The Role of Impact and Innovative Financing in Sustainable Development

The increasing global call for climate mitigation and adaptation actions such as the Paris Agreement, requires all economies to incorporate innovative and sustainable structures in their economic development and growth pursuits. Despite political controversies, there is a growing consensus on the relationship between human activities and the causes of climate change with over 197 international scientific organizations in agreement. This means that, human activities of all forms are required to shift towards more sustainable and responsible structures in order to avert the consequences of climate change. The term ‘green economy’ has been adopted by many to mean a shift from unsustainable practices in the pursuit of economic gains. In the absence of a globally agreed definition, green economy can be considered as an economy that aims to reduce environmental risks, and creates socially inclusive and sustainable developments.

The absence of a globally accepted definition and lack of data has led to the impression that, green economy is of limited size, small cap dominated, lacking diversification, too expensive and that investors give up performance in exchange for environmental benefits. Despite these unpopular myths, the FTSE Russell Green Index shows that going green is indeed profitable and constitute the future of investments. The FTSE Russell’s green index has outperformed their parent benchmark over the last 5 years. Also, unlike unpopular opinions, the green economy is diversified and multifaceted by representing all company sizes, industries and sectors addressing environmental challenges. Again, the green economy is significantly growing and represents a substantial amount of 6% of the market capitalization of global listed companies; an estimated $4 trillion in value. Furthermore, evidence points at impact investors and green businesses globally in the U.S.A, China, Germany, Australia, and Spain such as Elon Musk, CATL in China, Aloys Wobben, Anthony Pratt, and Jose Manuel-Entrecanales who have become billionaires by trying to stop climate change.

 

Despite the global call and awareness, green economy remains a relatively new concept within most emerging markets especially in Africa. Most green businesses in Africa specifically in Ghana are start-ups and early stage businesses with few matured ventures. The inherent risks of these developing businesses given their growth stages, small sizes, youthful teams with inadequate experience amongst other reasons means that, not all forms of financing are readily available to these businesses. This creates a dilemma known as the ‘missing middle’ financing gap which has crippled the growth of many businesses in emerging markets. The ‘missing middle’ dilemma states that, certain factors disqualify early to mid-stage businesses from accessing funding from various traditional financiers such as banks and high-ticket private equity firms. To the financial institutions such as banks, these businesses do not have collateral while their small ticket sizes increases the transaction costs and risks to private equity firms. Consequently, there is the need for more innovative financing vehicles such as growth and impact financiers, to invest capital and coach most of these early-stage businesses to occupy significant market positions.

 

To promote sustainable economic development in Africa, there is a need to encourage investment in these early-stage but innovative businesses that are climate friendly, socially inclusive and overall sustainable. The success of these businesses rest solely in the hands of growth financiers and impact driven investors given the challenges identified with alternative financiers. This is because growth and impact investors have business development services at their core provision of patient capital, and they also seek to achieve some measurable social and environmental impacts in addition to financial returns. For most early stage businesses delivering impact to succeed, it is imperative that they are given more than just financial assistance. The additional value offered by growth and impact financiers makes them the ideal source of funding for these early stage green businesses. Some additional value provided beyond provision of patient capital include but not limited to; access to a network of experienced and resourceful contacts, provision of technical assistance, flexible financing structures, access to markets and opportunities, business advisory amongst many other contributions that facilitate business growth. Example can be made of Incas Diagnostics, an innovative local point of care test kits manufacturer in Ghana, whom with the right support from MasterCard Foundation has developed a rapid test kit for Covid-19 which produces results in 20-minutes; currently undergoing FDA approval and could potentially ease Ghana’s pandemic test restrictions. This shows that, with the right support for early stage innovative businesses, they can contribute meaningfully to sustainable developments.

 

In recent times, impact/innovative financing has proven even more beneficial in helping to mitigate the challenges of COVID-19 global pandemic alongside governments’ efforts and other non-profits. As covid-19 continues to pose a global scare, impact actors have assisted to de-bottleneck the financing challenges of the private sector through flexible financing mechanisms for the private sector and innovative financing structures that serve the purpose of assisting the most vulnerable in society. Thus, impact actors provide high concessional working capital loans, guaranteeing prices to intermediaries and supplementing shortfalls to reduce cost of capital along with delayed interest payment and maturities for investees. These flexible financing mechanisms help to create value for private capital contributors and keep investees thriving amidst covid-19. Also, innovative financing structures adapted by impact actors such as the use of micro-lending, support to SMEs, support for women businesses amongst many initiatives have ensured access to support by the vulnerable in societies faced with the challenge of financial exclusion. Notable ecosystem actors responding to Covid-19 alongside governments and non-profits include; VISA Foundation Covid-19 Recovery, Master Card Foundation’s Covid-19 recovery program, GIIN’s response to Covid-19 alongside many funds that have set up Covid-19 response packages to assist their portfolio companies to thrive is quite commendable and only confirms the importance of impact and innovative financing in the world today.

 

In Ghana, a typical impact investor with the development of early stage green businesses at its core is Wangara Green Ventures. Wangara is a local currency denominated fund that offers early-stage green businesses with patient capital between GHS0.25m to GHS2.5m to finance their growth strategies. Wangara prioritizes sectors such as renewable energy, water and waste management, climate smart agriculture and climate friendly businesses. Beyond provision of capital, Wangara offers pre-investment technical assistance in the areas of business and strategic growth plan, market study, financial modelling, initial impact assessment amongst others. Wangara also provides post-investment technical assistance through value creation and value addition services which include; business formalization and governance, management building, supply chain development, access to new markets, and impact measurement and management etc. These value-added services are critical because most early stage businesses do not have firmed up business models and strategic plans, nor do they understand the importance of corporate governance and the quality of their teams. They may also not fully understand their identified markets, and importantly may not have financial plans which are key asks by investors. In addition, Wangara Green Ventures provides access to a pool of resourceful contacts within the impact investment ecosystem. For investees who require additional capital over time, Wangara is able to provide follow on capital as well as connect investees to other capital providers who now find the investees attractive as they have been de-risked having received support from Wangara Green Ventures. Investees also gain access to other useful ecosystem actors who work with them to ensure the growth of early stage green businesses.

 

Indeed, the world is gradually shifting in favour of sustainable structures as the solution to the increasing global challenges of climate change, crisis and inequality. For emerging markets in Africa to fully participate, there is the need for innovative and impact driven investments in essential sectors such as energy, sanitation, agriculture, water, health etc. The contributions of Wangara Green Ventures in Ghana and similar impact driven ecosystem actors across Africa are evidence that, with the right financing vehicles, emerging markets could become useful players in the global call for sustainability.

 

References:

[1] https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement

2 https://www.livescience.com/37057-global-warming-effects.html

3 https://www.ftserussell.com/research/investing-global-green-economy-busting-common-myths

4 https://www.bloomberg.com/features/2020-green-billionaires/

5 https://mastercardfdn.org/diagnostic-start-up-knust-develop-rapid-covid-19-test/

6 https://www.reuters.com/article/us-health-coronavirus-ghana-test-kit/ghanas-incas-diagnostics-expects-approval-for-covid-19-antibody-test-idUSKBN23H1OH

7 https://greenfinanceplatform.org/blog/covid-19-and-role-impact-finance

8 https://usa.visa.com/visa-everywhere/blog/bdp/2020/05/11/the-visa-foundation-1589219590276.html

9 https://mastercardfdn.org/covid19-recovery-resilience-program/

10 https://thegiin.org/covid19

11 https://wangaragreenventures.com/

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