Is impact investing effective all-in-one model for growth?

Impact investment, which loosely refers to having a focus that goes beyond the profit motive alone and instead seeking to generate triple bottom line returns namely social, environmental and financial, has been touted as a smart strategy for businesses in Kenya and Africa in general.

Proponents of impact investment argue that it can help to address health, education, infrastructure, environmental, water and sanitation deficits prevalent on the continent.

It is becoming a big deal globally, and already in Kenya there are numerous impact investment activities on the ground funding enterprises that seek to generate triple value.

There is a spectrum along which impact investments lie. On one hand are those that are more mission-oriented and on the other end are those that are more profit-oriented but both share a commitment to generate economic, social and/or environmental (social) returns.

But is marrying impact and profit realistic? Some argue that Nairobi has already hit an impact investment bubble where, too much money chases too few investment-ready companies, weak performers are propped up when they should really be driven out of business by superior competitors.

Impact investment makes sense and if such investments do deliver triple returns, it is an effective all-in-one pill for Kenya’s holistic development.

Further, given Kenya’s weak regulatory framework and even poorer implementation of policies and law, it is a good idea to welcome investors who seek to work honestly, responsibly and with economic and social development in mind.

Some companies pollute the environment, defy labour laws and exploit local communities as they conduct business.

Even if there are laws in place to prevent such phenomena, corruption and kickbacks means businesses can get away with unsavoury behaviour.

Thus welcoming ethical investors creates an automatic buffer against such delinquency. In addition, when social financing is done in partnership in communities­­ to build their entrepreneurial capacity to tap into their resources, develop assets and ensure assets benefit and are owned by the community, some dramatic socio-economic graduation can occur.

One problem with impact investing is that the definition given in this article is one of many. There is no consensus on what qualifies as impact investment.

Some argue that impact investors have to expect a lower than market rate of financial return because those with market rate returns should be easily absorbed by the market.

Others, such as the UN, define impact investing as any investment that has the intent to create benefits beyond financial return. The problem with ambiguity with basics such as definitions is that any enterprise can masquerade as an impact-focused investment and give a distorted representation of how big the impact market it. Further, it creates confusion about when impact investing works and when it does not.

Categorising certain investments as “impact investing” insinuates that other types of investment do not make any impact beyond financial gain.

Yet we know that SMEs all over the country, especially those active in poor communities, do not self-identify as impact enterprises, yet they are having impact in their communities.

They provide employment for thousands, support the development of employees and even provide medical care for them.

Trying to marry people, the planet and financial gain is not always profitable, especially when dealing with genuinely poor communities.

Such communities are the ones that need low-cost services the most, yet delivering at a price point the poor can afford almost always translates into very small margins meaning that impact businesses often have to be subsidised over long periods of time.

Therefore, are they viable market players? Many impact investments need subsidies which, may be prolonging the life of poor business ideas and products.

A chronic problem in the impact investment industry is the difficulty in measuring and demonstrating impact. There are so many models available on how to measure impact and different impact investors use different models thereby generating different, incomparable data sets.

Ms Were is a development economist.