Impact Investing: Why should we invest in education? (2024)

Did you know, investors around the world are making impact investments to unleash the power of capital for good? In this article, we would like to provide you with the core characteristics of impact investing digging into the education field.

Impact investing definition

Impact investing is first and foremost an alignment of an investor’s beliefs and values with the allocation of capital to address social and/or environmental issues. Impact investing refers to investments “made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return”.

Impact investments can be made in both emerging and developed markets and target a range of returns from below market to market rate, depending on investors strategic goals.

The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as renewable energy, sustainable agriculture and affordable and accessible basic services including housing, healthcare and education.

The Global impact investing Network defines the Core Characteristics of impact investing with the following four notions:

• Intentionality
  The investor’s intention to have a positive social or environmental impact through investments.
• Investing with return expectations
  Impact investing is expected to generate a financial return on capital or, at minimum, a return of capital
• Range of return expectations and asset classes
  Impact investing targets financial returns that range from below market (concessionary) to risk-adjusted market rate and can be made across asset classes such as cash equivalents, fixed income, venture capital and private equity.
• Impact measurement

  This is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.

Impact investing in Education

Many will agree in recognizing Education as the most powerful investment in our future. Research shows that education can make a lasting difference in people’s lives and it is not just good for individuals but also for nations. Investing in education is not just the right move but it is also smart economies.

Education lead path towards health, empowerment, and employment. Evidence shows that each additional year of education boosts a person’s income by 10% and increases a country’s GDP by 18%. Some investigations estimate that if every child learned to read this will mean 170 million fewer individuals would live in poverty. By 2030, over 600 million more children will need to be enrolled in school to achieve basic education for all.

So how can we get more people in school, learning skills that will help them to heal wounds and rebuild their societies?

1. We must invest more in education. We need $26 billion more to get people in school and learning.
2. We must invest more effectively in learning, improving learning assessment. And being accountable to communities for education results.
3. We must invest more equitably to make sure people who are most in need have access to quality learning.

Impact investing challenges

Financing is one of the key barriers to growth within the education sector. Most of impact investments are made to expand school infrastructure and capacity.

Impact investors are looking to strengthen the ecosystem which surrounds the emerging sector to offer quality education in a sustainable manner.

The objective is for institutions to be sustainable and managed independently, in order to generate market demand and drive intense competition between schools.

Invest in Education: An overview

Many low-income countries still lack the resources and capacity to provide Governmental universal basic education of quality.
The funding gap needed to provide basic education for all children, youth, and adults has increased to US$ 26 billion.

Education impact investing could mobilize new funding, enable private sector engagement in both public and private education service delivery, and introduce approaches or tools to improve efficiency in the service delivery, promote innovation in teaching and learning methods, and monitor outcomes and systemic effectiveness.

Impact investing in education remains nascent but could deliver immediate financial returns while reaching the most vulnerable beneficiaries.

Investors look at the risk and return of an investment as well as the positive and social impact it may generate.

Because of the perceived lack of innovation in education, private capital can fill a gap through funding direct service provision and spur innovations that increase equitable access, enhance quality, and ensure retention.

Impact capital differs from commercial private capital in that it seeks to reach the most vulnerable beneficiaries and differs from private philanthropic capital in that it seeks to apply market-based innovations to ensure financial sustainability, if not financial profit.

The challenge for impact investors is to catalyze models and approaches that target high impact and financial sustainability simultaneously.

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Invest in Education: Recommendations

Investing in Education is a question of mindset. That’s because the decision to investing in this field has a far-reaching impact: on the environment, the economy and society. Investing in Education is investing in tomorrow with a proven commitment to a better world.

Sounds like a good plan? A few key recommendations:

1. Maintain realistic expectations – finding high impact and high financial returns in the short-term remains a challenge
2. Establish philosophical clarity upfront – funders need to be clear upfront about their priorities and timeline, taking into consideration the positive social and environmental impacts
3. Look to interventions in the broader educational ecosystem – from low-cost tablets that revolutionize the textbook industry to back-office management systems to reduce teacher absenteeism
4. Consider channeling capital through funds and intermediaries to deploy larger amounts more efficiently – dedicated education intermediaries with proven models that enable investors to overcome fragmentation, diversify risk and invest larger sums
5. Adopt a more flexible definition of success – support a model that raises the bar for quality education, pushing the public sector to meet that bar
6. Focus on innovation – seek innovation through collaborative processes
7. Measure and evaluate impact on education quality and access – request evidence of model effectiveness

Impact investing has emerged in recent years as a potentially promising tool to mobilize additional capital toward the goal of broadening access to quality education.

