Nikita Boisits

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The economic value of education: Can impact investment in education generate both a social and financial return?

The economic value of education: Can impact investment in education generate both a social and financial return?

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THE ECONOMIC VALUE OF EDUCATION: CAN IMPACT INVESTMENT IN EDUCATION GENERATE BOTH A SOCIAL AND FINANCIAL RETURN? NIKITA BOISITS Abstract Impact investing, although not a new concept, has gained prominence in recent years as an alternative form of investment and has become a fast-developing investment strategy. It differs from conventional investment in bonds and equities in that both the financial and social impacts of investments are measured. This research explores the concept of impact vesting, its rapid growth in recent years, and analyses the different methodologies developed to measure both the social and financial impacts of an investment. While there 1s a growing participation in impact investing, some sectors such as education, remain undeveloped. This is partly because of the percerved difficulty in generating financial as well as social returns in these sectors. This analysis focuses on the general definitions and concepts of impact investing, provided through literature and the potential impact investing landscape in South Africa, particularly in its education sector. It concludes that impact investing in local education 1s an underutilised area that can yield high social returns. JEL Classification: 1143, 121, 122, 124, 125, 126 Keymwords: Project valuation, 1iducation System, Achievement Gap, Liducation Vinance, 1:ducation and Inequality, Iiducation and Economic Development, Returns to Liducation 1. INTRODUCTION While the concept of impact investing is not new, it has significantly increased as a form of investment in recent years. Several factors contributed to bringing this form of investment to the attention of mainstream investors, including its potential to generate a financial return. For instance, a 2010 J.P. Morgan report (in O’Donohoce ef al, 2010) predicted that globally through a $1 billion capital investment, S667 billion profits could be generated in five subsectors within the timeframe of 2010-2020. The five subsectors that this report focused on are housing, water, health, education and financial services. Proponents of impact investment claim it can provide affordable urban housing, clean water for the rural arcas, maternal health, primary education and microfinance in manners that generate profits as well as social returns (O'Donohoce ef al, 2010). The twenty-first century has allowed many innovative advances in service delivery. However, there are still many parts of the world that are left undeveloped and lack efficient resources to adequately provide services for their people. For instance, in South Africa the education sector 1s problematic due to the vast differences in the quality of education received, causing further inequality in education outcomes amongst the country’s youth (Spaull, 2014). FHducation occupies a prominent role in shaping the theoretical frameworks of sociology, anthropology, cconomics, philosophy and psychology, which further trickles into their subfields of social justice, development and economic growth (Spaull, 2014). Olaniyan and Okemakinde (2008) state that the concept of education being an engine of growth 1s highly dependent on the quality and quantity of education offered in any country. A prominent feature of impact mvestment 1s that it not only encourages investment in social services but emphasises the need to quantify and measure the impact from both the social and financial perspective (Colantonio and Reeder, 2013). Through the continuous quantifying and measuring of the impact of the investment, standardised metrics and benchmarks have begun to be developed which in return will provide a clearer view on how investments are positively contributing to society. This, according to Colantonio and Reeder (2013), will encourage further investment in the arcas where measured impact 1s greatest. This paper examines the literature on the importance of impact investing in education in particular, particularly in developing countries, as well as identifying the means of measurement used in the literature to illustrate the impact of investments in a financial as well as social sense. 2. LITERATURE REVIEW Although impact investing 1s not a new concept, it has only recently gained the interest of many mainstream investors as being a sufficiently attractive alternative form of investment. According to Alenius (2010), the growing participation in the impact investment market has made impact vesting a fast-developing investment strategy, where the impact itself represents the net effects generated through the investment portfolios. O’Donohoc ef al. (2010) argue that the momentum has been increasing for investors to consider impact investing as a new alternative form of investment. Impact investing, according to Bug-lLevine and Emerson (2011) 1s a type of mvestment strategy that focuses on generating financial returns whilst simultancously improving social and environmental

 

