In 2008, Mark Hemsworth, a Canadian manager in the restaurant and retail industry, headed for the jungle. He took a position with Engineers Without Borders and worked with Forest Fruits Ltd., a company that buys honey from 5,000 farmers in remote areas of Zambia. As he traveled across the country, he noticed that what prevented rural entrepreneurs from growing their businesses was a lack of equipment. If the farmers, food shacks, and bakers he met had had better milling machinery, a refrigerator, or a larger stove, he realized, they would have been able to improve their productivity, earn more money, grow their businesses and employ more people.
But farmers and small business owners in rural Zambia had no access to the capital they needed to pay for the equipment. Retailers were far away. They didn’t deliver, and even if they did, no one knew how to maintain or repair any of the equipment the entrepreneurs would have bought. There was a problem: entrepreneurs needed equipment that could improve their returns. Equipment makers needed to be able to reach their market. There was nothing bridging the gap.
Together with Patrun Chikolwizu, a colleague at Forest Fruits, Hemsworth formed a business called Rent to Own. Instead of simply lending small amounts of money, as microfinance banks have done in India and Bangladesh, Rent to Own would provide a complete service. It would supply equipment and financing. It would deliver the machinery, train the entrepreneur in its use, and handle any repairs. The equipment could also act as collateral, preventing the entrepreneur from falling deeper into debt. Flexible repayment schemes would help to ensure that the entrepreneur didn’t miss a payment.
The process depends on technology. Rent to Own uses a cloud-based management system. Field officers enter details onto tablets which uploads them to Google Drive which is linked to Salesforce which connects to SMS Magic, a business text messaging system. The process keeps clients informed about the status of their equipment and sends them payment reminders. Clients can pay using Zoona, an Android-based digital payment system.
Projects like these can make a huge difference to lives and communities in developing countries, and they don’t require a great deal of money. Rent to Own started with an equity and debt investment from Lundin for Africa, part of a group of companies best known for its association with mining and energy. The organization’s philanthropic arm was able to get Rent to Own off the ground with an investment of just $175,000.
“The move is much more than money,” Mark Hemsworth remarked at the time. “LFA is working to help us transition from a sole-proprietorship operation to a full on corporation with solid legal and financial footing.” The company hired a CFO grew new partnerships and attracted additional funding. In July 2019, the Dutch Good Growth Fund contributed an investment of a million Euros. Rent to Own now employs more than fifty staff and has delivered more than $4 million dollars worth of assets to over 7,000 clients.
A Big Impact with a Small Investment
That’s a great benefit from a small amount of initial funding. The seed round that got Rent to Own off the ground doesn’t need the help of a foundation supported by a mining company; it’s well within the reach of a small group of moderately successful business owners. Even the million Euros that keeps Rent to Own going nearly ten years after its founding would make for a negligible tax write-off for a medium-sized business. It would also buy positive publicity worth much more. Even more importantly, it gives an entrepreneur a sense that the work that they do, the success they’ve achieved, and the wealth that they’ve earned has a purpose. Their efforts in the marketplace haven’t just made them rich or created new jobs for Western graduates. They’ve helped entrepreneurs in the world’s most remote regions make the most of their own opportunities.
The practice is known as “impact investing,” and it has its origins in the socially responsible investing of the late sixties and early seventies. That was when unions, student groups, and churches began checking their investment portfolios to make sure that they weren’t funding the arms trade, the tobacco industry, or companies that did business with apartheid South Africa.
That was a negative move: traditional investments were fine as long as they excluded industries or companies that investors considered harmful. The investors accepted lower profits in return for the knowledge that their capital wasn’t putting guns in the hands of dictators or cutting down rainforests. As long as the definition of “harmful” was limited to areas as narrow as arms companies, tobacco, and businesses with large, well-known South African holdings, investors had plenty of options for traditional investing.
Later, “program-related investing” began looking for projects that aimed to do specific good. This is the world of microfinance and Grameen Bank: the lending of small amounts of money, often to women, to enable them to create small businesses. In the United States, it took the form of investments in developers like Enterprise who built affordable housing projects, sold them to low-income families, and used the profits to build more.
In the late nineties and early 2000s, Al Gore and former Goldman Sachs Asset Management executive David Blood were among the leading proponents of “sustainable investment.” This moved investors beyond the idea of doing less harm with their capital and even beyond the hope of doing good with market-returning expectations in the global capital markets. They started to look for places to allocate their capital where it could address societal challenges.
