible investments (SRI), which generally seek to minimise negative impact rather than proactively create positive social or environmental benefit.

In a world where government resources and charitable donations are insufficient to address the world’s social problems, impact investing offers a new alternative for channelling large-scale private capital for social benefit. With increasing numbers of investors rejecting the notion that they face a binary choice between investing for maximum risk-adjusted returns or donating for social purpose, the impact investment market is now at a significant turning point as it enters the mainstream.

Investors in this space range from philanthropic foundations, commercial financial institutions to high net worth individuals investing across the capital structure, across regions and business sectors, and with a range of impact objectives.

For a developing economy, such as Zimbabwe, there is indeed an opportunity for investors to make a return while making a meaningful impact on the country at large.

This will support sustainable long-term economic growth and ultimately an improvement in the standards of living of the citizenry. It should also be highlighted that impact investments generally aim to improve the lives of poor and vulnerable people or to provide environmental benefits at large.

Most impact investments target the base of the pyramid (BoP), which refers to the poorest two-thirds of the economic human pyramid, a group of more than four billion people living in abject poverty and earn annual incomes below US$3 000 in local purchasing power.

The Zimbabwe Association of Pension Funds (ZAPF) 49th Annual Congress that was held in Victoria Falls from May 15-18 was themed, Value Creation for Pension Funds in Zimbabwe.  Chengetai Zvobgo, the vice chairperson of the Association of Investment Managers Zimbabwe (AIMZ) gave an insightful presentation on impact investing in Zimbabwe.

According to Zvobgo, impact investing aims to achieve a dual objective of making a financial profit, while also contributing to solving social or environmental challenges. The presentation also highlighted the following key points about impact investing;

Intentionality - Impact investors are intentional about creating a positive impact alongside financial returns;

Measurable impact – There is need to define Impact goals (number of jobs created, increase in access to clean water) and implement a robust monitoring and evaluation framework;

Diverse sectors - Impact investing can span various sectors such as clean energy, affordable housing, healthcare, education, sustainable agriculture;

Financial returns - Impact investors expect to receive financial returns on their investments, although these returns may vary depending on the specific investment and impact goals (IRR, Payback Period, NPV);

Types of Investors - Impact investing is not limited to institutional investors or large funds; and

Limitations - Impact investing faces constraints such as measuring impact accurately, finding suitable investment opportunities that align with impact goals, and balancing financial returns with impact objectives. However, the field is evolving, and efforts are being made to address these issues.

The key takeaway from the presentation was that there is need for a multi-sectoral approach in promoting impact investments in Zimbabwe. Key stakeholders such as the Government of Zimbabwe, private sector, development partners and communities should collectively apply their creative energies to support the thrust towards the attainment of the country’s developmental goals through investments that are sustainable and make a meaningful impact.

This can be achieved by putting in place the following key enablers:

Prescribed asset (PA) status on impact investments - There is need for a seamless and efficient process of granting PA status to projects that have an impact on the broader economy as a sweetener for pension funds to allocate more resources to the asset class;

An enabling policy environment – There is need for an efficient and well-coordinated process of obtaining required regulatory approvals (permits, licences, and regulatory authority approvals);

Incentives for impact investments - Tax breaks (income tax, VAT, excise duty), guarantees on currency convertibility, enforcement of BIPPAs.  We note that the Government of Zimbabwe has put in place tax breaks for the first 5 years of operation and duty concessions when importing equipment for Independent Power Producers (IPPs) and recently launched Government Implementation Agreements (GIA) for selected new investments by IPPs. There is scope to extend such incentives across other sectors that will positively impact the socio-economic landscape of the country;

Capacity building - There is need to build technical capacity in the area of appraising, implementing and monitoring impact investment projects; and

Awareness and education – This involves raising awareness about impact investing and its potential benefits.

Overall, we conclude that impact investments are an emerging asset class that the investment community in Zimbabwe should focus on.

That said, the unique risk/return/social value characteristics of impact investments will require an alternative investment strategy.

While we recognise some views that impact investments should be assigned to traditional asset classes, such as equity and debt, we believe this would lead to a fragmentation of impact investing skills. In our view, positioning impact investments as an asset class within alternative investments is most likely to catalyse a significant inflow of both domestic and international capital.

  • Matsika is a corporate finance specialist with Switz View Wealth Management. — +263 78 358 4745/ [email protected]

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