COVID-19 has been a stark reminder of how our economic, social and environmental systems are closely intertwined and dependent on each other. The pandemic has deeply affected the economies of many Pacific nations. How the region recovers will be driven by the investment decisions we make now and the capital we reallocate towards sustainable industries in the short term, laying the foundations for a resilient and more adaptable post-COVID future.
Recently when I hosted a webinar for major financial institutions in the Pacific on the opportunities the region presented within impact investing, I realised that the participants in that Zoom call collectively manage US$4.3 billion – a huge sum, and a massive potential force for good. It got me thinking. Can our private equity players, our institutional investors, and our financial sector play a more critical role in building back better economies by actively seeking investment in businesses that find finance solutions to some of the biggest social and environmental problems we face – such as clean energy, waste management, housing and employment, to name a few? Could these impact investment solutions, when aligned with the broader realities of our societies, significantly influence the Pacific’s economic recovery post-COVID?
I posed this question to a former colleague of mine, Griffon Emose, who heads Kontiki Capital, an investment bank in Fiji who said,
“There is now a lot of buzz around impact investing, especially in the COVID-19 environment. I think historically, investors didn’t really understand that space and tended to view impact investment as “high risk-low return”. But there is increasing awareness that impact investment when well-structured can be a serious option. As a mainstream investor, if we are presented with an investment opportunity that addresses a social or environmental problem while at the same time generating an acceptable financial return, we would seriously consider it. After all, these social and environmental issues can become economic issues that affect our investments generally. This also goes beyond the social responsibility which I think most corporates see as an important criteria in how they operate.”
I agree with Griffon that institutional investors and large corporates do not operate in isolation from these issues and when these issues start crippling an economy, governments usually intervene with stimulative packages, incentives, policy and law reforms and even introduction of new taxes such as environmental levies and corporate social responsibility taxes.
Investors are fast realising that these longer-term and systemic risks affecting their portfolio and overall performance must be mitigated. And globally, shareholder activism as well as law reforms are rife in driving such transition. Look at the Exxon Mobil’s recent example where we witnessed a tiny hedge fund holding the board of this energy giant accountable for its effects on the climate. A Dutch court has also recently set new targets for Shell’s reduction in gas emissions.
Our superannuation funds, unit trusts and other institutional investors in the Pacific do have the power to effect such change by ensuring that the businesses they invest in are adequately addressing the environmental, social and governance (ESG) factors within their operations. They can take it one step further by actively seeking investments that provide social and environmental solutions and allocating a certain percentage of their portfolio towards it.
A very fundamental question that these institutions need to answer is whether their fiduciary obligations to the end beneficiaries extend beyond the financial return to include positive real-world impact when assessing investments. Impact that would benefit their very own members, unit holders, employees, small or micro business owners, customers, informal sector or the wider community – the people who are facing the brunt of these social and environmental challenges, whether it be extreme weather conditions, the strained tourism sector, depleting marine resources or the labouring informal sector.
The financial sector also needs to support these social enterprises through investment readiness and demand-led financial innovation. While some of these investments may present similar challenges to those commonly found in the SME sector (relating to governance, scale and perceived risk), our regional institutions are far better placed to mitigate these risks being on the ground.
An obvious advantage we have in the Pacific when it comes to impact investing is that there are already many businesses that deliver sustainable outcomes, whether through employment that improves livelihoods in villages, sustainable land use, financial inclusion or empowerment of women. Their social intent might not be as well recognized as Adidas which addresses plastic pollution by making eco shoes out of them. But there are some fully fledged social enterprises entering their growth phase – such as Ranadi Organics in Fiji which is using its premium organic ginger & turmeric produce in its expanding NZ brand Daily Good , Essence Group Fiji with sustainably harvested nama (seagrapes) skincare products, or TraSeable Solutions, a Fiji-based data company that supports agriculture and fishery businesses through traceability software. Then there are community-based enterprises, such as Rise Beyond the Reef which creates value chains engaging women and youths, and e-commerce platforms such as Aggie Global, that connects small farmers with profitable markets to supply Fijians with fresh local food at home.
Some have not even been labelled as social enterprises (yet), others may still be paving their path toward financial viability or becoming investable. Nevertheless, the innovative minds in the Pacific are working overtime to improve people’s lives, creating solutions for the problems that riddle our ecosystems, especially in the face of COVID. These entrepreneurs are ready to absorb capital and provide meaningful as well as profitable outcomes.
COVID-19 has precipitated the need to act now. As stated in the recent 2021 Pacific Resilience Meeting: “resilience is no longer an aspiration, it is a necessity!”
We have a region that presents a rich landscape of opportunities where our institutional investors have the power to make targeted and thoughtful investments, to generate positive financial and social outcomes, helping these businesses grow and become financially viable. This, in turn, will help make our island economies more resilient, equitable and sustainable. It is an inevitable metamorphosis for the Pacific.
Jinita Prasad is a financial sector specialist who consults with multilateral organisations, governments and businesses across the Pacific with a focus on social enterprises and SMEs.