Impact Investing – the latest green trend in the financial sector, is witnessing growth in both the emerging and developed markets. The investment involves generating a significant positive social and environmental impact alongside a promising financial return. The progress of this relatively new industry is tremendous as it is addressing the world’s most pressing challenges and supporting sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
To address the opportunities and importance of impact investment to investors and startups alike, LightCastle Partners and Roots of Impact had organized a virtual session on “The Thriving Future Of Impact Investments”. The panelists provided an insightful overview of impact investments along with the discussions on the various aspects of social impact, investment, and tools pertinent for facilitating them. Furthermore, it unveiled the Innovative Finance Toolkit, a financing structure that provides an alternative financing perspective for early-stage impact enterprises in Bangladesh.
The session was organized in collaboration with Biniyog Briddhi, Bangladesh Angels, SBK Tech Ventures, Startup Bangladesh Limited, and VCPEAB (Venture Capital and Private Equity Association of Bangladesh).
The discussion panel consisted of government bodies, angels, founders, and institutional investors represented by:
- Maxime Cheng – Lead Market & Capacity Building Programs, Roots of Impact
- Bjoern Struewer – Founder & CEO, Roots of Impact
- Sonia Bashir Kabir – Founder & Chairman, SBK Tech Ventures
- Shawkat Hossain – General Secretary, VCPEAB
- Nirjhor Rahman – Chief Executive Officer, Bangladesh Angels
Impact Investing Outlook:
The Outlook of Global Impact Investing Landscape
In 2019, the global impact investment industry had reached the milestone of being valued at US$502 bn. The GIIN 2019 Annual Impact Investor Survey Report describes the industry as one which is constantly growing, diversifying, and maturing.
The Global Steering Group (GSG) for Impact Investment is an independent global steering group catalyzing impact investment and entrepreneurship. It was established in August 2015, with the mission to drive real impact that improves lives and the planet. The GSG currently covers 33 countries and 28 national advisory boards, and brings together impact leaders from the worlds of finance, business, government and philanthropy. The organization defines impact using the following three indicators:
- Measurable: Impact investing should have measurable impact objectives and the management of financial performance.
- Drives change at scale: Impact investing has the ability to address the challenges posed by the major global societal issues.
- Adds up for everyone: Impact investing aims to drive huge social change to benefit the people and the planet, while delivering financial returns.
Overall, the future of impact investing looks promising as it aims to create a sustainable future where the beneficiaries are everyone. Studies have found that impact investors today are seen as much more proactive and focused on creating a positive impact, rather than negatively contributing to societal issues. Moreover, these investors are also dedicated to developing the impact investment ecosystem, both locally and globally.
When it comes to developing countries, mainly those in Africa, Asia and South America, some of the major societal issues include poverty, access to basic education and healthcare, etc. Factors such as political risk, corruption, and ease of doing business in these countries make it challenging for impact organisations to tap into the ecosystem in these countries. Bangladesh serves as a good case study in this case, and as such, we take a further look into its local impact investment ecosystem.
Impact Investing in Bangladesh
The impact investment industry in Bangladesh has gained momentum in recent years, though it is yet to reach the standards of its Asian counterparts, such as India and the Philippines. Looking into the timeline of the impact investing ecosystem in Bangladesh, a number of key events are worth mentioning.
In 2015, The Bill and Melinda Gates Foundation invested $11 million into bKash, which is considered the first unicorn startup on the market. From there, the leading online grocery company Chaldal.com received Series A funding from IFC in 2018. These are just a few recent examples in the country’s long list of active impact firms, including names such as Shop Up, Solshare, iFarmer that have earned and scaled impact capital. Lastly, the National Advisory Board of Bangladesh was founded in July 2018 and obtained GSG membership in August of the same year.
When it comes to impact current trends in the local ecosystem, a study conducted by LightCastle Partners in 2019 found that many enterprises want to connect deeply with their target community and solve social and environmental challenges through their sustainable business models. Moreover, as the country shifts towards a more middle-class income majority, the development financial institutions of the country believe that the traditional donor-grant model will have to evolve into a revenue generating model in the coming years.
The COVID-19 pandemic has brought about the opportunity for entrepreneurs to come up with innovative and creative solutions for the very issues they aim to tackle which traditionally would not have occurred. In the aftermath of this pandemic, sectors such as FinTech, Logistics, eCommerce have reported growth. Moreover, EdTech and HealthTech are good examples of emerging markets.
Even though the impact investing ecosystem of Bangladesh holds great potential, a number of challenges loom over both impact enterprises and investors. Knowledge gaps exist at both enterprise and investor level, as well as an absence of formal frameworks for measuring and reporting impact. These factors make it challenging to attract both local and foreign funding. In the study done by LightCastle Partners in 2019, it was found that sustainability of impact and financial returns were voiced as two of the most important elements when it comes to impact. On top of this, the same study also found that one of the major challenges that is faced by impact enterprises is the inability to scale and sustain, which is in direct contradiction to the two aforementioned concerns by investors. As such, impact enterprises of Bangladesh need to utilize certain financial tools and instruments in order to create a sustainable and profitable business model which also generates impact.
The Need for an Innovative Finance Toolkit
Bjoern Struewer mentioned in the session that when it comes to the idea of investing in enterprises, ninety percent of the people in Bangladesh think about equity or debt financing. The Innovative Finance Toolkit goes beyond the traditional ways of financing and provides alternative frameworks for financing early-stage impact enterprises in Bangladesh. It reformulates the terms of investments, enabling impact enterprises to create an impact at a larger scale.
The toolkit is designed to be used as a reference for further creative development of innovative financing instruments. The wide spectrum of available alternative financing tools can benefit the SMEs along with the Impact enterprises due to their size and vulnerability to variations in the credit market.
The aim of this toolkit is to provide impulses with selected examples for increasing the financing options available to investors and entrepreneurs.
The Overview of Innovative Finance includes:
1. Impact Investment– the main defining criteria for impact investment includes the investors’ intentionality to achieve a positive social or environmental impact, to have an expectation to generate sufficient financial return on capital, to target a wide range of returns from concessionary to market rate, and across different asset classes, and to actively engage in measuring and reporting the social and environmental performance as well as the progress of the underlying financial investment, in order to guarantee accountability and transparency.
2. Blended Finance: The use of catalytic capital from public or philanthropic sources to increase private sector investment in developing countries to realize the SDGs.Blended Finance have three distinctive categories:catalytic nature; contribution towards achieving the SDGs; yield of positive financial returns.
3. Result-Based Finance: Includes a broad spectrum of applications such as performance-based contracts, impact bonds, advance market commitments, and other financial rewards, and aims to provide more efficient and effective use of public finance and implementation capacity towards the SDGs.4. Impact-Linked Finance: Links financial rewards for market-based organisations to the achievements of positive social outcomes, and is an effective way of aligning positive impact with the economic viability of the investee enterprises.
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