Instead of investing in an energy company that had agreed to minimize its carbon output, for example, sustainable investors would look for solar or wind energy companies that could produce a new, cleaner way of generating energy. The risks would be higher and the rewards might be lower but the benefits to society and the environment would make those risks worth taking.
Each of these ways of balancing financial returns on investments with social and environmental benefits while avoiding harm lie on what Brian Trelstad of Harvard Business School has described as a “spectrum of capital.” Traditional investing, with its focus on financial returns, lies at one end; philanthropy, with its emphasis on doing good for no financial reward lies at the other.
Impact investing lies somewhere in the middle. GIIN, the Global Impact Investing Network, defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Those investments can be made in emerging and developed markets, and they can target a range of returns from below market to market rate. GIIN estimates that the impact investment market is currently worth about $502 billion managed by more than 1,340 organizations.
But the definition of impact investment is vague and leaves plenty of wiggle room. GIIN, which brings together impact investors and projects, provides training, and supplies tools and data, argues that the practice has four core characteristics. Impact investments, they say, expect a return on their capital of at least the capital itself. That return can range from below market rate to a risk-adjusted market rate, and it can come across a range of asset classes. Impact investors also measure and report the impact of their efforts. It’s easy to say that an investment improves opportunities for rural entrepreneurs or empowers local women but impact investors are also supposed to measure the difference the investment generates, and share those results so that other investors can learn.
But perhaps most important is the intention. “An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing,” GIIN says.
That still leaves plenty of room for impact investing to drift into socially responsible investing, or SRI. There are no shortage of funds now which promise returns without harm—or at least with less harm. State Street Global’s Gender Diversity Index ETF puts its money in 170 companies with women in senior leadership positions. iShares, a Blackrock company, offers a low-carbon ETF which invests in companies that have a “lower carbon exposure than that of the broad market.”
Both of those are low bars. The first fund includes Coca Cola, Visa, and Gilead Sciences. The second is dominated by tech companies like Apple, Microsoft and Amazon. This is traditional investing with a side of feel-good. However attractive it might be, especially to an entrepreneur looking for an easy investment that won’t do harm, it’s not quite the same as impact investing.
How to Give Your Money an Impact
To find investments that can have a real positive impact, you have to look a bit further. Ideally, you’ll do what Mark Hemsworth has done: travel to a remote, developing part of the world, spot an opportunity and use your wealth to build a new business. But it’s more likely that you’ll be putting your money in a fund that’s already operating. GIIN’s Impactbase has a database of funds and products that investors can search for projects that appeal to them. They can look for asset classes, geographic regions, fundraising status, and so on. It’s used by foundations, financial advisors, and private bankers, but also by individuals looking for rewarding places to put their money.
So you could use the service to look for a fund that supports wildlife conservation in Rwanda, for example, or which provides alternatives to palm oil to Indonesian farmers. But there are a number of factors you should consider before you send your money to the jungle.
First, look for the return. It’s always easy to give money away. It’s much harder to give money away so that it comes back. In impact investments that’s important not just because entrepreneurs like those who Rent to Own support don’t need charity. It’s also important because it can undercut local competition. Wendy Abt, the founder of a strategic investment advisory firm and a former deputy assistant administrator at USAID under President Obama, warns that rather than run the risk of distorting markets, “the unique and differentiating mission of impact investors is to build better, more competitive markets by investing non-concessionary capital in businesses with potentially large social benefits.” You might want to look for a project that does good, but you also have to be sure that you don’t accidentally do harm.
Abt also describes the difficulty of measuring impacts without a counterfactual to show the additionality. She recommends that impact investors focus on the returns to all stakeholders, including employees, contractors, suppliers, and governments. Projects should also comply with local regulations, and investors should be aware of threats such as the under-representation of women as well as accidental benefits such as greater market penetration. Rent to Own might have been founded to improve the lives of rural business owners but it also benefits the urban business owners who supply the equipment.
Finally, Abt, who has worked with the Bill and Melinda Gates Foundation, also recommends leveraging the power of big companies that can build roads and transport networks. Their efforts have an impact too.
Once you’ve built a successful business, the next question is always “what now?” That happens whether you’ve sold your marketing firm or sold Microsoft. And the answer is always the same: you want your money to have an effect on the world. You want it to do good. Impact investing is one way to do that. If you can’t spend time in the jungles of Zambia, looking for entrepreneurs who need help, you can browse a database and put funds where they’ll do the most good.
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