As COP28 approaches, the attention of GCC investors has turned, more than ever, to deploying capital to renewable energy sources as a way of combatting the climate crisis. Indeed, IRENA estimates that capital flows to renewable energy assets alone have increased nearly 70 percent from pre-pandemic levels. Local investors have contributed to this trend, but the opportunity for impact is much wider than climate investments and renewable energy assets.
In addressing social and environmental needs throughout the GCC and the wider MENA region – water scarcity, air quality, youth unemployment and access to finance, to name a few – some have applied risk-mitigating ESG approaches and negative screening.
Others have applied catalytic strategies like those presented by impact investing. The peak body for impact investing, the Global Impact Investing Network, differentiates impact investing from risk-mitigating approaches like ESG by classifying them as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return” – namely, intentionally seeking a financial return and an impact return.
However that begs the question – how do you do it in a responsible way?
Intentionality must be at the heart of the endeavour
There are investments that are impactful without necessarily being aligned with an impact investment strategy. Firms looking to make impact investing a part of their strategy must examine the ‘impact case’ (and impact returns) alongside the financial case (and financial returns) prior to investment.
As the investment progresses, they should monitor the impact return (if any) of the investment. Without this intentionality and measurement, publicising ‘impact investment’ as an investor’s strategy runs the risk of being a form of ‘impact washing’.
Having a clear strategy will allow for focus
The most impactful players in the impact investing space are clear on their focus. They develop deep expertise in their desired geography, sector or impact area (or specific Sustainable Development Goals: SDGs). For example, some impact investors are sector-agnostic but focus on specific geographies, like Aaviskhar Capital in India. Some focus on specific impact sectors, like Sunfunder with affordable and clean energy.
Understand the wide availability of investment sectors
Not all assets will be attractive or risk-appropriate for all investors. However, the social and environmental needs are wide and so the varied types of investments are in abundance. For investors with an interest in the education and skills development market, there are opportunities to improve access to quality education and skills training, addressing youth employment or economic growth.
Funding healthcare infrastructure, medical research, and innovative healthcare solutions can improve access to quality healthcare services and enhance public health outcomes. Opportunities for renewable energy are clear. Water scarcity and agricultural development can be addressed through instruments in water treatment, desalination, and irrigation technologies.
Consider in advance the vehicles you are interested in
Impact investing strategies present a wide variety of instruments ranging from equity investments, loans, bonds or concessional finance positions, outcome-based contracts, investments into professionally managed impact funds, and infrastructure/project finance opportunities.
Investors in the GCC also have exciting opportunities to deploy Islamic Finance products to truly impactful investment in the region.
Build partnerships with other investors
Impact investors can catalyse their capital by building relationships. Some investors will have different focuses (see points 2 and 3). Some will have higher financial risk appetites in pursuit of impact returns, while some will have lower appetites for financial risk. Some will bring deep sector or geographic expertise.
These relationships present opportunities for investors to share pipeline, de-risk transactions through co-investment (e.g. sharing the ticket size) or allowing specific to take a higher risk (e.g. first loss tranche or mezzanine level debt) that catalyse additional investors who would come in at a lower risk.
If these impact investing elements are appropriately considered, investors should be able to ensure that their capital is aligned with impact, responsibly and effectively, whilst avoiding the label of impact washing.