conditions. The Global Impact Investing Network (GIIN) defines impact investing in a similar manner and adds that this form of investment has an extensive range of alternatives, which can range from producing a return of principal capital to becoming a leading economic industry that produces market-beating financial returns (Colantonio and Reeder, 2013). Alternatively, O’Donohoce ef al. (2010) define impact investing in-line with the expression introduced by Prahalad (2004) as ‘bottom of the pyramid’ services. These ‘bottom of the pyramid’ services focus primarily on lower-income groups in developing countries and can operate in multiple sectors (Colantonio and Reeder, 2013). Impact investing 1s therefore an investment strategy that provides a financial return as well as produces a positive social outcome, either through granting access to basic services to members of society who currently do not receive such services, or through delivering more efficient production processes (Colantonio and Reeder, 2013). Impact investors can deliver these positive social outcomes by investing in agriculture, housing, health, investing in small or local businesses, education and other social, environmental or financial services (O’Donohoc et al., 2010). The sudden growth in the impact investment market has only recently been analysed and common threads that have assisted in the expansion of different activities have been identified (O’Donohoc ef al., 2010). An example of such success in the impact investment market, according to Brandenburg and Rodin (2014), 1s scen in the impact fund ‘d.light’, which was established to produce affordable and sustainable power sources to those in poorer socio- cconomic circumstances. During volunteer work for the US. Peace Corps in West Africa during 2004, Sam Goldman discovered that in developing countries there was a large dependency on kerosene lamps as a source of light (Brandenburg and Rodin, 2014). Kerosene lamps emit a lot of carbon dioxide, are expensive to buy, difficult to maintain and arc not the most effective source of light (Brandenburg and Rodin, 2014). In response dlight produced a low-cost solar lantern which by 2013, had impacted the lives of over 7 million children, helped families save around S870 million in energy expenses and reduced over 2 million tons of carbon emissions (Brandenburg and Rodin, 2014). By 2018, d.light had reached over 62 countries and provided around 80 million people with a cleaner source of energy (Donner and Haung, 2019). According to Donner and Haung (2019), the resultant impact of safe, clean sources of energy on student productivity was also significant as students were no longer constrained by the time of the day and were now able to work past sunset. 2.1. The spectrum of impact investing Ormiston e¢/ al. (2015: 355) note the importance of understanding the two classifications of impact investing; ‘financial-first” or ‘impact-first’. ‘Financial-first” investors seek market-competitive financial returns whilst simultancously producing a positive social and/or environmental impact (Ormiston ef al, 2015). Investors who primarily focus on the financial return aspect are usually banks, pension funds or development finance institutions (Ormiston ef al., 2015). For instance, in the United States, TTAA-CREF, which 1s regarded as one of the top fund Managers, requires impact mvestments to generate a competitive financial return (Brandenburg and Rodin, 2014). Alternatively, ‘impact-first’” investors focus on maximizing the social and environmental returns from the investment, and put little emphasis on the financial returns (Ormiston ef al., 2015). Financial-first investors and impact-first investors are drawn from a mixed group of industry players (Jackson and Associates Ltd, 2012). Investors include; private asset owners, demand-side actors, service providers, intermediaries and government (Jackson and Associates Ltd, 2012). Private asset owners include high net worth individuals or families, private foundations and investment funds and large financial institutions (Jackson and Associates Ltd, 2012). Large financial institutions include banks, pension funds and financial development funds, all of which primarily focus on ‘financial-first” investments (Jackson and Associates 1.td, 2012). High net worth individuals or families and private foundations often may focus on ‘impact-first’. Demand-side actors such as social enterprises or start-up companies, receive impact investments and utilize them rather than providing investment funds themselves (Jackson and Associates Ltd, 2012). Service providers, intermediaries and government/ non-government funds help the market function efficiently (Jackson and Associates Ltd, 2012). The multifaceted nature of impact investing has allowed investors from all segments of the market to engage in a variety of investment opportunities within different sectors and, through this, new opportunities of networking between investors have emerged. The Acumen Fund is an example of this. Funded by seed capital invested by large institutions such as the Rockefeller Foundation it operates in five different sectors, these being; housing, water, health, energy and agriculture (Responsible Research, 2011). ‘The Acumen Fund achieves the goal of a positive impact mnvestment through providing the poor with critical goods and services (Responsible Research, 2011). For instance, the fund focuses on providing clean energy through solar panels to Hast Africa’s poorest communities, who cither do not have access to power or use unsustainable sources of power (UNDP, 2016). The

 

Acumen Fund 1s now funded by multiple investors, all of which have invested between $10 000 and $5 million (Responsible Research, 2011). 2.2. Growth in the impact investment market Impact investing has grown in recent years, specifically in the areas of housing, energy and microfinance (GIIN, 2017). The GIIN (2017) report asked 209 respondents to identify which country they had chosen to allocate their impact investments and found that the countries that recetved the most impact investments were the US and Canada, with 97 respondents stating this. The second highest location of impact investments was Sub-Saharan Africa (SSA) with a total of 95 respondents investing in this region (GIIN, 2017). Third was Latin America and the Caribbean (including Mexico) with 85 respondents (GIIN, 2017). Although SSA 1s close behind the US and Canada in terms of receiving impact investments, there is a significant difference in the needs of highly developed and developing countries. Given the magnitude of social and environmental challenges in developing countries, there 1s both a greater need for impact investments and space for much greater investment opportunities. Figure 1 shows which sectors currently receive the highest capital investments from impact investors. 30.000 10000 0 [1 OE -.- Foes Forestry Energy Micoance Finsevices Food Hodlbhare WASH ¢ I Education Manfactorng IT lbrastcte AmsE (od) &a Limber cite Xd 2X IK DX 10% 6% 6 * 1 % % Ko oo% % Nododes IK BX 2X 10% & % Koa x 0% As ux Fagure 1. Assets under management (AUM) by sector in 2017. Source: Global Impact Investing Network (2017:22) Using the same respondents as before, GIIN (2017) found that the housing, energy and microfinance sectors recetved the highest percentage of investments. About a quarter of respondents stated that they plan to expand their investment portfolio nto the food and agricultural sector in 2017 (GIIN, 2017). The respondents also expressed interest in growing their impact investment funds in the healthcare, education and energy sectors (GIN, 2017). The data in this report indicated that investors primarily invested in existing private companies, as it provided them with a sense of financial security (GIIN, 2017). Companies in the growth stage received the second highest amount of capital. Companies in the venture stage received the least capital (GIIN, 2017). Although investors primarily allocated their capital into mature, private companies, the large number of respondents investing in growing companies indicates that they are responding to changes in the investment market and are slowly moving away from mainstream forms of mnvestment (GIIN, 2017). The 2019 GIIN report indicates that the impact investing market 1s still growing, with respondents now engaging in over 13 000 deals in 2018 and a predicted 15 000 deals set to take place in 2019 (GIIN, 2019). The number of deals in 2018 and predicted to take place in 2019 only represents impact investing organizations. Individual impact investors are not included in these numbers (GIIN, 2019). Moreover, to be included in the statistics the respondents had to have mvested a minimum of $10 million into their investments from their inception, or to have made a minimum of five impact investments, or both (GIIN, 2019). 2.3 Lixpansion in impact investing in emerging markets The impact investing landscape in India has shown promising results in terms of improvements in socio-economic circumstances and opportunities for capital deployment (Ravi ez al, 2019). A survey of 25 impact investors found that 67 percent of respondents had invested in both education and agriculture (Ravi ef al, 2019). Impact investments in education differed depending on whether investors are motivated by financial or social and/or environmental returns. Impact investors seeking a financial return primarily target middle to upper-middle income classes as they have the means to pay the minimum required for generating targeted financial returns (Capital Partner, 2013). Whilst, impact investors motivated by the social returns of education focus on the social benefit for vulnerable beneficiaries (Capital Partners, 2013).

