Impact investing – is it the next big thing?

A recent news item revealed that Tanna Coffee was to benefit from a sizeable investment facilitated by The Difference Incubator (TDi). TDi are brokers for impact investors.

Impact investing is well established in other parts of the world. But it is a relatively new concept in the Pacific island region. It’s something that we are likely to hear more about. It is an area of focus for Pacific Islands Trade and Invest. They are looking at ways to increase this type of investment in our part of the world.

So it’s worth finding out a bit more about what impact investing is. How does it work? What are the opportunities this form of investment provides to business in Vanuatu and elsewhere in the Pacific island region? What are the risks involved?

Impact investing is similar to venture capital investment, in terms of where in the business cycle it is most likely to be introduced. The main difference is that impact investors want to see a return that is more than just profit. They are looking to work with businesses that can deliver positive social impacts as well as a financial return.

These social impacts could include environmental protection, improved service delivery in relation to health or education or better livelihood opportunities (including jobs) for previously marginalised groups. Impact investors expect to make a profit but they may be prepared to accept a lower rate of return in exchange for beneficial social impacts. They will expect businesses to be able to measure the impacts of what they do with the investment and report accordingly.

The methods of investment used by impact investors are pretty standard. They are looking to lend money to businesses (to be repaid with interest). Or they are prepared to buy a share of a business, giving them some control and a return by way of a dividend or a share of the profit.

An advantage of this type of investment for Vanuatu and other countries in our region is that this is new money to address local challenges. There are individual investors that work in this way. But increasingly, arrangements of this type are managed through investment funds. This provides an increased level of stability of finance flows.

This type of investment is growing globally. Last year The Age reported that in 2015 a total of AU$15.2 billion was put into impact investing across the world. This was up from AU$14.3 billion the year before. The Pacific island region is a new market for those who manage this type of investing and provides fresh opportunities.

There are some reasons to be cautious. This type of investing is likely to have the most impact if it can be applied to the Small and Medium Enterprise (SME) sector. However, this sector is one where risks are often high and profits are low.

Often businesses in this sector need a lot of support before they are ready to absorb external investment of this type (or any type). One of the key aspects of this type of investment is how the agreed beneficial social impacts are to be measured and reported. This can be challenging for small businesses and if they have to get outside assistance that will come at a cost.

Pacific Islands Trade and Invest are working in this area to position our region as an emerging market for this type of investment. One of the most important things they need to do is educate these investors and their representatives about our region. These investors come with little or no knowledge of Pacific island economics, politics and culture. They need good advice about all of these plus the different legal and regulatory structures that apply across the region.

Businesses that hope to benefit from this type of investment also need to learn. They need to understand what impact investing is and what it is not. For example, it is not aid and it is not a grant. They also need to make sure that their systems and processes are right in order to monitor and report on social impacts in addition to profit and loss.

Governments and policy makers have a role to play. First of all, they need to decide whether this form of investment is one they wish to encourage. If it is, they need to ensure that the regulatory structures and policy settings do not create barriers to impact investors.

The Tanna Coffee investment is the second in our region to have been facilitated by Pacific Islands Trade and Invest. The first was in Solomon Islands, with Kokonut Pacific. As more of these investments are negotiated and then implemented, we will need to invest in learning about them. There will be important experiences to be shared with businesses and investors. This will inform how this type of support for private sector growth can work well in our region.

It may not be the next big thing but it will likely play its part.

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