By Chinenye Uwanaka BL, LLB, ACI.Arb (U.K), IPP (Harvard), Nathaniel Ojobo BL, LLB, ACI.Arb (U.K) and Sandra Chude B.sc, LLB, BL, LLM

1. DEFINITION OF THE CONCEPT

Impact investing is the allocation of assets (in the form of investments) into companies or organizations with the aim of bringing about positive social or environmental impact while also anticipating profit from such investments. Impact investment challenges the long-held view that social and environmental issues should be addressed only by philanthropic donations and that market investments should focus exclusively on achieving financial returns.

The strategy actively seeks to make a positive impact by investing, for example, in nonprofits that benefit the community or in clean-technology enterprises that benefit the environment. Impact investing can create significant value for investors and society as a whole. Impact investing attracts individuals as well as institutional investors including hedge funds, private foundations, banks, pension funds, and other fund managers.

2. KEY CHARACTERISTICS OF IMPACT INVESTING

a. It aims to have a positive environmental or social impact: Impact investing uses investments to help address social and environmental issues like climate change, hunger, poverty, homelessness, and epidemic like HIV/AIDS and COVID-19.

b. It delivers a financial return on capital: Impact investing is foremost a business activity and, therefore, expected to yield a financial return on capital or, at least a return of capital.

c. It spans a broad range of sectors and regions: Impact investing is inclusive across asset classes, from cash equivalents and microfinance, to private equity and clean technology.

d. It can be used to regularly measure social and environmental impact regularly: The impact investor regularly assesses and reports the social and environmental performance of existing investments to ensure transparency and accountability, and inform potential investors.

3. TYPES OF IMPACT INVESTMENT

The opportunity for impact investments varies and investors may choose to put their money into emerging markets or developed economies. Hence, there is no hard and fast rule on the delineation as to what is and what is not impact investment.

However, Impact Investments span across number of industries including:

a. Healthcare e.g., developing and providing technology that will enhance good health of humans, telemedicine/telehealth/e-health

b. Education e.g., emerging online education and schools especially during and post COVID

c. Energy, especially clean and renewable energy

d. Agriculture

e. Microfinancing e.g., digital microfinance banking platforms.

f. Housing

4. TYPES OF IMPACT INVESTING

a. Institutional Impact Investing

These come in the form of investments carried out by Firms and Institutions singularly or in partnership with each other. Private equity and venture capital investors largely fall under this category. Pension funds investors (either singularly or in collaboration with Government and Corporations) and Foundations with endowments are also included herein

b. Individual Impact Investing

Under this category are private persons. Examples include syndicate and pooled investment platforms and digital microfinance banks which issue micro loans. An example of the latter is MyC4, a Danish Company founded in 2006 and which allows retail investors to loan money to small businesses in African countries via local intermediaries. Though now liquidated (since 2016) and closed, they helped over 19,000 investors to help finance over 8000 businesses in seven African countries. Also included in this category are Exchange Traded Funds traded on the Stock Exchange as a public stock and available to anyone with a stock brokerage account.

5. WHO CAN CARRY OUT IMPACT INVESTMENT?

a. NGOs

b. Development Finance Institutions

c. Financial Institutions/Banks

d. Individual Investors

e. Charities

f. Government Organizations

g. Private Organizations

h. High net worth Individuals

i. Pension fund and Insurance Companies

6. LEGAL FRAMEWORK/REGULATORY REGIME FOR IMPACT INVESTMENT IN NIGERIA

In Nigeria, there is no law whose sole purport is to particularly regulate impact investments. However, there are several laws with implications for impact investment and investors. They include:

a. The Companies and Allied Matters Act

b. The Nigerian Investment Promotion Act

c. The Investments and Securities Act

d. Consolidated Rules and Regulations of the Securities and Exchange Commission

e. The Finance Act

f. The Foreign Exchange (Monitoring and Miscellaneous Provisions) Act

g. The Industrial Inspectorate Act

h. The Industrial Development (Income Tax Relief) Act

i. The National Office for Technology Acquisition and Promotion Act

j. The Rulebook of The Nigerian Stock Exchange 2015

k. The Immigration Act

Considering the many government institutions that one will have to deal with towards obtaining relevant certifications, permits and or licenses, the Nigerian Government, through the Nigerian Investment Promotion Commission (NIPC), created a One-Stop Investment Centre (OSIC) to help bring together all the relevant regulatory bodies and institutions that one may need to relate with for the purpose of obtaining the relevant certifications and or licenses before commencing operations in Nigeria.

The idea behind the creation of OSIC is to help investors (including impact investors) conveniently set up their businesses in Nigeria. How well this aim has been achieved is in doubt.

7. A CONSIDERATION OF THE CONCEPT FROM THE NIGERIAN PERSPECTIVE

Nigeria, being a developing country in the third world, has its fair share of socio-economic challenges ranging from poverty, hunger, unemployment, illiteracy, lack of (and sometimes, inadequate) social amenities, security, etc. Issues of climate change (being a general problem world-over) also pose a challenge to the country. These challenges are natural attractors of impact investors both within and outside Nigeria. Hence, the obvious intervention being carried out by some of these impact investors in some of Nigeria’s sectors. Examples of such investors are Uber, Bolt, Gokada, Oride (all car and bike hailing services mostly operational Nigeria), Learners Corner International Limited (a Nigerian Company that uses technology to deliver education to Nigerian Children especially as a result of COVID), LifeBank (a startup that works with hospitals round the clock to find lifesaving medical products and deliver same to the hospitals in the right condition across Africa), Wecyclers, (a company that offers convenient household recycling services using a fleet of low-cost cargo bikes), Andela (a technology company that recruits and trains local software developers at little or no cost, who in turn work remotely for them for various international companies, thereby generating employment opportunities for thousands of the unemployed populace in Nigeria), and the many Agritech Firms (e.g., Farmcrowdy) that use technology and crowdfunding in furthering their existence and objectives.

