Sunday 29, October 2017 by Nabilah Annuar

Impact investing in the GCC

Shailesh Dash, Founder & Board Member of Regulus Capital highlights the potential of impact investing in the region.

Impact investing is becoming an integral part of investment strategies due to the increasing awareness of integrating ethical, social and governance (ESG) factors into investment processes. Businesses and investors, including private equity (PE) and venture capital (VC) firms, have started applying the 'impact investing' vehicle to generate beneficial social or environmental impact with financial return, unlike the traditional philanthropists.

According to the Global Impact Investing Network (GIIN) 2017 Annual Impact Investor Survey, the size of the impact investment market was estimated at $114 billion as of 2016, up significantly from $77.4 billion in 2015. Some of the pioneer names in the impact investment sphere range from specialist investment firms, such as Acumen Fund and the Omidyar Network, to large foundations, such as the Ford Foundation, Bill & Melinda Gates Foundation and The Rockefeller Foundation. Moreover, global investment firms, such as Goldman Sachs, JP Morgan, Bain Capital, Bank of America's Merrill Lynch and Blackrock, are seen joining this newest wrinkle with their own impact investment platforms.

Although impact investment has gained considerable impetus globally in recent years, the GCC remains at a nascent stage of adopting this emerging investment strategy. While the concept is still in its infancy among local investors, global organisations that employ a VC approach to social enterprises, such as Village Capital, the Acumen Fund, Grey Ghost Ventures, Root Capital, Willow Impact Investors and the Grassroots Business Fund, are all pondering expansion in the wider MENA region, signifying a large-scale potency.

On the other hand, regional PE investors such as the Abraaj Group and Al Masah Capital are both well known for advocating sustainable investment as a way of doing business, screening potential investments based on their sustainability performance. Progress can also be seen in the GCC, as the Islamic Development Bank recently announced the launch of the Global Islamic Finance and Impact Investing Platform (GIFIIP) with the United Nations Development Programme to work towards achieving the UN’s Sustainable Development Goals (SDGs).

Additionally, GCC sovereign wealth funds (SWFs) have also started playing a catalytic role in advancing the social agenda of both Islamic finance and impact investment programmes. For example, Abu Dubai is using one of its smaller SWFs, Mubadala, for the development of Masdar City—a multi-billion dollar 'green economy' project, not only as a hedge against the stumbling oil sector, but also to support its diversification strategy outlined in the 'Abu Dhabi Economic Vision 2030', for sustainable evolution of its economy. Moreover, the GCC family businesses, who represent around 90 per cent of the private sector economy and have a tradition of philanthropic activity through charitable donations or 'Zakat', should start exploring impact investing as a means of innovative financial mechanisms to further bolster the concept.

GCC needs a renewed commitment to catalysing a greater domestic impact investment industry in order to fix some of the region's most pressing problems. It is important to realise that impact investing has the potential to change the trajectory of employment, education, healthcare, and green energy, amongst others; but hinges on investors buying into the value of social businesses and governments' initiatives to create an enabling ecosystem for social enterprises. Although the GCC has made positive gains in supporting entrepreneurship, impact investing has yet to be embraced by large institutional investors, including SWFs, primarily due to subdued returns and stakeholder obligations.

Further, as the fiscally distressed governments struggle to meet social and development challenges, impact investing can replace traditional market sources by supporting the under-funded socio-economic sectors. Regional impact investors now have the opportunity to replicate the success of business and start-up ecosystem in the social areas to accelerate the pace of innovations. Achieving a transition toward more social-minded investment practises, the regional financial institutions will need to come up with creative solutions to overcome these challenges, while the GCC governments contemplate on the most effective way to capitalise on impact investing to generate returns. Greater awareness of the opportunities to make a positive social impact, in lieu of potentially achieving returns will help draw fund managers in this direction.