Scaling Impact Investing The Opportunity for Social and Financial Returns

Transcription

1 Scaling Impact Investing The Opportunity for Social and Financial Returns

2 Private investors, governments, development finance institutions, NGOs and philanthropies must come together to create a whole new, sustainable eco-system through which to invest in our collective future. We call this Partnership Capital. Arif Naqvi Founder and Group Chief Executive Officer, The Abraaj Group

3 1 The international community established the UN Sustainable Development Goals (SDGs) in 2015 to positively address and deliver on a range of social and environmental goals including better education, health, infrastructure, clean energy and job creation. The challenges faced by the private sector to play a more active role in meeting these are offset by the unique returns they could generate an estimated US$12 trillion of market opportunities and 380 million new jobs. For us, investing with impact is core to the markets in which we operate. We deploy private capital to tackle some of the world s most pressing challenges. Our investments span across growth markets and have impacted hundreds of thousands of businesses, communities and individuals. Contents Forging Partnerships, Creating Impact: A New Model for Business Arif Naqvi Capitalizing on the Sustainable Development Goals: A New Opportunity for Investors Matthew McGuire Case study: Health and well-being for all Frederic Sicre

4 2 Scaling Impact Investing Forging Partnerships, Creating Impact: A New Model for Business Arif Naqvi Two years ago, the United Nations General Assembly committed to achieving a universal series of metrics for progress in advancing conditions for people, planet and prosperity. The UN Sustainable Development Goals (SDGs) are as ambitious as they are daunting: provide clean water and sanitation, quality education and affordable clean energy. In short, the foundations for any good society. What has been largely overlooked, however, is that the SDGs offer a pragmatic roadmap for effective business investment. For example, four areas reflected in these UN Global Goals food and agriculture, cities, energy and materials, and health and well-being represent opportunities for up to US$12 trillion a year in business savings and revenue, according to the Business and Sustainable Development Commission. If similar benefits are captured across the total global economy and paired with much higher labor and resource productivity, the investment opportunity could be two or three times greater. To give you a tangible expression of those benefits, the International Monetary Fund notes that if women simply participated in the formal labor force at the same rate as men did, India s GDP would increase by 27%, and even in the United States the world s largest economy it would increase by 5%. In the investment firm I founded, we gauge and manage the prospects of our global investments against SDG metrics. The opportunities they outline are unprecedented, with this one pre-condition: If you want to be a great company in the 21st century, you first have to be a good company that realizes it must benefit its communities. Yet it would be naïve to expect that business alone can fully deliver the better world envisioned in the SDGs. Private investors, governments, development finance institutions, NGOs and philanthropies must come together to create a whole new, sustainable eco-system through which to invest in our collective future. This vision requires hard dollars and soft power. Fortunately for us, governments and civic leaders around the world are showing an unprecedented willingness to partner with business in achieving the SDGs.

5 3 In the investment firm I founded, we gauge and manage the prospects of our global investments against SDG metrics. If you want to be a great company in the 21st century, you first have to be a good company that realizes it must benefit its communities. So, as business leaders, how do we collectively tap into the massive potential that the SDGs afford us? First, we must think and act like Millennials. Perhaps more than any of us, Millennials more innately grasp that we are all investors in the future health and wellbeing of every person, and every nation, in the world. For them, the frameworks of impact investing of pursuing profits and social benefits isn t charity, or a passing phase. It represents how business should be done. Second, we have to shed antiquated views about developing nations and recognize the faster-growing economies of much of Asia, Africa, and Latin America for what they are: global growth markets. It is also these markets where progress and inequality co-exist in fairly equal measure. The massive opportunity we have today is to build on the gains of progress and eradicate the scourge of inequality that holds so many people back. But how do we really invest in our collective future? If we are to genuinely embrace the SDGs as an investment opportunity, the final element is changing our mindset. First, we need a fundamental re-design of the global financing system. Pension funds, insurance companies, other institutional investors and sovereign wealth funds are stewards of US$290 trillion. As of August 2017, US$8.5 trillion of those funds were invested in negative yielding bonds. Let s take a step back and understand the consequences of this. Effectively, major stewards of other people s capital are deciding to lock in losses with a notable portion of their investments. That is the sign of a broken system that has to be fixed. Second, private finance is key. It represents one of the most scalable solutions to tackling global challenges. But from our experience, when you blend financing from private investors and operating partners with public development finance institutions, you generate an economic rate of return that is incredibly powerful. Development financing institutions and multilateral agencies can provide crucial loan guarantees and risk mitigation support, alongside traditional financing. Through such blended finance mechanisms, the social and economic landscape of

