NB Financial Health

Monday
November 3
2014

Max Pichulik

NexThought Monday – Impact White Washing?: When any deal in a developing country with a few generic metrics can be considered impactful

This summer TriLinc’s Global Impact Fund announced more than $1 million in additional trade finance to a South African textile importer and distributor through a revolving trade finance facility. The transaction, which matures later this year, is secured by the unnamed South African company’s clothing inventory, which is imported from Asia and sold to large South African retailers “serving all of the country’s market segments, including low-income consumers,” according to the press release.

The deals were announced as impact investments with no further information and no further mention of its potential or intended social or environmental impacts.

TriLinc is a retail fund that is registered with the Securities and Exchange Commission (SEC) in the United States. When asked over email for comment on the deal, Trilinc’s Chief of Staff Marixa Barba wrote that TriLinc is in a “fund offering period and per SEC regulations are unable to discuss the Fund.” It is understandable that TriLinc wants to be cautious about the level of detail it releases about its investments. (For example, all of the portfolio investments are listed on the website, but none of the portfolio companies are named).

This caution, however, has created many questions among numerous ecosystem players in South Africa’s impact investing community, and has generated skepticism over whether this specific deal could have any significant positive impact locally.

I can only speculate on TriLinc’s intended impact. By their reference to “low-income consumers,” it would seem the intent is to provide South Africans with better access to affordable clothing. That may be a worthy cause, but is their capital actually providing that benefit significantly given the availability of other trade finance capital locally? And is TriLinc aware of some of the serious potential negative impacts that could result from bringing more cheap clothes made in Asia to the South African market?

The most obvious one is the effect on the local textile industry, which is already in an extremely fragile state. It has consistently shed jobs over the last decade, and increasing imports from Asia is a key reason. Fortunately, the wave of job losses has slowed in the last few years – the industry cut around 5,300 last year compared to over 10,000 in 2010 – thanks in part to South African government incentives and developmental strategy. But the sector has still not reached a recovery stage, and the TriLinc deal seems to work directly against local initiatives to support it.

Secondly, most households in South Africa purchase clothing on debt, which of course has negative effects at the household level. In fact, upwards of 70 percent of retail sales volume is driven by debt-based purchases, often by consumers who are living close to or below the poverty line. As TriLinc’s deal was being made, one of South Africa’s largest micro-lenders, Africa Bank Limited, was placed into curatorship and bailed out by the South African Reserve Bank. Perhaps the deal’s intent is to reduce the need for more consumer debt by providing access to cheaper staples, but the debt issue has become deeply embedded in the way the consumer finance and retail industries operate in South Africa – it is beyond the scope of one retailer to impact.

A final concern is the environmental impact of importing cheap goods from Asia when there is a ready supply of labor that can produce them locally, with a smaller logistical carbon footprint.

The point of raising these issues isn’t to suggest that TriLinc hasn’t done its market or investee due diligence. Rather, the point is to highlight the need for more clarity and better communication of the intended impact at the transaction level. TriLinc’s South African textile investment is a recent example of why this is important, but it certainly isn’t the only one.

TriLinc is a member of GIIN (Global Impact Investors Network), and publishes its profile and how it uses GIIN’s Impact Reporting and Investment Standards (IRIS) metric framework on the organization’s website. More than 130 organizations have publicly disclosed the IRIS metrics that they use to track performance on the site. And, on the “Register your IRIS use” a note prominently explains: “Neither the GIIN nor IRIS endorse the organizations or validate the information listed on the IRIS User Registry” and directs readers to the full terms and conditions. GIIN does not certify or rate investors or investments, but does promote this definition of impact investing.

Back to the deal. The fact that TriLinc publishes a press release describing this deal as an impact investment and shares commercial aspects of it, but does not clarify the impact intentions because the fund is “currently under offering,” doesn’t provide any clarity to the industry.

More broadly, it seems that any fund manager can now publicly declare himself or herself as an impact investor, apply to become a GIIN member and utilise a few standardised IRIS metrics, which the fund manager can apply subjectively. Unless we ensure meaningful rating systems, provide adequate education to this growing marketplace, have a growing community that cares about its efficacy, and have clear safeguards in place, we run the risk of placing capital with marginal impact. I have not seen any significant movement for putting safeguards in place, with little to no public debate on the value of doing so. As a growing investment marketplace, impact investing seemingly has an “open door policy” where almost everyone is welcome. If these issues are not addressed, my fear is that the promise of impact investing could simply devolve into marketing fluff on fund fact sheets and terminology found in report glossaries, which are meaninglessly thrown around at investment conferences.

However, for those who are passionate about the potential for impact investing, and seek to achieve social, economic and environmental justice, standardised metrics don’t define a good deal for us. We just “know it when we see it.” But that doesn’t necessarily build the new, cohesive financial system that many of us hope to see.

Max Pichulik is co-founder of Impact Amplifier, an investment, supply chain and sustainability advisory firm based in Cape Town and Johannesburg.

Categories
Entrepreneurship, Impact Assessment
Tags
Impact Assessment, impact investing, NexThought Monday