 

Understanding the socio-economic needs of individual countries 1s important. MicroVest 1s an impact investing business that has expanded in different sectors across India (MicroVest, 2017). In order for MicroVest to maximize their impact, they understood the specific socio-economic needs in India and designed their allocation of funds accordingly. After analysing the education sector in India, MicroVest noticed that Indian parents want to send their children to private schools because of the low-performance government schools, however financing private education was expensive (MicroVest, 2017). MicroVest identified a gap in the market when affordable private schools emerged in India that struggled with capacity constraints due to high demand for private education amongst the low to middle income classes (MicroVest, 2017). In response, MicroVest created the Indian School Finance Company (ISEFC) finances schools to improve their infrastructure, for mnstance bigger classrooms, larger labs and more restroom facilities (MicroVest, 2017). The ISFC has managed to reach over 3 million students in over 3000 schools and colleges across India as well as providing loans to people in rural arcas (MicroVest, 2017). 3. IMPACT MEASUREMENT FRAMEWORK Despite the distinct differences in the way in which the outcomes of corporate social investment and impact investing are measured, the similarity in the nature of their work allows for similar approaches to be used to evaluate the impact of their investments. According to Hall and Millar (2013) investments in public service projects arc more challenging to assess than conventional commercial investments, as the benefits derived from the projects arc often intangible, making it harder to assign a monctary value - for example measuring the benefits to improved health of clean water. Ravi ¢7 al. (2019) note that understanding the investment portfolio metrics 1s beneficial for both investors and portfolio companies as it helps them make wiser financial decisions as well as ensure that their investment will generate a return, whether financial or social. In order to measure the positive soctal and/or environmental impact generated from a capital investment, Alenius (20106) notes that actors have started to develop impact measurement tools and standards, as well as adopting a variety of traditional investment measures such as the Social Return on Investment (SROT). 3.1 Impact measurement through traditional investment processes A number of methodologies for evaluating the economic value generated by social enterprises have been developed (Arvidson ef al, 2013). ‘The method that 1s most commonly used 1s known as the Social Return of Investment (SROT) (Hall and Miller, 2013). The SROI 1s a performance measurement tool used to capture the impact of social enterprises (Hall and Miller, 2013). The SROT framework was originally developed in the United States in the mid-1990s and was further developed in the United Kingdom (UK), under a programme funded by government which focused on measuring social value (Arvidson ez al, 2013). In the UK policy makers as well as the Department of Health encourage social enterprises to the use the SROT framework so that they can understand and measure the social value generated by their activities (Department of Health, 2010). The SROI framework 1s specifically designed to understand, manage and report on the impact a social enterprise generates and can be used to derive its overall economic value (Hall and Miller, 2013). Hall and Miller (2013) suggest that the implementation of the SROT framework in the UK has created an opportunity for social enterprises to understand the wider impacts of service delivery and has allowed for these results to be quantified into monetary terms. The foundations of the SROI framework are built on accountancy and cost-benefit analysis (CBA) which has allowed for a monetary value to be attached to both the social and environmental returns (Rotheroe and Richards, 2007, cited in Hall and Miller, 2013). The CBA measures the value of social benefits attached to a social project relative to the costs associated in achieving those benefits (Emerson and "T'wersky, 1996, citied in Hall and Miller, 2013). The framework therefore measures the return on social investment in the form of a ratio which measures the economic value relative to the value of the investments made (Arvidson et al., 2013). The methodology behind developing the ratio requires several components (Lyne and Ryan, 2008). These components are measured independently and when all the steps have been completed, they are combined and expressed as a ratio. The first part of the methodology focuses on estimating the costs and benefits attached to a venture in the overall timeframe measured and the calculation of a discounted enterprise value (Lyne and Ryan, 2008). The enterprise value 1s derived from the combination of an Index of Return (IoR) and Net Present Value (NPV) (Lyne and Ryan, 2008). In this way calculating the value of a social investment would differ little from any other capital project in the private sector. However, the second part of the calculation focuses on calculating the social purpose value (Lyne and Ryan, 2008). The social purpose value analyses the social cost savings through the process of dentification and valuation. Once both parts have been completed, they are added together, 1c. the enterprise value plus the social purpose value will equal the blended value of the mnvestment (Lyne and Ryan, 2008). The blended value approach provides society with a wide view of the possible impact of the venture. According to Lyne and Ryan (2008), one limitation of the SROT approach is that the measurement of the social purpose value 4

 

