A collection of Futuregrowth thought leadership pieces, media articles and interviews.

Metrics and the multiplier effect of impact investing

12 Jun 2019


Luzuko Nomjana / Investment Analyst


There is a growing interest in impact investments by institutional investors who wish to invest profitably but at the same time align their investments with their values.

Additionally, we are seeing an increase in the number of frameworks used to measure and report on impact, which provides investors with more options and opportunities to create more robust processes.  With this also comes an added challenge: these frameworks tend to differ in their approaches and methodologies, and, at the end of the day, investors have to make their own choice as to how they measure and report on their impact investments. 

Two of the most commonly cited challenges in measuring impact include subjectivity and a lack of a universal or standard reporting framework.

  • Subjectivity: The argument around who decides what constitutes impact can become a bit blurred. Some say that it is “in the eye of the beholder”. There is some truth in this, if you consider that how we view the world is mainly driven by our personal biases, beliefs and values, which means we might not all agree all of the time on how impactful an investment is. As an illustration, in developed countries, access to transport infrastructure isn’t considered to be an “impact”.  But in emerging market countries like South Africa, a lack of access to transport infrastructure is a reality, particularly in many rural areas, where roads that are filled with potholes or a lack of adequate roads to support communities in rural areas which inhibits access to peri-urban and urban areas, making it difficult for these communities to achieve sustainable economic growth. 

  • A lack of standardised reporting frameworks: We believe that there is no standardised framework that will address all the needs of every investor when it comes to measuring and reporting on the impact of their investments. That said, investors have to determine their needs and can adapt one or more of the existing frameworks to their process.  During the past ten years, we have seen a profusion of reporting frameworks appearing, which adds to the confusion. 

Many investors have adopted the United Nations Sustainable Development Goals (SDGs) as a guideline framework.  The SDGs cover 17 goals, which comprise a call for action by both developed and developing countries to end poverty, improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.

Sustainable development goals
Source: United Nations  

In a recent development in April 2019, International Finance Corporation (IFC) (the development arm of the World Bank) launched its Operating Principles for Impact Management.  The aim of the nine principles is to “contribute to measurable positive social, economic, or environmental impact, alongside financial returns”. The principles go beyond asset selection that aligns investment portfolios with impact goals (such as the SDGs), to requiring impact considerations to be integrated into investment decisions throughout the investment lifecycle.

International Finance Corporation
Source: International Finance Corporation

Can metrics provide insight into impact?

We believe that there is a place for frameworks and metrics, which can enhance and promote stronger investment processes, as well as greater transparency for clients investing in impact funds. 

Some insights from our experience in managing impact funds over the past 24 years include:

  • In addition to earning appropriate risk-adjusted returns, investors require compensation in the form of tangible social or developmental outcomes.

  • Although measuring impact can be highly subjective, this aspect can be minimised by identifying tangible criteria to be used for measuring and reporting on impact. For example, metrics for an affordable housing investment could include the number of homes built, jobs created, and the type of “green” building materials or technology used in the construction.  It is possible to align impact and developmental objectives with concrete outcomes that are measurable and that does not compromise financial returns when they are identified upfront.

  • Not all types of impact are created equal. Different investments have different on-the-ground impact. Holding a listed parastatal bond, for example, has a lower impact than providing low-income housing. We categorise our impact investments into “High, Medium or Low” impact, with examples as follows: 
    • High impact: infrastructure project finance (water & transport infrastructure, etc.), access to finance for the previously "unbanked", social infrastructure (health care, education, etc.).
    • Medium impact: access to affordable rental housing. 
    • Low impact: environmentally-screened ethical investments. 
  • Sectors that facilitate the most diverse impact include those that address South Africa’s infrastructure back-log and those that historically had a lower deployment of capital. Most of these sectors are aligned with government’s National Development Plan (NDP) goals and contribute to the economic and social development of South Africa, which, in turn, promotes and stimulates job creation. Some examples of these sectors include:

Sectors that facilitate impact
Figure 1: Sectors that facilitate impact

Futuregrowth’s investment in SA Taxi is a good example of the “multiplier effect” at play.  In this case study, we are able to demonstrate that it is it possible, by identifying tangible metrics, to demonstrate that impact investments can be leveraged for social good, while achieving sustainable risk-adjusted returns.

