As we look forward from the midst of a global unprecedented economic and health crisis, COVID-19 looks to bring unique opportunities for private debt investing to create significant social impact. There is a pivotal opportunity for institutions and investors, who are increasingly seeking investments aligned social objectives or the UN SDGs, to bridge financing gaps and contribute to social development through financing and investments. With sustainable investing set to increase to 95% of global assets by 2030¹, and an expected wealth transfer of $68 trillion to the more socially conscious millennial generation over the coming years², the investment appetite to create positive change whilst being financially beneficial has never been higher.
However, a key question and perhaps barrier, that surrounds ESG and impact investments is ‘what difference is my investment actually making?’ There is an imperative need for better integration of sustainability and impact data to reflect the outcomes on beneficiaries and meet client expectations. The practice of impact measurement, where social and environmental outcomes are measured and tracked as part of the investment process, is a key enabler in closing this gap and ensuring capital is reaching – and benefitting – the target segments of the population.
A credible and robust impact measurement system, comprising the tools required to assess and report the impact of financing and investments, would provide institutions and investors the assurance they are achieving their stated impact objectives, and drive more catalytic capital towards development goals.
How can impact measurement support post-pandemic sector recovery?
Key sectors that have been disproportionately impacted by Covid are low-income populations and the micro, small and medium-sized enterprise (MSME) sector. A powerful, but often overlooked driver of economic growth, MSMEs provide up to 60% of GDP contribution and 90% of employment across emerging markets in Asia³. However, an acute lack of access to affordable financial capital hinders their ability to participate in and contribute to long-term economic growth, creating a financing gap of over $2.7 trillion⁴ in the Asia Pacific region alone. These businesses, often run as a family operation or by young entrepreneurs, provide a critical means of livelihood, security, and social development opportunities, but are excluded from economic growth and its benefits without access to formal financial services.
An alarming report from the World Bank⁵ indicates that approximately 70% of MSMEs in emerging markets lack access to credit and basic financial services. They are hindered by a lack of collateral, financial records and a credit score, rendering them unable to upgrade, innovate or expand, leaving them at the base of the pyramid. While some of these enterprises are economically viable, most of them eke out a minimum subsistence. Expanding financial solutions for these vulnerable groups is critical to their post-pandemic recovery, enabling them to become professional, productive and profitable, both for low-income populations to participate in sustainable inclusive growth, as well as the wider region to facilitate upward mobility and bridge socio-economic divides.
Introducing impact measurement to investments directed at alleviating this financing gap would bring greater accountability to the sector and could speed up economic and social recovery. Credible and transparent impact measurement brings visibility to how and where financing is having a positive impact on livelihoods and contributing to social development. For example, did providing affordable financing allow an MSME to pay its employees’ wages, invest in employee training or education or purchase new technology to improve productivity? Or, in fact, did the financing not lead to any economic or societal benefits? Without traceability in the financing chain, investments are often misdirected or misrepresented in terms of impact, leading to the persistence of socio-economic inequality.
The new fintech start-up helping institutions close this gap
There are many firms providing an alphabet soup of ESG and sustainability indicators, but fintech start-up GreenArc, who specialises in impact management, have become more attuned to the need for credible and transparent impact analysis to help institutions and investors understand the impact of investments to inform and facilitate more impactful decision making.
Designed with ease of deployment in mind and offered as a SaaS solution, GreenArc is helping to build a financial sector that drives the SDGs and serves social & environmental goals. With the objective of developing a best-in-breed impact measurement and reporting framework that can be integrated holistically and quantitatively to drive decision-making, GreenArc’s solution enables the incorporation of sustainability and impact data to reflect the real-world outcomes of financing on the environment & society. Leveraging the benefits of technology to go a step further than traditional ESG, GreenArc has aligned with global industry standards to develop a data-driven impact score to assess the potential impact of financing on a beneficiary’s e.g. MSME, livelihood. Their solution utilises machine learning techniques to generate impact scores, providing a framework for comparison and consistency to help institutions understand if, where and how impact is created. Taking into account socio-economic, environmental and development factors, their solution provides a rating on the capacity of an investment to generate positive impact.
¹ Deutsche Bank
³ IFC, SME Finance
⁴ SMEs in Developing Asia, Asian Development Bank
⁵MSME Finance Gap, World Bank
ARTICLE WRITTEN BY: MEETA MISRA
Meeta Misra is the Director, Head of Impact and Outreach of GreenArc Capital.
GreenArc Capital is part of our Batch 6 Fintech program in Singapore.
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