1s limited to the calculation of only socio-economic value. The method fails to capture the pure social value attached to the investment as there 1s no calculation of the value of, say, improvements in quality of life (Lyne and Ryan, 2008). Although the SROT approach has its limitations, 1t 1s a useful step forward in valuing the work conducted by social enterprises. 3.2 Measuring the return though impact investing: IRIS, GIRS & other measurement tools The TRIS was established 1n 2008 by a coalition of well-respected institutions such as the Rockefeller Foundation, the Acumen Fund and B-Lab (Jackson and Associates Ltd, 2012). The goal of the IRIS is to provide a standard classification of social, environmental and financial performances, as well as to establish a set of definitions for cach category (Jackson and Associates 1.td, 2012). The IRIS has been used to develop and refine standards and to promote and encourage their adoption (Jackson and Associates Ltd, 2012). According to Donner and Huang (2019) the IRIS tool 1s beneficial for mvestors because it provides mnsight on the newest impact investment trends and innovative finance. Donner and Huang (2019) note that in the impact investing industry, the IRIS performs the same function as the Generally Accepted Accounting Principles (GAAP) or the Financial Accounting Standards Board (FASB) in the realm of accounting. Although the IRIS was established in 2008, it only became fully operational in 2009 after a $4.5 billion investment towards its development by the Rockefeller Foundation (Jackson and Associates Ltd, 2012). The TRIS assesses social and/or environmental impact by providing standardized reporting metrics over various institutional categories (Donner and Huang, 2019). Although there 1s a multitude of categories, the two main metric categories used are section and sector (Donner and Huang, 2019). Section refers to the core sections of IRIS metrics which include organisation description, production description, financial performance, operational impact and product impact (Donner and Huang, 2019). The sectors identified by IRIS metrics are agriculture, education, energy, environment, financial services, and conservation, health, housing/community facilities, water and cross sector (IRIS, 2016 cited in Donner and Huang, 2019: 57). Since the IRIS provides performance metrics over a wide range of categories, Donner and Huang (2019) note that impact investors can benefit in the sense of choosing the metrics from the various categories that are most attractive to them. The IRIS provides a platform for impact investors from different institutions or asset classes to engage with onc another as well as compare the returns generated from their social and/or environmental impact mnvestment (Donner and Huang, 2019). Moreover, Donner and Huang (2019) note that when the IRIS 1s teamed with another impact evaluation tool such as B Lab, impact investors will have access to more data analysis as well as reporting. The GIIRS measurement tool 1s carried out through a system of questions, answered by the managers of impact investment projects (Donner and Huang, 2019). The GIIRS also requires additional assessments and weights in order to access the impact of the nvestment and its overall performance in governance, workers, community and the environment (Donner and Huang, 2019). The GIIRS impact rating includes key performance indicators (KPIs) specific to the industry in which the company functions, its geographical location, size and mission (Busenhart and Wilson, 2012). ‘The IRIS has a role in the GIIRS assessment as about 30 of the KPIs included in the assessment arc drawn from IRIS taxonomy, and thought the process, IRIS definitions are utilized to ensure the assessment adheres to the impact industry standard language (Busenhart and Wilson, 2012). Donner and Huang (2019) observe that the application of GIIRS includes a rating system and that the rating of a company’s performance will be achieved by applying the B Impact Assessment. The assessment 1s conducted in two stages, firstly a weighted survey and secondly a questionnaire. The objective of the first stage 1s to determine a company’s or fund’s Impact Model Rating Score and Impact Operations Rating. From these two measurements an overall score 1s estimated (Donner and Huang, 2019). The first measurement tool, Impact Model Rating Score, 1s divided nto a colour-based rating system whilst the second measurement tool, Impact Operations Rating, 1s based on a rating system from 0 to 5 (Donner and Huang, 2019). If the company or fund achieves a score of 80 or above, with regards to rating the performance in community, environment, workers and governance, then they would move on to as the questionnaire stage (Donner and Huang, 2019). An example of a fud that has used GIIRS tools 1s Vital Capital. Vital Capital 1s a private equity fund that focuses on generating a positive impact through re-investing wealth into Africa and other emerging markets (Shvartzvald and Weinberg, 2019). Shvartzvald and Weinberg (2019) found that investors needed differentiation as a means to demonstrate why they should invest in their fund. The funds mission 1s to transform the quality of life for those living 1n the developing world. In order to communicate their mission to investors, Vital Capital adopted GITRS as a tool to cqually measure the social and environmental (S&F) impact as well as financial performance (Shvartzvald and Weinberg, 2019). According to Shvartzvald and Wemberg (2019), investors can use GIIRS in every stage of their investment process. For example, Vital Capital incorporated GIIRS into their process of duc diligence with recent prospects. This was achieved by asking companies to complete the B Impact Assessment in

 

the format of an online self-assessment, in which produced a preliminary report for cach company showing both the unconfirmed preliminary score and relevant performance benchmarks (Shvartzvald and Weinberg, 2019). In a different context, Vital Capital uses GIIRS tools to measure the impact created by their portfolio companies (Shvartzvald and Weinberg, 2019). For example, the fund used the B Impact Assessment during their reporting process which helped them measure the positive impact generated from their portfolio companies, quantify the required metrics and lastly, track performance within the specified timeframe against a benchmark (Shvartzvald and Weinberg, 2019). Overall, through implementing the GIIRS rating system, companies or funds are able to access the performance of their impact investment as well as identify the specific areas that need to be improved in order to carry out the desired social and environmental impact. In the analysis conducted by J.P. Morgan (2010, in O’Donohoc ef al, 2010), risk management and social performance monitoring instruments were used to measure the impact of social investment. O’Donohoc ef al. (2010) note that the risk management and social performance monitoring instruments used in this analysis have similar characteristics to the risk measurement of high vield debt instruments. The reasoning for this would be that the form of risk measurement for the high yield debt instrument focuses on emerging market transactions whilst taking into account the different components of a specific country as well as its currency risk (O’Donohoc ef al, 2010). Furthermore, when using this methodology, the complexities linked to the social performance measurement and exposure of the investment are reviewed (O’Donohoc ¢ al, 2010). Including risk management as well as social performance in monitoring the value of investments benefits the investors as it helps them track the progress of their investment. A challenge found throughout the literature was the lack of evidence producing a clear measurement of investment success. Clark ef al (2013) state that the challenges of measuring performance are found mn two dimensions. Firstly, data provided by institutions or intermediaries 1s limited and even when provided often covers only a brief period of time. Therefore, it was almost impossible to make an accurate analysis of the investment’s success (Clark ef al, 2013). Secondly, institutions that are involved in impact investing were reluctant to provide data on the performance of their investments and preferred to reveal that information only to their investors (Clark et al., 2013). However, these challenges did not hinder Clark e als (2013) research altogether and they were able to make use of the public impact data provided by the IRIS and GIIRS to conduct their study. 3.3 How impact investment funds have used the measurement tools in practice Harlem’s Children Zone (HCZ) in New York focuses on educational development (Ebrahim and Rangan, 2014). The organization focuses on enhancing and developing a child’s capabilities through offering a variety of activities within different stages of educational development (Ebrahim and Rangan, 2014). A few of these activities include pre-natal programs for parents, carly childhood and after-school programs for students, charter schools and skills development workshops (Ebrahim and Rangan, 2014). HCY embraces the ‘theory of change’ through offering interventions from carly childhood education to the adult livelihood phase which resonates further into promoting sustainable living practices as well as responsible citizenry (Hbrahim and Rangan, 2014). The organization decided that the best method to measure the impact of their activities was to concentrate their comprehensive interventions in a narrow geographical region in Harlem, as this allowed them to some extent to control the child’s overall environment (Ebrahim and Rangan, 2014). According to the 1998 Harlem Children’s Zone Biennial Report, 60 percent of the children in Harlem lived in poverty and amongst the children enrolled in clementary school, 20 percent were incapable of reading at the required grade level (Ebrahim and Rangan, 2014). Post 1998, HCZ. expanded its programs and focused on educational development across Harlem. By 2011, the organization was producing significant results, specifically in the after-school programmes and through charter schools. The impact generated from the after-school programmes was measured by HCZ using outcome measurement (Ebrahim and Rangan, 2014). Students attending the after-school programmes were all seniors from public schools therefore the organization used college acceptance as their base of measurement (Ebrahim and Rangan, 2014). The programs were deemed a success as 95 percent of students attending the after- school programmes were accepted into college. Since the interventions focus on improving a child’s capabilities through educational development, the true impact of activities can only be measured over a long-time period, through longitudinal studies (Ebrahim and Rangan, 2014). Impact investors wanting to invest in the education sector, primarily in developing countries, are often clouded with uncertainty in terms of how to intervene and at which level to intervene. According to Ebrahim and Rangan (2014), this uncertainty can be reduced by adopting the same logic as HCZ. and designing interventions that first focus on a narrow geographical region and if a positive impact 1s generated then investors can decide whether to expand the interventions or remain in the specific region. They note that HCY had a clear operating mission which contributed to the success of its programs. Although the programs were concentrated on education, the overall mission was to reduce poverty in Harlem (Ebrahim and Rangan, 2014).