6 4 Scaling Impact Investing The real question is how quickly leaders in government, non-profits and the private sector can coalesce as committed partners in generating and shepherding the world s abundant capital. 27% The increase in India s GDP if women participated in the formal labor force at the same rate as men cities from Hyderabad to Nairobi are being transformed through the creation of hard and soft infrastructure. We need to embrace and scale this approach so as to mobilize more development finance capital alongside the commitments that institutional investors are making to growth markets. Third, the final element that brings this all together is what we term partnership capital. It is an approach to doing business where shareholder and investor returns go hand in hand with long-term partnerships forged between different parts of the socio-economic landscape and entrepreneurial eco-system. As we know, private capital is a massive enabler for economic development in growth markets. One does not have to look very far to imagine how transformative private capital can be when it is imbued with a partnership approach. Consider the SDG-tied aspirations for a US$1 billion Fund that our firm recently launched to build affordable and accessible health eco-systems for middle and low income communities in Sub Saharan Africa and South Asia. Alongside us, our partners in the Fund have created a healthcare platform that is currently delivering healthcare services to more than 3 million patients per year, expanding to over 10 million patients served by Crucially, our partners bring more than just capital. The Fund s beneficiaries are enriched by the intellectual rigor of the Bill and Melinda Gates Foundation, the sector expertise and credibility of Philips and Medtronic, the development focus of our DFI partners, and the commercial acumen and market-based returns approach of institutional investors. In coming together as an example of blended finance, we have collectively marshalled our resources, capital and capabilities to help attain SDG 3, a simple number with a gigantic goal behind it ensuring healthy lives and well-being for all. In our mind, there is no doubt that achieving the UN s Global Goals will help shape a safer, more inclusive and prosperous world. The real question is how quickly leaders in government, non-profits and the private sector can coalesce as committed partners in generating and shepherding the world s abundant capital. The methods are proven. The time is now. Arif Naqvi is the Founder and Group Chief Executive Officer of The Abraaj Group, He is a Board Member of the United Nations Global Compact, Founding Commissioner of the Business and Sustainable Development Commission, and a Global Business Leader of the B Team.

7 5 Capitalizing on the Sustainable Development Goals: A New Opportunity for Investors Matthew McGuire The last 30 years have been extraordinarily transformative ones for humanity, as economic structures and opportunities have shifted enormously. Put most simply, during that time the percentage of people living in what is defined as extreme poverty has declined from about 40% of the world s population to less than 10% of it; and those considered wealthy has increased from less than 10% to over 30% of the world s citizens. When several billion people s fortunes change so notably, societies are transformed and new opportunities arise. One such set of opportunities are framed by the United Nations Sustainable Development Goals (SDGs), which have emerged by consensus as the priorities for global change over the next 13 years. Building on the success of the Millennium Development Goals ( ), the SDGs were ratified in 2015 and they have been embraced by global leaders in government, business, philanthropy, education, and finance. They offer a coherent framework for addressing the core needs of our planet and its people, and they provide a template for collective action in doing so. In fact, many see the SDGs as the guidebook for targeting quality investments while addressing the world s most pressing problems. For investors and corporate leaders, the framework offered by the SDGs is useful because it identifies areas where capital can be allocated most productively. That is true from a financial perspective in that they outline areas with especially high unmet demands for particular goods and services (such as healthcare, education, and energy); and it is true from a social perspective insofar as effectively providing those goods and services that will radically improve the lives of people the world over. Philips, the Dutch healthcare technology business, is an example of a company that is already taking advantage of the opportunity. It has oriented its growth strategy around the SDGs, publicly aiming for 95% of their revenues to be tied to fulfilling the SDGs by 2025, and with the intent to improve the lives of 3 billion people by then as well. Philips stock price, by the way, is up significantly since announcing their strategic commitment to the SDGs.

