IMPACT INVESTING: THE CHALLENGE OF ECONOMIC INCLUSION
This concept is based on the fact that people at the bottom of the social ladder are generally ignored by large private companies, which focus their commercial activities on the middle and upper classes. This leads to economic exclusion, which prevents the poorest from accessing essential services, particularly those that foster economic and social development. Economic inclusion therefore seeks to turn these marginalised groups of people into real economic players with the capacity to pay – on adjusted terms – for the education, health, energy and nutrition services from which they are traditionally excluded.
HELPING SECTIONS OF SOCIETY PROSPER
“Access to basic services is not only a vital element of economic and social development, it also boosts a given region's economy by triggering a virtuous circle fuelled by fresh demand,” explains Bertrand Gacon, who heads the Impact Investing team at Lombard Odier. “And these days, the number of people without access to basic financial, health or educational services runs into the billions. Finance was one of the starting points for our approach: basic banking services like current accounts or non-cash payment methods are vital for people launching a business, or for supporting its growth outside the narrow circle of their family or village. Access to credit plays a highly important role for micro businesses: a sewing machine, a bicycle or a few seeds don't cost a lot per se, but without them a whole production chain sometimes grinds to a halt. Many entrepreneurs don't have the cash flow to cope with this sort of situation.”
“Besides financial services, people ‘at the bottom of the economic ladder’ need to be able to access services related to health, food, energy and education. And although the large companies offering these services don't target this stratum of the population, it holds the most potential for economic growth,” Bertrand continues.
A MAJOR OPPORTUNITY
“There are several reasons why economic inclusion as a sector is especially suitable for private investors,” adds Bertrand. “Firstly, the principles underpinning impact investing in this sector are simple: we grant loans – or support the production of goods and essential services – to obvious, virtually indispensable ventures, such as access to water or healthcare. It's a meaningful dynamic that investors must fully understand: we lend money, at interest, to entrepreneurs so that they can develop their business. Or we invest in companies supplying essential services to the community (health, nutrition, energy, housing, sustainable agriculture). The income that the business generates enables the entrepreneur to repay the loan plus interest or to generate returns on the capital invested. The instruments used are based on totally traditional investment mechanisms.”
“But the most important thing to understand is that the growth of impact investing, and in particular of economic inclusion, is based on an underlying trend,” says Guillaume Bonnel, Fund Manager for Lombard Odier’s Impact Investing team. The rate of demographic growth in Asian and African developing nations is extremely high: with 60% of the world population, Asia is the most populated continent on earth, and almost half of its population are under the age of 20. India alone adds 19 million people, three times the Swiss population, to the global population every year. With 4.7 children per woman, Africa has the highest fecundity rate in the world1. According to the UN, one human being out of four will be African by 2050. Africa will represent 40% of the global population by the end of this century. This continent will be home to new demographic giants such as Nigeria (which will have more inhabitants that the US by 2030), the Democratic Republic of Congo and Ethiopia. It's a fact that the global population living in developing countries is growing continually, and that the need for basic services – and for local suppliers to meet these needs – will increase.”
Given the economic and demographic fundamentals, the lion's share of growth will take place in zones where traditional asset classes cannot be accessed. On the long term though, the positive demographic trends and the potential for productivity gains will inevitably create massive opportunities for economic growth in those countries which are today difficult to access for traditional investors. And because it has a long-term perspective, impact investing contributes to a fair and sustainable economic development by, for instance, building the access to basic services for low-income populations.
“Impact investing gives investors exposure to markets that are often missing from their portfolio, despite these regions’ large growth potential. It's a real opportunity for investors with minimal exposure to the economic growth that these regions will inevitably produce.” With regard to risks, these can be controlled by diversifying methodically and taking a long-term view.
1 According the United Nations Population Fund, 2015
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