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Don’t muddy the waters by getting emotionally involved when impact investing

Catherine Wijnberg
By Catherine Wijnberg
21 Aug 2024
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Like all investors, impact investors need to follow a disciplined investment process and adopt a rational approach to opportunity selection, based on clear goals, risk tolerance and time horizons.

Given South Africa’s high rate of unemployment, poverty and inequality, it’s perhaps no surprise that making a meaningful difference is front and centre in the minds of impact investors focused on the small and medium-sized (SME) sector.

Unlike traditional investing where the primary goal is financial gain, impact investing seeks to create measurable positive outcomes. However, even impact investors can’t allow their emotions to take precedence over more measured rationality.

South Africa’s economy has been stagnating for more than a decade and has been struggling even compared with comparative emerging market economies. The SME sector has long been touted as the solution to the country’s ailing economy.

A significant amount of enterprise and supplier development (ESD) money has been invested into this sector – conservatively estimated at between R25-billion and R35-billion per annum – but the investment has not translated into a burgeoning and successful SME sector.

Huge potential


What has become increasingly clear in recent years is that while there is undoubtedly huge potential, South Africa’s SME sector is not realising its potential to create employment and drive productivity and growth.  

There are numerous reasons for this, including the lack of a supportive environment, persistent load shedding that imposes a high cost on SMEs, logistics challenges, rising inflation, high interest rates and a lack of access to finance, among other reasons.

Another challenge is that all too often impact investors put too much focus on the potential impact of their investment, sometimes at the expense of conducting the same due diligence and analysis as they would on any other investment. Even a pure impact investment needs to generate some kind of financial return in order to be sustainable. Investments that fail to provide a return are more likely to result in business failure.

There is no question that most impact investors are experienced and certainly have good intentions. What can muddy the waters is if investors become too emotionally invested in the outcome to make an objective investment decision.

Systemic risks


Emotional investors can end up making poor investment choices; follow the crowd rather than conduct their own research; respond to fads and trends; and become overly attached to certain investments, ignoring the benefits of diversification and, in the process, increasing their exposure to systemic risks.

It’s all too easy to advise investors not to make emotional or knee-jerk decisions when it comes to investments. However, as psychologists have long been aware, advice on its own is not enough. Like all investors, impact investors need to follow a disciplined investment process and adopt a rational approach to opportunity selection, based on clear goals, risk tolerance and time horizons.

Some of the strategies that successful impact investors use to eliminate emotional investing and ensure meaningful and sustainable results include:

  • Have a plan: Be clear on what you want your investment to achieve. Is it job creation, economic growth or inclusivity? Is it social or environmental impact, financial return or a blend of all three? Outline a set of criteria to evaluate and select your investments, and a strategy to monitor and review their progress.

  • Know your budget: Identify how much you have to invest and how you could deploy the capital for maximum results. Is it for a non-financial enterprise and supplier investment, grants into promising SMEs or contributions into a blended or catalytic fund?

  • Do your research: before you invest, do your own analysis and avoid relying on rumours, tips or opinions. Understand the track record, the business and financial model, competitive advantage and the growth prospects of the SME or initiative you are wanting to support. Where possible, compare the investment and its returns against similar opportunities, being sure to compare like with like;

  • Be realistic: have realistic expectations of your investment, ring fencing possibilities for the short term and what’s more probable in the long term. Write down your expectation for inevitable losses, so these don’t affect your emotions or generate knee-jerk responses. Create an open feedback loop so you and your team can learn from your mistakes and adjust where necessary.

  • Factor in hidden costs: impact investment projects invariably come with entry or set-up costs and exit or close-out costs. Set-up procedures may require customisation or adjustments that eat into and delay project start dates. In order to successfully close out an impact investment project, additional post-investment support or budget may be required to make the overall investment performance successful.

  • Get professional advice: if you find it difficult to assess a good investment, struggle to separate your emotions or to follow the plan, there may be benefit in seeking professional advice from an investment advisor or impact investment fund manager to help set goals, develop an investment strategy, manage the investment process and execute transactions, while keeping you accountable and objective. DM

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