Furthermore, a good number of impact investing funds have been made available by some foreign development institutions and bodies. For instance, the African Development Bank invested in the Africa Food Security Fund (AFSF) to boost agri-business SMEs and enhance food security in some African countries like Nigeria. Also, the International Finance Corporation made an investment in Hygeia Nigeria Limited to improve the healthcare infrastructure in Nigeria and to facilitate access to quality healthcare services.

Locally, the Nigerian Capital Development Fund (NCDF) launched an Impact Investment Note and Fairshares investment platform to enable impact investors make investments and become stakeholders in NCDF with the aim of driving sustainable impact projects in the country.

Notable Points

a. Nigeria is a country faced with an avalanche of socio-economic challenges like hunger, poverty, unemployment, poor healthcare, poor/inadequate infrastructural facilities, illiteracy, among others, which largely affects its growth and development.

b. Data from the National Bureau of Statistics reveals Nigeria’s unemployment rate as at the second quarter of 2020 to be 27.1% indicating that about 21.7 million Nigerians remain unemployed.

c. In 2019, The National Bureau of Statistics (NBS) released its “2019 Poverty and Inequality in Nigeria” report, which highlighted that 40% of the total population, or almost 83 million people, live below the country’s poverty line of 137,430 naira ($381.75) per year.

d. However, these challenges create an opportunity for impact funds and impact investment.

e. Over the last few years, impact investments have continued to grow in Nigeria. Its impact, however, might not be significant amidst the plethora of challenges faced across the country. This myriad of challenges impedes the expansion and maximum realisation of its potential to deliver social, economic and environmental returns at scale.

f. Nevertheless, these perceived challenges should not serve as an excuse to bury the idea of impact investment. On the contrary, it is a time for stakeholders to re-evaluate guiding principles and collaborate to build a strong socio-economic society.

g. For investors willing to bear the risks and challenges, Nigeria holds enormous promise. Its sheer size and strong growth prospects position it well to continue its role as a leading economic powerhouse on the African continent. Moreover, the large proportion of its citizens underserved by basic goods and services provide a wide variety of opportunities for both financial and social/environmental impact.

8. LIMITING FACTORS/CHALLENGES TO IMPACT INVESTING IN NIGERIA

While it is clear that impact investments have helped to strengthen Nigeria economically and social wise, several challenges still militate against the sustenance and continued growth of impact investment. Highlights of some of such militating factors are as follows:

a. Difficulty while sourcing for viable investments that meet both financial and social/environmental objectives. This is as a result of limited capacity of sustainable social enterprises in Nigeria. Low deal flow is partly due to the limited number of sustainable social enterprises or impact investees able to demonstrate a sufficient track record and capacity development following the risk appetite of impact investors. This is coupled with limited ability to measure and report adequately on impact performance where such capacities do exist.

b. Difficulty Exiting Investments: Value in private equity investments in the traditional financial markets is sought and realized through an exit point at which the investor sells their stake in a firm. This can be done through Initial Public Offerings (IPOs) as the endpoint of the funding value chain. The challenge of finding profitable and varied exit options stems from the fact that most African capital markets are still at a relatively early stage of development.

c. Unclear Policies and Regulatory Environment: While Nigeria was reported by the World Bank to have improved its ease of doing business in the World Bank Report of October, 2019, the issue of uncertainty in policies (almost always a consequence of state politics) and regulations has hampered the development of impact investments. Currently, Nigerian enterprises are generally challenged by a poor environment for doing business, and investors constrained by our developing financial markets.

d. Lack of Ecosystem Synergy: There is a poor synergy between sustainable social enterprises, entrepreneurs, investors and innovation networks. The majority of Nigeria’s sustainable social enterprises are not members of professional associations or other formal networks, which makes finding investible enterprises and entrepreneurs a challenge for investors. Furthermore, sustainable social enterprises may have limited access to academic and research institutions focusing on research and development (R&D) that can be developed into goods and services for markets.

e. Negative perception about the unprofitability of impact investing.

f. Concentration of actors in particular locations.

9. THE WAY FORWARD/CONCLUSION

It is proposed that the following be adopted as solutions towards some of the problems identified above:

a. Enacting of an all-inclusive and targeted legislation for impact investors and investment

b. Setting up modalities for proper integration of social enterprises into one umbrella body for easy identification of investors

c. Setting up avenues (like associations and a regulatory body) for education and disabuse of negative and untrue mindset pertaining to impact investment

d. Establishing a central data system to provide information on impact measurement and tracking and other indices emanating from impact investment. This will enable impact investors and other stakeholders make informed decisions and choices.

e. Enable and continue to enhance the ease of business operations through means such as adopting tax free regimes or reduced tax obligations for impact investors.

f. Encouraging local investors to consider impact investment

With the great human capital that Nigeria possesses and the numerous economic cum social challenges that bedevils her, it can be argued that the country is a fertile ground for impact investors and investments. It is the view of the writers of this piece that impact investment is indeed a goldmine whose potential remains largely untapped. Therefore, government and other stakeholders should endeavor to do the needful towards establishing the apparatus needed.

NOTE: This piece is a work of research and reference was had to some already existing piece of work from which some of the points herein were sourced. We do not take credit for such parts of this piece.