What’s the impact of investing with integrity?
Impact investors play a critical role in international efforts to meet the United Nation’s Sustainable Development Goals (SDGs). And as first movers in emerging and frontier markets, they often set the standard on responsible investment.
Investing with integrity, by integrating high standards of anti-corruption, is integral for investors to meet their development objectives. Yet, business integrity considerations remain peripheral to discussions about shaping standards for responsible investing, and a common approach hasn’t been established within the industry.
“There isn’t a framework that addresses business integrity for impact investors or development finance institutions (DFIs),” explains Alex Maddy, Director of Business Integrity at British International Investment. “The IFC performance standards are a really good framework for environmental and social issues. There’s also a corporate governance framework that the IFC and DFIs have built together. We don’t have the same thing for business integrity and that means investors have quite varied approaches.”
A new report by Transparency International UK, supported by British International Investment, ‘Investing with integrity’, examines the current practice in the sector and what needs to be done to raise the bar on business integrity standards for ESG and impact investors. The report explores the links between business integrity considerations and development impact outcomes.
Transformational impact
During a recent event to launch the report, anti-corruption specialist and report contributor Phil Mason set out the scale of the issue and its potential for impact. “$500 billion – $2 trillion [of investment] is flowing into developing and emerging markets on an annual basis. When you compare that to the annual flow of classic development aid – which most recently is around $179 billion a year – we’re looking at huge leverage. We’re looking at 3-12 times the amount from classic aid donors, which receives much more attention than impact investors.”
“Impact investors tend to pick up businesses at their early stage of formation. That’s significant because if you can set the weather in a growing economy at the beginning, with that sort of scale, then you’ve got a huge chance of shaping the way in which that economy is going to change. It seems to me that impact investors are in a prime space to influence the change in development.” In addition, Phil says that impact investors often hold other operational advantages, such as long-term partnerships spanning several years.
Tim Gocher OBE, Founder and Chief Executive Officer of Dolma Impact Fund, agrees with Phil and points to the positive influence of ‘industry champions’, which can be created by investing in companies and enforcing anti-corruption business integrity standards.
“As an investor we have a certain amount more leverage over our investee companies than perhaps an aid organisation does over a government program,” says Tim. “We can sit on the board, we can pull funding, we can do all sorts of things. But for me, my interest goes beyond the organisation that we have some control over, to asking what’s the effect of impact investing on an ecosystem, not just the company that’s the destination for your capital.”
Shifting the debate
The new report aims to raise awareness of the value of focussing on business integrity and stimulate action across the investment industry. SDG16 – Peace, justice and strong institutions – focuses on business integrity and has bribery and corruption targets. Yet evidence shows that out of all the SDGs, impact investors target SDG16 the least.
Dr Ingrida Kerusauskaite, Head of Business Integrity at Transparency International UK, highlights the report findings that focusing on anti-bribery corruption improves company performance, according to investors. They have easier and cheaper access to capital, for example, because more companies are willing to invest.
“There’s also quite a lot of research now that shows that impact investors and the sort of companies that they invest in tend to have better financial returns where you have business integrity risk management,” says Ingrida.
Inspiring action
The case for prioritising business integrity is clear, but how feasible is it for investors to act?
Mediterrania Capital Partners is a private equity firm focussed on investments in SMEs and medium-sized companies in Africa. Rajaa Berrkia, the firm’s Partner and Director of Sustainable Development and Risk Management, explains the firm’s business integrity journey to date. “We started working on business integrity and not only concentrating on corporate governance such as composition of the board or the IFC corporate governance metrics. We were mastering all these aspects but also looking at business integrity issues such as corruption, fraud, money laundering and compliance crime.”
“For us, it has been a game changer to have somebody responsible for these areas, who is incentivised to carry out the business Integrity action plan that we put in place.
“I would also say that the speed of action is everything for us as a private equity fund manager. Everything happens in the first or second year of investment – if you leave it until the third year, you don’t have much power or weight, even having one or two board seats. Everything has to be implemented during the first 100 or 120 days.”
Tim Gocher agrees with Rajaa’s view, and highlights the importance of supporting investees to establish the right structures to mitigate risk: “Very importantly, those structures don’t necessarily have to remain static. There will be new risks emerging and new challenges, so tracking and monitoring both the changes in the environment and the risks, as well as the adequacy of the controls is very important.”
These recommendations align with the research carried out by Transparency International UK. “A lot of investors invest in companies that are not perfect at the outset but do commit to changing certain aspects,” says Ingrida. “All too often, as long as they commit and say “yes we’ll change”, the issue is then parked and that’s a deal done. Following up on those changes and asking whether they are still adequate is critical. Finally, I think it’s quite important to share the lessons of what’s worked and what hasn’t, both among impact investors and development organisations.”
Catch up on the full recording of the event and read the full report
