Why Africa must create impact investment opportunities that improve social mobility

It’s clear that increased impact investment would go a long way to solving Africa’s current social inequality. Improving social mobility by selecting investment opportunities that will have a positive impact is obviously the way forward.

However, impact investment is suffering from a lack of clarity around its true definition. It can mean different things to different people, which clouds its positive potential.

How can impact investment improve social mobility?
According to the World Economic Forum (WEF), social mobility can be defined as: “the ability of a child to experience a better life than their parents.” In other words, it’s about opening up new opportunities and improving the quality of life for each subsequent generation.

Social mobility is also tied directly into the country in question’s economic performance and GDP growth. The Global Social Mobility Report 2020 by the WEF explains why economies benefit from fixing inequality.

The main finding of the report is that most economies around the world are actually failing to support their citizens. They are not providing the conditions in which people can thrive and improve. The result of this is that a person’s realistic life opportunities generally remain tethered to the conditions in which they were born. All this does is continue the legacy of historical inequalities and ensures a future of more of the same.

African countries fare badly on a global comparison of social mobility

And while this an obvious problem for the individual who is born into poverty and limited opportunity, it’s actually a much wider problem for society and the global economy. The driving force of economic growth is human capital. Therefore, anything that slows this and gets in the way of its growth also holds back economic growth.

Should social mobility be increased, then economic growth would follow. This newly constructed Global Social Mobility Index covers 82 economies. The WEF has designed it to identify the areas that could be changed and improved through policy and Government support.

According to the WEF, if the countries included in the Index increased their social mobility index scores by just 10 points, this would lead to an extra growth in GDP of 4.41% by 2030. So, not only would there be a massive improvement in conditions and opportunities at an individual level, there would also be a marked economic improvement.

Most African countries don’t make the top 82 economies included in the Index. However, South Africa comes in at 77 thout of 82 in terms of social mobility. For context and info, the top ten are as follows (with the social mobility score in brackets).

South Africa comes behind China, Brazil, India and the Russian Federation.

Social mobility must be supported across Africa
Impact investors and Governments must, as a matter of urgency, analyse projects for their potential positive impact on social mobility. These factors include things like population health or working conditions. By prioritising these factors, the investment will be sustainable in terms of return on investment (ROI).

South Africa’s place on this Index clearly shows the huge gap between the rich and the poor. And this is a model repeated throughout Sub-Saharan Africa. In real terms, this means that it will take at least nine generations for the very worst-off South Africans to make it to median income. For comparison purposes, it would take just two generations in Denmark.

Change is now urgently needed across Africa. This is down to rising unemployment, exceptionally low GDP growth and challenges faced by African countries that go beyond those caused by COVID-19. While the problems are more wide-ranging than the pandemic itself, obviously they have been worsened by its impact too. All of this together means that closing these vast gaps between the wealthy and the destitute is more urgent than ever before.

And one way to tackle this is through systematic and wide-ranging impact investment.

Formally defining impact investment opportunities
In broad terms, a project is considered impact investment if it creates a definite social or environmental benefit (in addition to a ROI). One of the challenges hindering impact investing is the lack of coherent definition around what constitutes an impact investment.

This is an issue around the world, and in South Africa it’s no different. If we look at an example of investing in some form of equipment designed to improve air quality and lower emissions. This could feasibly be classed as an impact investment as the project appears to show a benefit to the environment and should also give a financial return.

However, it could also be looked at as a legal operational requirement to comply with the South African Government’s Air Quality Act. This would mean it can’t be classified as an impact investment, instead it’s a licence to operate investment. In other words, this is a project that is about applying widely used tech to make a project greener, rather than providing true innovative changes for a better future.

This isn’t a bad thing, of course, but impact investors are unlikely to want to prioritise this kind of project over something that is future-focused. Dilemmas and confusion like this show the challenges that are holding back impact investors, and it’s important that South Africa (and other African countries) clearly define investment opportunities for potential investors.

What can African countries do to land impact investment funds?
One way to do this would be to include disclosure reports that would inform the investor exactly where the project falls. However, currently these are optional and are not standardised, which makes it almost impossible for an investor to compare like for like.

Legislating impact reporting around the financial, social and environmental impact of a project would work. This would define which investment opportunities are defined as impact investment by using a standardised scoring system.

The countries that implement standard definitions of the more confusing aspects of impact investment are likely to land the funding for their projects. Environmental and socially conscious investors will be looking for clarity and proof that their money is going towards something they are satisfied is proper impact investing. African countries have the chance to be a big part of this, by showing investors exactly how their funding will change lives for individuals.

Originally published at https://stories.swns.com on April 6, 2021.