 

Through concentrating its programmes in a narrow geographical region, HCZ’s performance could be evaluated in terms of scale and scope (Ebrahim and Rangan, 2014). "This lesson suggests that if, for instance, impact investors wanted to invest in education in South Africa, they could initially focus their interventions on one specific province such as the Eastern Cape, or further narrow the geographical location to one area such as Grahamstown. Within that limited area the investor might choose to invest in a wide variety of activities, similar to those of HCZ.. 4. EVIDENCE OF SUCCESSFUL IMPACT INVESTMENTS 4.1 |.B. Pritzker’s multimillion-dollar investment initiative Pritzker, a venture capitalist, announced a multimillion-dollar investment initiative at the 2013 Clinton Global Initiative America conference (Brandenburg and Rodin, 2014). The objective of this initiative is to increase access to high-quality carly education programmes for the disadvantaged youth across the United States. Pritzker believed that carly learning was the answer to reducing social and economic inequality as it will lead to a more efficient workforce and stronger nation (Brandenburg and Rodin, 2014). With the help of an impact investment advisor, Imprint Capital, Pritzker was able to improve the transition from secondary education to tertiary education or the labour market (Brandenburg and Rodin, 2014). Over 3500 high-needs children in two distinct areas in Utah were also moved from the waiting list into high-performing preschools (Brandenburg and Rodin, 2014). Like any investment, impact investors require some form of returns, whether it be financial or social, or both. In the Pritzker initiative, investors base their returns on the cost savings made from children remaining in school and staying on track and who therefore do not require more expensive special education (The Rockefeller Foundation, 2016). This type of impact investment is identified as a social impact bond (SIB). The initiative generated positive results in terms of the reduced number of children needing special education. The results showed that out of 110 four-year-olds whom were said to need special education in kindergarten, only one child actually required special education in grade school (The Rockefeller Foundation, 2016). The positive results generated from Pritzker’s project received much praise from mainstream investors as well as government entities. Not only did the results highlight the different investment opportunities for SIB, investors for the first time received payment for any SIB in the U.S (The Rockefeller Foundation, 2016). Payment for SIB was made possible because fewer children required special education and remedial services and through this both government institutions and the education sector saved $281,550 during the 2013-2014 schooling period (The Rockefeller Foundation, 2016). 4.2 Anudip India has become a global economic powerhouse duce to its significant economic growth since the year 2000 (Aeschbacher and Schudel, 2015). Nonetheless, many of India’s population remain in poor living conditions. Anudip took note of the disparities in India’s education system, standard of living and employment opportunities (Aeschbacher and Schudel, 2015). The Anudip impact investment fund directs their impact through a series of vertically integrated programmes, which focus on bridging the gap between traditional schooling and individuals’ standard of living, in terms of a sustainable livelihood (Balkus ez a/., 2014). The fund focuses solely on India’s poverty-stricken communities based in the rural arcas and urban slums (Balkus e a/, 2014). The founders of Anudip initially developed the fund solely as a philanthropic venture. However, it did not take long to realise that what the people in these rural areas desired were also opportunities to make profits through utilising their energy (Aeschbacher and Schudcl, 2015). Anudip offers a variety of services, such as training, job placements and entreprencurship, all of which improve people’s social conditions as well as economic conditions (Balkus ef a, 2014). Between Anudip’s development in 20006 and 2014, an estimated 15 000 students were trained and, more importantly, 80 percent of these students were able to find employment across a wide range of sectors (Balkus ef al, 2014). Aeschbacher and Schudel (2015) note that Anudip expands its services further through developing its own Business Process Outsourcing (BPO) centres. These BPO centres promote India’s Information Technologies (I'1) sector by offering jobs to youth, women and minorities who have studied in that field and will therefore be able to further their skills and knowledge (Aeschbacher and Schudel, 2015). iMerit 1s known as the ‘sister’ company to Anudip and together they form a well-rounded framework to development (Aeschbacher and Schudel, 2015). 1Merit 1s an impact sourcing company which focuses on creating jobs (Aeschbacher and Schudel, 2015). Moreover, iMerit has generated a financial return since 2012, which not only funds Anudip but also funds the projects Anudip runs (Aeschbacher and Schudel, 2015). For instance, Anudip started the DREAM project which provided people in the rural arcas with the opportunity to learn about how to start a business as well as with the equipment to start it (Aeschbacher and Schudel, 2015). 4.3 Insurance Companies and Pension V'unds

 

