Nikita Boisits

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

#thesis #economics #investment

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

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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

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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

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