The Middle East and North Africa (Mena) region is home to increasingly developed entrepreneurship ecosystems, a growing number of venture capital (VC) deals and relatively large levels of philanthropy and charity, but it has yet to factor into the larger field of global impact investment.

Getting the definitions straight

Lots of institutions have their own definitions and terminology for describing the field - some refer to it as sustainable investment, others term it as responsible or ethical investment, while others simply call it social investment. While there is no single entity that can lay claim to having coined the definitive definition, there are a few common themes that are prevalent in the more commonly used interpretations: Intentionality and measurement. Regarding the first criteria, to be a legitimate impact investor, a fund must invest with the explicit intention to achieve both financial and social and/or environmental returns via their investment. Second, investors must rigorously measure the social and environment impact that they have. Measurement means setting agreed-on expectations for impact with their investees and subsequently monitoring and evaluating the impact over time. The impact measurement standards, just like financial milestones, must be pre-set in order to ensure that the intentionality is being realised. Similarly, just as portfolio companies are held accountable for meeting financial projections, they are similarly expected to meet their impact objectives.  

It is also important to see that in these definitions, as well as within the portfolios of impact investors, the issue of impact is not separated from the company’s day-to-day operations. It is not a by-product of their work, achieved only once the company’s core business needs have been addressed, or a corporate social responsibility objective that is prioritised once a company is profitable. A company’s impact must be achieved by virtue of deploying its core products and services that are also its chief revenue generators. Put differently, its business model is equally responsible for sustaining and growing the company as well as delivering a tangible, measurable impact on their society and economy.

Taking stock of Mena’s absence from the global impact investment community

The Global Impact Investment Network (GIIN) recently wrapped up its annual conference in Paris, France. In total, more than 1,200 attendees from over 70 countries attended, making it one of the largest gatherings focusing on impact investment to date. Latin America, Sub-Saharan Africa, South, Southeast and East Asia, North America and the European Union (EU) all figured prominently in the GIIN conference, yet the Mena region had minimal presence at the event. Aside from a session on how impact investors can provide new solutions to support the refugee crisis, Mena was largely absent.

On one hand, this absence from global dialogue surrounding impact investment is not surprising. In the GIIN’s most recent annual report, the region ranks second to last globally in terms of impact investment activity. Aside from Oceania, no region in the world has a smaller degree of impact investment activity than Mena, which figured into only 15 per cent of surveyed investor portfolios. Additionally, while roughly 40 per cent of the survey’s respondents allocate 75 per cent or more of their capital to developing countries, none of this 40 per cent have allocated the bulk of their funding to Mena.

So why is that? For one thing, GIIN’s annual study uses criteria that can eliminate any fund from around the world if they do not meet its standards. Its annual survey only includes funds that have allocated at least $10 million to impact investment, which can eliminate many funds globally from the get go. In total, GIIN surveys more than 200 impact investment funds globally, representing with assets under management (AUM) of $228.1 billion, yet if they fail to meet this threshold they are not included. And so small funds, angel investors, and other entities with more modest AUM are not reflected in the survey.

Moreover, much of Mena’s VC investment comes from within the region itself, as opposed to non-regional players. Few non-Mena VCs have invested in the region to date, and while this is changing slowly, the majority of entrepreneurs, both impact-focused or otherwise, have to rely on regional funds. Because the bulk of impact investors are still in the US and the EU, the chances of these funds extending their reach to Mena in the near-term is slim. While it is arguable that a maturing VC community in the region will help spur more investment from abroad down the line, as long as the impact space is heavily dominated by US and EU players, it will be difficult to entice them into the region.

Lastly, given that impact investment is still, despite a phenomenon that is gaining momentum, a nascent investment practice, investors have yet to fully explore what this field’s full utility can be globally. While other developing regions have received more attention from impact investors - i.e. 46 per cent of investors had allocated at least some capital to Latin America and the Caribbean and 40 per cent to Sub-Saharan Africa - most impact investment activity is still located in the US and Canada, which accounts for 20 per cent of AUM in the GIIN report and 48 per cent of funds’ investments in general.

However, there are indeed signs that Mena’s VC community, and greater entrepreneurship ecosystem, is supporting companies that are aligned with these definitions. For instance, over the past five years the Wamda Research Lab (WRL) has produced several reports examining the state of entrepreneurship and VC investment in Mena’s ed-tech, healthcare and cleantech sectors. Between these three studies alone, the WRL identified more than 150 companies that are using innovative approaches to tackle a challenge that could have a social or environmental impact.

What we learn from these reports is that there is indeed a population of companies that, by virtue of opening their doors in the morning, are focusing on boosting development outcomes. The entrepreneurs themselves may not have started these companies in order to have this impact, and may have indeed been simply pursuing a profitable business opportunity, but the fact remains there are companies in the region, some of which have received VC and angel backing, that should not be overlooked when considering the role of entrepreneurship in achieving impact outcomes.

Similarly, much of Mena’s VC activity can be considered responsible for ushering in new technologies into a region that still lags behind the rest of the world in terms of digital readiness. Does this not count as impact as well? These investments may not be geared towards the same impact measurements as their counterparts in traditional impact investment funds, but their developmental contribution cannot be overlooked.

How does Mena adopt/grow an impact investment community?

Impact investment certainly has an important role to play in the region in the future, yet the field cannot be built overnight. The process will be gradual and must ensure that any efforts to promote it align with these concepts of intentionality and measurement.

While it may be difficult for currently existing funds to adopt an intentionality in their investments, one initial step funds in Mena can take to begin understanding their impact is by adopting a thoughtful measurement strategy. The emphasis here should be to be rigorous, and to assess both the bad and the good - i.e. understanding what an investment can potentially create as well as what it can potentially destroy. Assessing this net effect is critical to gauging if and how a fund’s impact is actually positive or negative. Simultaneously, investors need to be able to take action when assessing the results of their measurements. Simply obtaining numbers is meaningless if there is no action taken afterwards. When faced with results on the impact of their companies investors face an obligation to judge whether or not they are satisfied with their new learnings, rather than simply use positive findings as a form of marketing or hide away the negative, or lackluster ones. By the same token, it would also be helpful for groups who do not measure their socio-economic impact to refrain from labeling themselves as impact-focused. Protecting the integrity of the impact investment field relies on proper recognition of what is legitimately having an impact.

One initial measurements have been conducted, funds will have a baseline that they can also use to entice other impact funds from abroad. Demonstrating how and to what extent entrepreneurs in the region are contributing to solving its development challenges is a preliminary step to catching the eye of impact funds and subsequently playing a bigger role in this field globally.

Jamil Wyne is an adviser to impact investment funds and social enterprises. He is the founder and former head of the Wamda Research Lab.