8 6 Scaling Impact Investing <10% Extreme poverty has declined from c.40% of the world s population to less than 10% US$12 trillion New market opportunities opened up by the SDGs Importantly, what the SDG framework also makes clear is that social and financial returns are deeply reliant on one another. It explodes the false dichotomy of investors having to choose between doing well and doing good, because it lays out the path for doing well by doing good. As more people have moved out of poverty in countries on every continent, expendable income has increased along with demand for what businesses have to offer. And as businesses have been able to meet that demand, they have been able to lower costs and stimulate even greater social change in the markets where they operate. To that end, the U.N. s Business and Sustainable Development Commission a group of CEOs and civic leaders from around the world has identified US$12 trillion of new market opportunities that have been opened up by the SDGs. The Commission focused on four sectors that make up 60% of the world s real economy: food and agriculture; cities; energy and materials; and health and well-being; and it lays out concrete ways that businesses can shift their strategies and their models to capitalize on the opportunities in those sectors. What makes the opportunities so compelling is the support and the momentum that has been generated by the U.N. s myriad stakeholders agreeing to the SDGs. With 193 countries agreeing that these goals are vital to their interests, companies and investors are finding partners in new markets and creating new business models that did not exist in previous eras. For example, Sweden s development agency has funded a limited first-loss facility for an infrastructure fund run by the IFC (the Managed Co-Lending Portfolio Program) that raises the ratings of projects to a level where insurance companies can invest in them. By doing so, they are attracting billions of dollars to emerging market infrastructure projects from institutions that had never invested in such assets before. And given IFC s long and enviable record of impressive risk-adjusted returns in the space, that is giving those investors access to new sources of alpha that they were shut out of prior to Sweden s intervention. Just as importantly, business, government, and civic leaders have all taken note of how Sustainability generally and the SDGs specifically, have captured the imagination of Millennials around the world. As the generation that has only known a highly-connected world, and as a group that is coming of age as climate change manifests itself more clearly by the day, Millennials have embraced the importance of addressing the SDGs more forcefully than anyone else. Their consumption choices, their lifestyle choices, and their financial choices are all driven by sustainability concerns to a much greater degree than others are. To succeed in capturing the attention of this large, active, and increasingly wealthy group, many businesses have come to realize that focusing on one or more of the SDGs must be core to their strategies and to their allocation decisions. It is quickly becoming a business imperative, and those who think of sustainability as an after-thought will suffer competitively in the years ahead. The question for investors, of course, is how to execute on the possibilities presented by the SDGs. How to capitalize on them, in fact. That is the topic of focus, and one we look forward to exploring now and in the years ahead. Matthew McGuire is a Managing Director at The Abraaj Group.

9 7 Case study: Health and well-being for all Frederic Sicre The Abraaj Group established a US$1 billion healthcare Fund to help meet the goals of SDG 3 ensuring healthy lives and promoting well-being for all. This Fund brings together a range of partners, including healthcare technology companies, foundations, development financing institutions and institutional investors, to fundamentally address and impact poor healthcare outcomes in Africa and Asia.

10 8 Scaling Impact Investing For every 10,000 people in the world, there s an average of 15 doctors. In Ethiopia, the figure is 0.2. And for that East African country, the lack of resources doesn t just stop with doctors. The numbers are also bleak in other areas: two nurses per 10,000 people, compared to a global average of 33; two hospital beds, versus 27 for the wider world; and just 10 births attended by skilled personnel, far short of the average of 67 achieved across the planet, and a fraction of the US or UK s average of 99. Ethiopia is just one example. From Nigeria to Bangladesh, Kenya to Pakistan, low- and middle-income countries trail their richer counterparts on healthcare provision. And the outcomes are serious. Nigeria has an infant mortality rate of 69 per 1,000 live births, according to World Bank data; in the UK, it s 4. In India, 174 mothers die per 100,000 live births; in the US it s 14. Academic research suggests 22.6 million DALYs (disability-adjusted life years) were lost due to unsafe hospital care in 2009, two thirds of them in low- and middle-income countries. There are economic consequences too: the World Bank says almost a million Kenyans are pushed below the poverty line annually by medical bills. So what can be done? A lot, in fact. At Abraaj, we believe that transformative change in healthcare eco-systems is possible and the investment community has a crucial role to play. Consider this. Our healthcare strategy is focused on improving care in the fields of non-communicable disease and mother and child health in 10 cities, including Lagos, Hyderabad, Karachi, and Nairobi, which together represent a total population of close to 50 million people. Recognizing that existing health systems are hampered by weak funding, infrastructure and skills, we, along with our partners in the Fund, have adopted an integrated approach by creating networked ecosystems of facilities from tertiary hospitals to labs and imaging centers that can work together to make the most of the resources they have. By connecting facilities and personnel across specialties and geographies, for example through telehealth and doctor exchange programs, the idea is to find synergies that can boost the quality of care while saving both providers and consumers precious funds. In addition to developing a physical network of primary, secondary and tertiary care facilities, we are also investing in preventative health measures at the community level through programs such as a free non-communicable disease screening program. This program, which is administered in Kenya by a dedicated staff of specially trained Clinical Officers, combines proven algorithms such as the Q Risk Series into a single app-based screening tool that assess a patient s medium and long-term risk of, among other conditions, Type II diabetes and hypertension. This program has already reached over 35,000 patients in Nairobi alone and is set to expand to India, Pakistan and Nigeria ecosystems in the coming months. We and our partners remain committed to achieving our goal of impacting 10 million lives through a network of over 30 hospitals comprising nearly 5,500 beds by Building on the early gains made so far, and through the diverse forms of partnership that continue to accelerate our progress, we move ever forward in realizing this goal now and in the years to come. Frederic Sicre is a Managing Director at The Abraaj Group. An earlier version of this case study was published in the 2017 Better Business, Better World Report of the Business and Sustainable Development Commission.

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