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The financing agenda of international development: the role of impact investing

Image credit: World Bank Photo Collection (Flickr: Creative Commons)

The financing of international development is an increasingly complex and pressing issue as the world comes to grips with approaching the challenges of meeting the Sustainable Development Goals (SDGs). The large-scale scope of the SDGs with 17 goals and 169 targets is an ambitious objective, which will require approximately US $22 trillion. Beyond Official Development Assistance (ODA) and philanthropy, the leveraging of private capital and the role of impact investing is paramount to achieving the SDGs by the deadline of 2030.

Impact investing, private capital and the provision of public goods

Impact investments are investments that seek to allocate capital to ventures that have a social or environmental benefit, whilst also generating a financial return. This is often called ‘blended value’, combining profit seeking enterprises and the provision of public goods. Whilst microfinance is smaller loans to individuals, impact investing finances small and growing businesses from approximately $2,000 to $5 million or higher. Impact investing is not contradictory to philanthropy and ODA commitments, but rather it is complimentary and can fill the funding gap for the provision of public goods in the international development arena. This is similarly argued by PwC, which promotes the increased use of impact investing where ‘sources of financing such as official aid and philanthropic grants are not enough to achieve the complexity of today’s global development challenges’.

In response to the complexity of development challenges, international aid programs, particularly in the UK, the US and Australia, have sought to incorporate more private sector involvement and harness the notion of impact investing. The UK Development Finance Institute have set up the Department for International Development (DFID) Impact Fund which aims to draw in sustainable sources of capital for investment in low income and lower-to-middle income countries in Sub-Saharan Africa and South Asia. USAID has a similar initiative in the Partnering to Accelerate Entrepreneurship that aims to ‘catalyse private sector investment into early stage enterprises’.

In the context of significant cuts to Australia's aid budget seeing the provision of aid fall to 0.22% of Gross National Income in 2016, impact investment and the role of private capital could be a solution for meeting international development needs. A prominent example is the innovative business The Difference Incubator (TDi), which promotes the blended value concept of private capital and the provision of public goods. TDi has partnered with the Department of Foreign Affairs and Trade (DFAT) to set up investable social enterprises in the Pacific by drawing upon private capital and moving away from grant reliance. Through this venture TDi aims to demonstrate that ‘effective aid and development work needs to closely align with economic development to create sustainable futures and reduce grant reliance for the world’s poorest’.

The limitations of private capital and impact investing

Whilst there is considerable promise in the capacity of private capital to fill extensive gaps in development funding and move away from the over reliance on grants, there are notable constraints. With any investment in emerging and developing economies there is a high a degree of risk, which can impact the allure of private capital. Political and economic risks coupled with corruption, conflict and ambiguity over land contracts can deter impact investing in developing economies. This risk also entails the transparency factor of investing in emerging markets.

Although, the Global Impact Investing Network is collecting data from investors to establish a set of metrics to assess the nature of investments in order to provide increased transparency and accountability.

Furthermore there are concerns over unrealistic expectations that impact investing can produce public goods for international development whilst simultaneously making a financial return.

Impact investing is not a silver bullet

Impact investing and private capital may not be the solution for every development problem but it can help fill the funding gap in traditional sources of financing. If the ambitious objective of achieving the SDGs by 2030 is to succeed impact investing will have to play significant role alongside philanthropy and ODA commitments.

Thomas Penfold holds a Master of International Relations from the University of Melbourne and has previously worked in Laos.

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