Financial-first investors, alternatively identified as institutional investors, are often limited in their investment requirements due to the fiduciary duty that investments generate market-related returns (Brandenburg and Rodin, 2014). Both insurance companies and pension funds are categorised as institutional investors. The increasing growth of the impact investing industry as well as the growing importance attached by savers to social and environmental issues, have gained the interest of mnstitutional investors, many of whom have begun to consider social investment as a component of their fiduciary duty (Brandenburg and Rodin, 2014). Brandenburg and Rodin (2014) suggest that there 1s an increasing belief amongst the trustees and staff of insurance and pension funds that including impact investing in their portfolio will generate a better long-term financial return or, at least, that incorporating impact mnvestment will not subtract from the competitive returns. According to Brandenburg and Rodin (2014), Zurich 1s an example of an investment company that has engaged in impact investing through investing Stbillion in green bonds 1ssued by the World Bank and other financial stitutions. Green bonds focus on funding environmental issues as well as promoting eco-friendly business operations and infrastructure (Donner and Huang, 2019). Donner and Huang (2019) found that $694 billion of bonds out of a global bond market value of $90 trillion are assigned to improving climate change whilst, S118 billion of this amount 1s assigned strictly to green bonds (Donner and Huang, 2019). In terms of pension funds, fund members such as the pensioners themselves, have actively put forward their desire to engage in impact investing activities (Brandenburg and Rodin, 2014). In 2011, the South African government actively engaged in impact investing by passing a regulation which legally binds pension funds to perform an environmental, social and governance (HSG) analysis across their asset portfolio, as well as encouraging involvement in institutional investments, in other words, developmental investing (Brandenburg and Rodin, 2014). In the U.S, many states have encouraged public support in impact investing through ensuring public pension funds mnvolvement in cconomucally targeted investments (F'1Ts) which serve to direct investments into impoverished communities (Brandenburg and Rodin, 2014). The largest public pension system in America, the Investment Committee at CalPERS, locked in a $475 million capital commitment for its first initiative known as the California Initiative, in 2001, which aimed to stimulate investment opportunities through opportunizing the assets in underserved communities (Brandenburg and Rodin, 2014). The second allocation by CalPERS in 2006 increased to $500 million (Brandenburg and Rodin, 2014). 5. IMPACT INVESTING IN THE EDUCATION SECTOR The education sector in developing countries presents impact investors with a wide-range of mnvestment opportunities. However, Capital Partners (2013) note that although the education sector remains full of opportunities, the uncertainty of how to intervene, or at what level of education to intervene, has raised doubt about this type of social investment amongst impact investors. Greenstein (2018) suggests that through investing in education, impact investors have the ability to improve and transform an archaic ficld into one that meets modern needs and international standards. Therefore, the decision to invest in education represents a monetary commitment as well as an investment for the future through national and global development (Greenstein, 2018). Greenstein (2018) refers to education as the ultimate impact investment for investors. The achievement gap between students persists in developing countries because students in different geographical regions recerve different qualities of education. Enhancing a country’s education system through impact investing will grant students from previously disadvantaged backgrounds the opportunities to expand their capabilities which can further transcend into them escaping the poverty trap (Greenstein, 2018). Channelling impact mnvestments into primary schools enables students from different geographical regions to acquire the necessary tools and knowledge (basics) to further enhance their schooling career. Since a large percentage of students in developing countries live in poverty, providing quality education will open up opportunities for further growth and development, which previously would not occur. 5.1 The South African education system Spaull (2014) highlights the complexities in the South Africa education system and how big the learning deficits arc amongst students from all ages. Through the use of national and international assessments of quantifying student’s mathematical achievements, Spaull (2014) was able to forecast the gap in the learning outcomes between poor and wealthy students in South Africa. A central finding in this research is that children in grade 3 from certain provinces are already facing a learning deficit of up to three years and majority of these children are from the poorer communities (Van der Berg ez al, 2011 cited in Spaull, 2014: 62). Therefore, children from as young as nine years old are already behind their peers and are often in circumstances that prevent them from ever catching up, which only widens the poverty trap. Studies have shown that the South African economy 1s one of the most unequal economies in the world (GIN, 2010). Given the country’s political and economic history, inequality is to a large extent drawn along racial lines. Spaull (2013) suggests that the mnadequate source of education offered to members in poorer economic

 

