Developing countries need an estimated additional $2.5 trillion each year to achieve the Sustainable Development Goals. It’s clear that investment from BII alone is not enough. To help countries develop as nations that can fully support their citizens, multilateral development banks and development finance institutions need to encourage more private investment into Africa and Asia. This will only happen if new markets develop and work well.
Delivering on the Sustainable Development Goals requires new and improved markets to provide a greater range of goods and services at lower prices. This means changing the behaviour of investors, companies, public institutions, and consumers. Investments can play a critical role in driving these behavioural changes by enhancing competition when it results in higher or more affordable access to products. In addition, investments can demonstrate the feasibility of new business models, build skills and capacity, or improve the regulatory environment which allows other businesses to enter the market, for example by investing in the first partnership between the government and private companies in a particularly country or sector.
This discussion paper, jointly developed by impact professionals from BII, EBRD, IDB Invest and IFC, invites like-minded investors to build a shared language for defining, claiming, and measuring market effects in private sector impact investing.
We outline four steps for investors to incorporate market effects into their impact assessments:
- Identify unmet needs and root causes of market underdevelopment
- Define the market
- Define market change channels (e.g. competition, demonstration, skills, enabling environment) and consider potential negative effects
- Define what success looks like and measure it
We also provide guidance on some of the key questions investors could ask when designing investments that aim to change how markets operate.
Multilateral development banks and development finance institutions have increasingly focused on creating market changes as part of their investment strategies in recent years. For example, in 2019 we committed up to $200 million to set up Gridworks, an energy transmission and distribution platform company operating a portfolio of assets across East and Southern Africa. By building a track record of success, we aim to demonstrate that private capital can be successfully deployed in difficult markets.
A call for action
Systemic market change requires coordinated efforts from all stakeholders—public and private investors, companies, governments, and industry bodies. This paper calls on impact investors to explore new ways to build public knowledge platforms and share experiences about delivering market changes.
These platforms can bring together stakeholders to take stock of their ongoing efforts to change markets and test new collaborative approaches to achieve transformational impact.