By Laurie J Spengler, CASE Senior Fellow
Laurie J Spengler serves as a non-executive director of the Impact Investing Institute, the CDC Group (the UK development finance institution) and Bridges Insights. She is the founder and CEO of Courageous Capital Advisors, a Global Ambassador to the Global Steering Group on Impact Investing and a Senior Fellow and Advisory Council member at CASE i3 at Duke University’s Fuqua School of Business. She is a member of the Council on Foreign Relations.
With the social and economic repercussions of COVID-19 affecting every corner of the globe, impact investing offers a pathway to building a more resilient future for us all. Resilience is our new north star – the guiding principle that will ensure that we build sufficient resource capacity to absorb adversity and avoid a slide into economic, social and health despair. COVID-19 may be an unprecedented crisis in its reach and scale but it is likely not to be our last.
The invitation – and opportunity for investors – is to put their capital to work now in solutions that will yield durable returns and positive social, economic and environmental results. This approach means we will be moving at least two steps forward to absorb the hit from a crisis that puts us one step back. Four of the ‘first principles’ of impact investing offer a ‘SPOT’-on playbook to advancing towards our north star: Solutions driven, Proximate to community, Outcomes managed, and a Tolerance for innovation. Let’s tap the tools of impact investing and build a resilient future for all, with a specific focus on emerging markets.
We are fundamentally interconnected and emerging markets offer compelling openings
COVID-19 has touched every corner of the world. While many initially described the virus as geographically and socially agnostic, it is now clear that the virus lays bare two basic realities: (i) that we are permanently and fundamentally interconnected and (ii) that the health and economic repercussions of a pandemic are not distributed equally. These basic realities represent a risk and opportunity lens in considering interconnectedness. Each lens frames an investing imperative, one more defensive in nature and the other more offensive. Both are appropriate; when combined, they are forceful in targeting capital to emerging markets.
We see our interconnectedness on the flight plan of a virus that cannot be contained by borders of any kind – lines on a map, walls constructed, immigration restrictions and more. We experience our interconnectedness on multiple levels – from our empathetic reaction to strangers fighting for their lives and a global dashboard that clicks forward with each new case discovered and each life lost, to the practical gaps in food and garment supply chains as obvious early examples. These practical gaps initially present in the form of lost orders with the knock-on effect of lost jobs. The next stage of realization is businesses and consumers at the purchasing end of the supply chain with fewer available products, higher prices, and delays to market. This is a risk lens. According to the World Bank about half of world trade depends on global value chains, which means that a large number of the goods and products we use in our daily lives cross at least one border as part of their production or assembly process. Although perhaps mundane thoughts at the moment, imagine no more coffee or bananas on the shelves of your local supermarket; imagine no more cellphones on offer to you, your business, your kids; imagine no paper products to absorb our heightened hygiene disciplines.
Pre-pandemic structural inequities in nearly every country of the world mean that the health, social and economic repercussions of COVID-19 will be felt most acutely by poor and marginalized communities, particularly those in developing countries. This is true of nearly all crises – natural disasters, disease, climate change and more. But rather than lamenting these inequalities, there is an opportunity to reframe them as openings to invest for resilience. Emerging markets are rich in resources, supply chain contributors, consumers and talent. Applying an opportunity lens, these are essential ingredients for the recipe of investing for resilience.
We can (and MUST) build back better
Some of the core principles of impact investing developed over the past decade putting capital to work, offer a pathway to resilience.
Solutions driven: The most compelling framework for building a more resilient future can be found in the Sustainable Development Goals (SDGs) put forth by the UN in 2015. Before COVID-19, these Global Goals were gaining traction among investors, from pension funds to family offices, as a way to think about the use of their capital. In building a resilient future for all, we should pick right up from the SDGs and embed the concept of resilience into the solutions that spring from the Goals. These include, for example, financing affordable housing at scale to make cities more liveable (Goal 11); scaling local and regional manufacturing of sustainable food production to ensure adequate local supply while contributing to global supply chains (Goal 2); bridge financing to SMEs as the largest employers (Goal 8). The impact investing community was using the SDGs as a compass to direct capital prior to COVID-19; that compass is now available to everyone.
Proximate to communities: Following the solutions driven approach, impact investors look through their investments to be sure the intended impact is happening at the ‘first mile’, where the product or service meets the needs of the individual, household, enterprise or community. In this examination, impact investors have developed an understanding of the critical role played by local distribution channels, from community development financial institutions in the US (CDFIs) and social lenders in the UK to microfinance operators in emerging markets to local banks, off-grid energy distributors, healthcare clinics, community schools and beyond. Proximity to community is a source of knowledge and risk assessment of an investment; it is often the most cost-effective means to distribute capital to the target destination. Local ecosystem actors are the plumbers of the ecosystem without which resilience at the household and community level cannot be achieved. Impact investors understand this market feature and know how to use it to guide their investment and bolster their returns.
Outcomes managed: As solutions driven investors, impact investors assess their success by the outcomes they catalyze with their capital. Managing and measuring these outcomes is required. Significant efforts over the past many years have introduced coherent, systematic approaches to outcomes considerations. The Impact Management Project is at the forefront of these efforts. Advances in outcomes management and measurement allow more investors to have confidence in making their impact investments and for new products to be structured where ex ante outcomes are made explicit as the investment rationale and strategy. Capabilities across the impact investing community are ready to be tapped in completing our scorecard for managing and measuring resilience.
Tolerance for Innovation: COVID-19 has spurred a raft of innovation explorations, from testing to therapeutic treatments to vaccines. Beyond health innovation, the pandemic has unleashed tremendous productive energy in new business models as well as modification of existing business models. In emerging markets, there are few barriers to entry which makes these fertile grounds for innovation. Impact investing has played a vital role to date and that can be dialed up, particularly when combined with the three other referenced principles.
The powerful combination of resilience and impact
Resilience at the individual, household, enterprise, community, national and global levels is our north star. Achieving greater resilience – across sectors and geographies – will allow us to withstand the next crisis, like bolstering buildings to withstand the tremble of many (not all) earthquakes. Impact investing through the framework of the SDGs offers a pathway to our destination, whether we consider a post-COVID-19 world through the lens of risk or opportunity. If we fail to reach our destination, our interconnected world will pay an unacceptable price.
Now is a time for action not words. The Impact Investing Institute invites investors to adopt the SPOT-on playbook and deploy capital now that will contribute to a resilient future. Stay tuned for what will follow in this blog series – specific examples from the SPOT-on playbook in emerging markets across social, health, education, housing and other dimensions of resilient life and livelihoods that advance the SDGs.