circumstances 1s to blame for the country’s high unemployment and income inequality. South Africa’s attendance rates are amongst the highest in Southern Africa, but the World Economic Forum’s Global Competitiveness Report ranked the primary education system 140% out of 144 countries (GIIN, 20106). In addition, South Africa’s primary school education ranked last in the subjects of mathematics and science (GIIN, 2016). These findings correlate with Spaull (2013), who found that students whom have failed to receive the necessary numeracy and literacy skills during their foundation and intermediate phase have struggled to remain within their grade- appropriate curriculum (Spaull, 2013). Spaull (2013) also found that even when students are able to read, the majority failed to understand what they were reading, Spaull’s (2013, 2014) rescarch, alongside local and international literature have recommended that intervention in the South African education sector needs to be from the bottom up, meaning starting at primary school. Investing in the carly stages of education will be most beneficial because it alleviates the learning deficits between children from a young age and it 1s more cost-cffective and casier in the remediation process (Heckman, 2000 cited in Spaull, 2014). From the economic perspective, education is beneficial because it improves the labour-market outcomes which stimulates economic growth. Education 1s also beneficial from the socio-economic perspective as it can lead to a decrease in fertility (Basu, 2002 cited in Spaull, 2014), improvement in children’s health (Currie, 2009 cited in Spaull, 2014: 103), a fall in social violence, increase in social cohesion (Heyneman, 2003 cited in Spaull, 2014) and overall improvement of human rights (Salmi, 2000 cited in Spaull, 2014). International evidence shows that impact investors interested in investing in the education sector can do so through a varicty of activities, ranging from building new affordable private schools in low-income areas to providing resources to enhance the students’ learning experience. For example, EdoBest enhanced the Nigerian education sector by providing teachers with information systems in order to improve learning environments as well as tracking students’ progress as it acted as an incentive for children to remain in school (Jack, 2019). 5.2 Can impact investing in education generate both a financial and social return? Intervention in the education sector through the means of impact investing automatically generates a social impact. However, the ability to generate a financial return through investing in education 1s extremely difficult and there 1s limited evidence of successful financial-only investment in this arca. Several landmark studies have observed the need for intervention in the education sector, primarily in developing countries, however the limited evidence on how to do so means investing in education remains an intimidating task. The mited data on impact investing in the education field requires investors to be mnovative in their project or programme design as it needs to motivate other impact investors to also participate in helping address the global challenges in the education sectors (Ardourel, 2018). The key to developing successful impact investments in education is to offer programmes, services and resources that the government fails to provide. This requires extensive planning, scaling and novation on behalf of the investors. An example from the literature of such mnnovation is the development of EdTech. EdTech 1s a new impact model designed by impact investors secking to invest in the education section. The model aims to tackle the global educational challenges in an innovative matter as it aims to deliver instruction through the means of information technology (Ardourel, 2018). EdTech aims to enhance learning for students through the use of computers which will provide online lectures and courses (Ardourel, 2018). Online classes and courses enable students across the globe to access quality education and therefore this delivery model does not limit itself to one geographical location (Ardourel, 2018). EdTech’s potential growth has sparked interest from venture capitalists across the globe. The model’s projected growth for 2018 amounts to S280 billion as well as a 47 percent market growth in the U.S and 25 percent projected growth in Europe, the Middle East and Asta (EMEA) (Ardourel, 2018). EdTech provides an introduction for impact investors wanting to expand their portfolios into the education sector as it appeals to both the financial and social aspects (Ardourel, 2018). The projected growth of EdTech in the impact investing market has exposed the potential for generating financial returns at both market and near- market financial returns, whilst simultancously generating a positive social impact. Funding from private investments cither through private grants or private impact investments contributes only a small percentage of funding into the global education sector as majority of the funding comes from government or public spending (Capital Partners, 2013). Through innovation, impact investors can develop impact models that generate a substantial positive impact in the education sector whilst remaining cost-effective, affordable and requiring less capital. A key barrier to growing the impact investing landscape in the education sector 1s finance, as the majority of funds in education 1s provided by the public sector. Gray Ghost Ventures (GGV), an impact investment company focuses on producing market-based-solutions to businesses and investors who focus on improving inadequate service delivery in developing countries 1IBAN, 2018). GGV acknowledge the financial barrier of impact investing in education, specifically in the area of low-cost private schools and addressed this challenge through founding the Indian School Finance Company (ISFC) 1IBAN, 2018). Gray Matters Capital

 

(GMC), the charitable arm to GGV was established to focus on looking at innovative ways to reduce the dependency of finance whilst still achieving their goal to strengthen the education sector 1IBAN, 2018). Although impact investors contribute a tiny portion of the global spending on education, GMC’s investment portfolios aim to generate a positive impact beyond what public sector services have achieved. 6. CONCLUSION The concept of impact vesting has been floating around the investment market for years, however it has only recently gained the interest of many mainstream investors as being a sufficient alternative form of investment. O’Donohoc ef al. (2010) show that in recent years there has been a rise in momentum to engage in the impact investing industry as investors have become more socially and/or environmentally conscious. Bugg-levine and Emerson (2011) show that impact investment differs from other investment strategies in that it focuses on generating a financial return whilst simultancously creating a positive social and/or environmental impact. Ormiston ¢/ al. (2015) emphasise the distinction between the two classifications of impact investing being cither ‘financial-first” or ‘impact-first’. Impact investors have been sceptical about whether to engage in the market due to the limited measurement tools developed to measure the investments social impact. However, the Rockefeller Foundation with the help of other large investment funds such as B-lLab, developed two main measurement tools to capture an impact investments performance, these are IRIS and the GIIRS (Jackson & Associates Ltd, 2012). Participation in the impact investment market has grown significantly in recent years, specifically in the U.S and Canada as well as Sub-Saharan Africa. The latest GIIN (2019) report revealed that the impact investment market 1s still growing with respondents currently engaging in over 13 000 deals in 2018 and a predicted 15 000 deals set to take place 11 2019. The analysis of the impact investment market showed that the housing, energy and microfinance sectors received the highest percentage of investments. However, surveys revealed that there was a growing interest amongst impact investors to invest in sectors like education and health as they would generate a larger positive impact. The education sector in developing countries presents impact investors with a variety of investment opportunities, however main remain uncertain of how to intervene or at what level of education to intervene in. In developing countries such as South Africa, the education sector remains an archaic field which fails to meet modern needs as well as international standards. South Africa’s primary education system was not only ranked in The World Economic Forum’s Global Competitiveness Report 140™ out of 144 countries, it ranked last in the subjects of mathematics and science (GIIN, 2016). Channelling impact investments into primary schools enables students from different geographical regions to acquire the necessary tools and knowledge (basics) to further enhance their schooling career. Since a large percentage of students in developing countries live mn poverty, providing quality education will open up opportunities for further growth and development, which previously would not occur. Impact investors wanting to expand their portfolio investments into the education sector can adopt the same logic as was used to establish Harlem’s Children Zone. Investors can start by designing interventions that first focus on a narrow geographical region and if a positive impact 1s generated then they can decide whether to expand the interventions or remain in the specific region. It 1s key for investors to remain innovative in their programme or project design. The goal 1s to offer services that the public sector fails, whilst using fewer resources and making an overall greater social impact. 10

 

