UN initiative shows investors the way to finding impact ventures in developing countries
Well over half of the households in Africa still rely heavily on wood as their main source of fuel, especially for cooking their everyday meals. Despite being expensive, smokey and dangerous to use, many families are faced with no alternative, making it one of the main drivers of forest degradation.
These factors are what led Kenyan entrepreneur Chebet Lesan in 2015 to come up with a biofuel alternative: a carbonised block made of farm waste that can burn for longer and also be reignited for later use.
Her company BrightGreen Energy is one of the 28 sustainability-led businesses selected as finalists for an investment initiative run by the UN Development Programme in partnership with Lausanne’s EPFL, Orange and SAP.
Now in its second year, the project, called the Growth Stage Impact Ventures (GSIV) for Sustainable Development Goals (SDGs), finds and showcases midcap companies in developing countries, like BrightGreen, with the potential to make both a positive impact and generate profit.
In what started as an advocacy campaign, UNDP spokesperson Sarah Bel said the ultimate goal of the programme is “to influence the financial sector so that they consider the SDGs as a potential investment opportunity”.
In short, it wants to demonstrate how investors can profit from solving social and environmental problems by investing in companies in developing countries helping to serve low-income populations.
The focus in this year’s edition on health, clean energy and waste management. Over 237 companies from 65 different countries were nominated to take part. A team at EPFL helped whittle down the list to just 28 companies that will now be evaluated by a committee of technical experts, investors and UN representatives.
The top 12 ventures will be invited to pitch at UNDP’s SDG Finance Geneva summit, scheduled to take place in May 2021.
Why it matters. Impact investing has grown rapidly over the last decade from a niche practice to a $715bn market in 2019. Governments, nonprofits, and institutional investors are increasingly turning their attention to the sector, especially since the onset of Covid-19, as a means to create more financially sustainable projects and to direct new capital to developing economies.
However, impact investing still faces some major hurdles. For investors, finding and evaluating suitable companies that meet their criteria can be a problem. Businesses with a social impact are highly diverse, spanning various sectors and countries, levels of risk, and expected returns. For institutional investors with large sums of money to put to work, finding opportunities at scale can also present problems.
For the UNDP, the aim was to show that these opportunities exist. “From the beginning we worked hard to build scale,” Bel said. Instead of reaching out to entrepreneurs directly, they called on third parties, from impact funds to family offices and international organisations, to nominate from their own pipeline three entrepreneurs that met their eligibility criteria. Bel added.
“This is how we cracked the nut of finding bankable projects that are solid enough to be interesting opportunities. Because through the nomination process we are leveraging existing efforts, existing due diligence and an existing pipeline.”
The first, the feedback they received was that investors would never agree to share their pipeline. However, the 237 nominations proved otherwise, Bel said, with investors perhaps choosing to share names of businesses that needed more exposure or different partners.
The selection process. Experts within EPFL’s Tech4Impact initiative, which promotes the university’s work in the field of innovation, are responsible for screening the nominations and checking the feasibility of the projects. Only impact ventures that had already completed series-A funding were selected. On top of this, only ventures with their headquarters in developing countries were eligible this year so as to attract more local entrepreneurial profiles.
Alessandra Rojas, sustainable entrepreneurship manager at EPFL’s Tech4Impact, said this made the screening process more challenging but ensured “a fair playing field for everyone”.
The programme also decided to establish a stronger gender lens approach, with half of the 28 companies shortlisted run by female entrepreneurs. This year’s selection round was also focused on companies finding solutions in the area of clean energy, access to health and waste management. Indian ventures dominate the latter, with companies including GARV toilets and Saahas Waste Management making the shortlist. Rojas said:
“We want to see that they have a strong competitive advantage and good technology behind [their business]. If we are talking about reducing or recovering waste, for example, we want them to see them actually doing this and not as a byproduct. They need to be impact-driving, and not greenwashing.”