Case Study: Local taxi industry buys stake in SA Taxi

SA Taxi

Futuregrowth provided financing to SA Taxi Finance Solutions, a subsidiary of the listed Transaction Capital, where funding is provided to small business owners starting and expanding taxi operations. The taxi industry provides an important transport service for people to get to and from their places of work.  SA Taxi was founded in 1996, and now has more than 1 098 employees and a national customer base.

When determining the criteria to measure the impact of this transaction we considered both the direct (primary) impact on consumers as well as the indirect (secondary) impact. Some of these are unpacked below.

Impact indicators
Figure 2: Impact indicators

Job creation

  • Over the past 10 years, SA Taxi has provided more than R21 billion in loans to the taxi industry. This has, in turn, facilitated the financing of small businesses and contributed to the creation of about 130 000 direct and 220 000 indirect job for drivers, rank managers and associated service providers.

 Facilitating transport infrastructure

  • The R50 billion a year local taxi industry is central to more than 40% of South Africans for whom the use of public transport is a non-discretionary daily spend.
  • Further, the taxi industry has a much deeper route penetration than other traditional public transport services, such as buses and trains, and also serves as a feeder to these nodes.

Providing Access to Finance

  • SA Taxi utilises an innovative credit scoring technology to assess credit risk, and, if it wasn’t for them, the industry would remain largely unbanked.

 Supporting BEE Finance & Transformation

  • The empowering impact and developmental flavour of the transaction Futuregrowth, acting on behalf of its client funds, to partner with SA Taxi and Standard Bank to finance the acquisition by the South African National Taxi Council (SANTACO) of a 25% stake in SA Taxi. SA Taxi has more than 20 years of experience in financing taxi operators, anchored by an unparalleled understanding of the industry.
  • A trickle dividend was planned to flow through to the taxi industry from day one of the transaction. This is earmarked to help address, amongst others:
    • The unsafe conditions of taxi ranks across the country as an immediate priority;
    • Promotion and emphasis of safety among the drivers, so as to curb road carnage (the “Hlokomela Campaign”); and
    • Upskilling of targeted participants within the transport sector to better run their taxi operations (encompassing numeracy and literacy, small business management, vehicle maintenance, etc.).
    • These projects are driven by a dedicated committee comprising representatives of SANTACO and the funders.

  • Upon settlement of the outstanding debt, SANTACO will enjoy unencumbered share ownership of SA Taxi, which has consistently declared sound dividends over the past years.

This transaction represents Futuregrowth’s core values of generating returns that matter. An examination of the impact metrics also illustrate the multiplier effect on economic activity that can result from a smart injection of spending.

This case study was adapted from a previous case study written by: Luzuko Nomjana, Investment Analyst, Futuregrowth Asset Management.on 28 November 2018.

Impact versus risk and return

Futuregrowth has a 24-year track record of investing in impact investments, with more than R44 billion invested in infrastructure and developmental assets that provide tangible social and developmental impact. This has been possible due to the continued support from our pension fund and corporate clients. 

Impact fund performance

Contrary to popular belief, South African pension funds have a long history of investing for impact and, in turn, supporting national development through a diversified pool of investments.  Futuregrowth’s flagship Infrastructure & Development Bond Fund (IBF), which houses the SA Taxi transaction, has seen a total of 44 clients supporting the fund over the past 24 years.  The growth in the IBF and similar impact funds has contributed to positive growth in the sector.  

That said, there’s also been an increase in “impact washing”, whereby investors are lured by clever marketing which is used to camouflage the underlying impact or lack thereof.  Pension funds have to critically assess these investments based on sound investment principles. Firstly, they need to define their social and developmental mandate, their objectives and the impact outcomes they want to achieve - and at all times never compromise on achieving sustainable risk-adjusted returns for their underlying beneficiaries.

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