7. REFERENCE LIST AESCHBACHER, 'T. and SCHUDEL, C.B.M. (2015). 2015 Collection of Course Papers from: Impact investing- Redefining the meaning of return. ALENIUS, R.A. (2016). Measurement Process in Impact Investing: State of Practice in urope. Unpublished Master’s thesis. Massachusetts: Harvard Extension School, Harvard University. ARDOUREL, F. (2018). Impact Investing: What it 1s & How does it work. Frank Ardourel. [Online]. Available: https://franckardourcl.com/impact-investing/ 13 October. ARVIDSON, M,, LYON, I, MCKAY, S. and MORO, D. (2013). Valuing the social? The nature and controversies of measuring social return on investment (SROT). Voluntary Sector Revie. 4(1) 3:18. BALKUS, J., LUQUE, M., and VAN ALFEN, I. (2014). The intersection of impact investing and international development: A Primer. AMP. 3-11. BRANDENBURG, M. and RODIN; |. (2014). The Power of Impact Investing: Putting markets to work. for profit and global good. 1.ondon: Wharton Digital Press. BUGG-LEVINE, A. and EMERSON; J. (2011). Impacting Investing: Transforming how we make money whilst making a difference. Innovations: Technology, Governance, Globalization. 6(3): 9-18. CAPITAL PARTNERS, DD. (2013). Impact investing in education: An overview of the current landscape. LSP Working Paper Series, 2013 No. 59. CHARLTON, K., DONALD, M.S., ORMISTON, |. and SEYMOUR, R.G. (2015). Overcoming the Challenges of Impact Investing: Insights from Leading Investors. Journal of Social 1ntrepreneurship. 6(3): 352-378. CLARK, C., EMERSON, J. and THORNLLEY, B. (2013). IMPACT INVESTING 2.0: The Way Forward. Global Impact Investing Network. [Online]. Available: https://thegiin.org/research/publication/impact-investing-2-0- the-way-forward 8 May. 11

 

COLANTONIO, A. and REEDER, N. (2013). Measuring impact and non-financial returns in impact investing: a critical overview of concepts and practice. Unpublished report. London: Department of Feonomics and Political Science, The I.ondon School of Economic and Political Science. Department of Health. (2010). Measuring Social Value- How Vive Social interprises Did It. 1.ondon: The Stationary Office. DONNER, B. and HUANG, C.C. (2019). The Power of Impact Investing. Unpublished report for the Human Research Centre. Rutgers University. EBRAHIM, A, and RANGAN;, V.K. (2014). What Impact? A framework measuring the scale and scope of social performance. California Management Review. 56 (3): 118-141. GLOBAL IMPACT INVESTING NETWORK. (20106). The Landscape for Impact Investing in Southern Africa. Global Impact Investing Network. GLOBAL IMPACT INVESTING NETWORK. (2017). 2017 Annual Impact Investor Survey. Global Impact Investing Network. GLOBAL IMPACT INVESTING NETWORK. (2019). 2019 Annual Impact Investor Survey. Global Impact Investing Network. GREENSTEIN, |. (2018). Education 1s the ultimate impact investment. Thrive Global. [Online]. Available: https://thriveglobal.com/stories/education-is-the-ultimate-impact-investment/ 9 September. HALL, K. and MILLAR, R. (2013). Social return on investment (SROT) and performance measurement. Public Management Review. 15 (6): 924-939. INCLUSIVE BUSINESS ACTTON NETWORK. (2018). Impact Investing in Education in Developing Countries. 1IBAN. [Online]. Available: https://www.inclusivebusiness.net/ib-voices/impact-investment- education-developing-countries 11 October. JACKSON, ET. and HARI, K. (2012). Accelerating Impact: Achievements, challenges and what's next in building the impact wmvesting industry. New York: The Rockefeller Foundation. JACK, A. (2019). Impact investors learn value of African education sector. Financial Times. [Online]. Available: https://www.ft.com/content/40735046-82£6-11¢9-a7£0-77d3101896¢c 2 October. LYNE, I. and RYAN, P.W. (2008). Social enterprise and the measurement of social value: Methodological issues with the calculation and application of the social return on investment. Education, Knowledge > 1iconomy. 2 (3): 233- 237. MICROVEST. (2017). Social Impact Report 2018. Wisconsin, USA: MicroVest. O’DONOHOLE, N., LEIJONHUEFVUD, C. and SALTUK, Y. (2010). Impact Investment: An emerging asset class. J.P. Morgan Social Finance Research Report, New York. OLANIYAN, D.A. and OKEMAKINDE, T. (2008). Human Capital Theory: Implications for Educational Development. Pakistan Journal of Social Sciences. 5 (5): 479-483. RAVI, S, WRIGHT, E. G., SHARMA, P. and JONES, 1.B. (2019). The Promise of Impact Investing in India. Brookings India Research Paper No. 072019. RESPONSIBLE RESEARCH. (2011). Issues for responsible investors: Impact Investing in Emerging Markets: Responsible Research. THE ROCKEFELLER FOUNDATION. (20106). Innovation in Social Finance. Unpublished report for the Stanford Graduate School of Business. Stanford University. SHVARTZVALD, R. and WEINBERG, FE. (2019). Using B Analytics Across the Investment Cycle. B Analytics. [Online]. Available: https://b-analytics.net/customers/case-studies /using-b-analytics-across-investment-cyele 13 October. SPAULL, N. (2013). South Africa’s Education Crisis: The quality of education in South Africa 1994-2011. Centre for Development 1nterprise. SPAULL, N. 2014). Education Quality in South Africa and Sub-Saharan Africa: An Liconomue Approach. Stellenbosch: Department of Feonomics, University of Stellenbosch. UNDP. (2016). Impact Investment in Africa: Trends, Constraints and Opportunities. [Online] United Nations Development Programme. Available: http://www.undp.org/ 12 September.

 

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THE ECONOMIC VALUE OF EDUCATION: CAN IMPACT INVESTMENT IN EDUCATION GENERATE BOTH A SOCIAL AND FINANCIAL RETURN

Impact investing, although not a new concept, has gained prominence in recent years as an alternative form of investment and has become a fast-developing investment strategy. It differs from conventional investment in bonds and equities in that both

https://www.academia.edu/99762737/THE_ECONOMIC_VALUE_OF_EDUCATION_CAN_IMPACT_INVESTMENT_IN_EDUCATION_GENERATE_BOTH_A_SOCIAL_AND_FINANCIAL_RETURN

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