A new algorithmic based lending platform tailored to assist companies in the green economy is to be launched in South Africa in 2017.
The platform, a joint initiative between the University of Cape Town’s Bertha Centre for Social Innovation and Entrepreneurship, the World Bank, and Greencape, will grant small loans of up to R5 million to green companies from a fund that is expected to attract upwards of $10 million.
According to Aunnie Patton Power, innovative finance leader at the Bertha Centre, the platform aims to solve distribution problems in the innovative finance space, whereby large funds boasting hundreds of millions of dollars cannot grant microloans to business.
She added that distribution problems are partly due to investors are looking for gazelles – fast growing, high impact companies and products that are about to take off – when there are lots of oxen – slow growing companies in less sexy industries – which show great promise.
South Africa appears to be a world leader in innovative finance, with outcomes based models pioneered in the country, reportedly set to be copied in Europe and the United States.
This, after the world’s first outcomes based impact fund to combine public and private funds was developed in the Western Cape.
One model attracting foreign interest is the South African Government’s Jobs Fund-funded Outcome Based Fund of Funds, which will see R100 million distributed to three Impact Investing Small and Medium Enterprise (SME) funds.
Outcomes based contract payments differ from traditional in that payments are subject to the achievement of predetermined measurable outcomes. In the case of the Jobs Fund, the three SMEs will need to invest in other companies, which create jobs in order to draw down the capital.
“It is a different way of thinking, using different forms of capital and funding mechanisms to solve social issues and ensure that each player achieves their own set of outcomes. Government can achieve its social goals, corporates generate returns from impact investing and venture capitalists that are paid based on their achievements can have liquidity during the investment cycle,” said Patton Power.
Innovative finance differs from traditional financing models in that it is an outcomes focused approach to solving problems while optimising social, environmental and financial impact.
“It uses existing financial and philanthropic tools to support enterprises and if these tools don’t work, it creates new ones. How you fund is just as important as what you find,” she explained.
Innovative and impact investment is gaining traction globally, as reports show that such funds can perform as well as, or even better than, traditional funds. Data from a Global Impact Investing Network and JP Morgan survey revealed that the social impact of investments outperformed the expectations of 27% of investors, with only 9% reported of investors reported to be disappointed with the returns.
“Business is realising that inequality is really costly. It is no longer a case of government needing to fix problems on its own. Business is realising that it must work with the system in order to benefit in the long term. And those that do and that invest in social causes should return more capital to shareholders in the long term,” she said.
She added that innovative and impact funds also provide investors with opportunities to diversify their portfolios without exposure to the financial markets. “Investing in affordable housing is not correlated to the market. If market goes down, the returns from affordable housing will not be affected,” she said.
Estimates by JP Morgan see global investments made with the intention of generating financial returns as well as promoting social or environmental good to grow from $60 billion in 2015 to between $400 billion and $1 trillion over the next five years.
According to the Bertha Centre, 22% of global impact enterprises are located in Sub-Saharan Africa, with several opportunities for investment in financial services, the green economy, agriculture, health and education technologies.