Business

Impact investors should focus on long-term profits – experts

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By COSMAS BUTUNYI

Posted  Sunday, July 3   2011 at  10:34

As impact investment gathers steam in East Africa, some experts are arguing that by just concentrating on making profits in the long term, companies would be putting themselves in good stead to have greater social impact.

“Executives targeting profitability with a sufficiently long time horizon will make investments that generate social benefits because these investments serve the interests of their companies,” the experts state in a paper that was published recently by Dalberg Global Development Advisors.

In the paper titled, “The Single Bottom line,” Daniel Altman and Jonathan Berman, both of the strategic advisory firm that has offices in Nairobi and 10 other locations across the world, have indicated that companies employing this approach would generate social benefits more efficiently and sustainably than those using typical strategies for corporate social responsibility.

This comes against a backdrop of excitement in the region over the rise of impact investment, which considers social as well as environmental impact alongside financial returns.

The new thinking brings to the fore a new twist to the concept of social investment, which has been forecasted to become the world’s emerging asset class this decade.

The authors of the paper however argue that using a single bottom line to assess investments with a social benefit is not an entirely new concept as it has been applied for some time.

Among the examples cited is one involving Tata organisation, which has undertaken investments to promote India’s economic development and raise living standards for more than a century, in the belief that the country’s growth could only be good for the company.

The paper argues that a return to the single bottom line, which focuses on profit-making, does not however imply that companies’ involvement in activities that create social benefits will diminish.

“On the contrary, we argue that these activities will become more common as companies make a case for them in terms of the single bottom line,” it states.

According to the authors, the conditions of focusing solely on profit making makes companies more likely “to do less of the activities rather than more; as in other areas, uncertainty should be expected to make companies more conservative.

“Using the single bottom line will help companies to avoid misallocating resources and, with fewer unproductive projects on their balance sheet, likely increase their appetite for activities that create social benefit,” it is argued.

However, other analysts also say that any profit-making enterprise would undoubtedly have a social impact.

“The soul of an enterprise must have social content,” says Prof Calestous Juma, who teaches technology and innovation at Harvard University.

The Dalberg paper states that using the single bottom line also makes investments that generate social benefit more sustainable since, if companies view social initiatives as cost centres rather than contributors to profitability, then these initiatives are likely to become procyclical, being cut in downturns and then reinstated when balance sheets are flush again.