Impact investing includes a range of funding activities in various sectors that combine financial return with social and environmental good.

Impact capital can help to:

• Experiment – “Prove the Concept”
• Catalyze – “Grow and Refine”
• Scale – “Deploy large-scale Capital“

Models that target higher-income populations with greater spending power present more investment opportunities and can offer attractive or even commercially competitive returns.

Invest in Education: Types of investments

There are several types of investments within the educational sector. School infrastructure investments are the most prevalent and are easily measurable. There is also investment in people that include loan programs, vocational training, teacher training. We can also recognize investment in technology and service models including software development, distance learning programs, and integrated management or back-office support to reduce costs and improve quality, with deals that can be very small and highly risky. Finally, we can also have investment to consolidate the education ecosystem aiming at building a more robust education marketplace.

The investment channel chosen by an investor depends on how much capital it seeks to deploy and how much risk it wants to take.

By investing through intermediaries, investors can deploy more capital, enabling them to take on large-scale projects or spread risk across a range of models with relatively lower transaction costs.

When private commercial funding accounts for an estimated US$500 billion, impact investing comprises about US$3 billion of that subset, representing only a tiny share of overall education funding.

The sector is still in its infancy, meaning that large international players still dominate the landscape and most investors are taking a gradual, opportunistic approach for building their education portfolio, notably due to limited examples of success heightening perceptions of risk.
Most finance-first oriented impact investors have targeted middle to upper-middle income customers who have meaningful ability to pay for various for-profit education models, that have proven to also be commercially attractive.

Larger funds and institutional investors tend to seek investments with low transaction costs, lower perceived risk, and greater potential for returns to capital.

Invest in Education: limitations for impact investors

We must recognize also some limitations for impact investors such as lack of innovative education models and innovative financing structure. We also have lack of track records of successful interventions that increase the perception of risk and constrained definition of success that is informed by traditional/commercial investing principles.

Impact investment builds up the education sector as a continuum, paralleling the maturing of a national education system:

• Where government is absent, private sector can fill a gap through direct service provision.
• Where government is present with low capacity, private sector can spur innovations that increase utilization and enhance quality to ensure retention and access to under-served populations.

Strategies for Complementing the Public Sector are transitioning gradually from grants to investments, from private funding to government funding and/or take an already proven business model and extend its reach to more vulnerable populations.

For many impact investors, the ultimate goal of sustainability is demonstrated not only through financial profits and successful exits for them but also through preserving capital until community or the government has the capacity to take over the operations and funding.

Education impact investing has exciting potential to mobilize new sources of funding and develop innovative approaches to education aiming at broadening access to quality education for all.

Models that do generate financial returns are usually targeted toward middle and high-income population.

Instead of focusing on discrete, small deals one-by-one, funders may choose to channel their investments through innovative intermediaries who are able to deploy larger amounts of capital more efficiently; catalyze innovative tools and service providers who are enhancing quality while reducing costs; support the broader education sphere for a healthier marketplace where private and public models can co-exist in the future.

Invest in Education: Supporting Africa

Several studies have indicated that investment in higher education and GDP were positively related in African countries and that higher education had broad benefits for individuals and societies. (Bloom et al, 2006 & 2014)

Knowledge is the single most important engine of growth and the driving force of economic performance in the OECD countries. (Marginson & van der Wende, 2007)

Participation in higher education tends to increase individual’s earnings and induce growth that benefits the entire society, there is an intense debate about who should bear the responsibility for the investment in higher education.

Three kinds of arguments are put forward to justify the allocation of public resources for higher education.

1. Education is a right
2. Education contributes to society through economic growth and poverty reduction
3. Public spending is supposed to be equitable

In response to the mismatch between supply and demand, private universities are growing steadily. Distance education is a strategy that governments may pursue to face budget constraints, but which raises quality issues. (Schendel & McCowan, 2016). The most effective interventions to boost learning appear to be the ones related to teaching.

The development of technologies which help officials to better manage schools and the entire education system is another possible field where technology can be useful.

Recommendations to structure impact investment strategy:

• Quality learning first
  • Strong educational outcomes
  • Effective teaching
  • Innovative teaching & technologies
  • Accreditation
• Focus on local relevance and employability
  • Professional development
  • Extra-curriculum skills
  • Professionalization skills
  • Highly relevant skills & training
  • Job market matching
  • Focus on scientific subjects
• Strengthen equity in access to partnering institutions
  
  • Financial incentives (merit scholarship, student loans, low-income populations, rural communities, marginalized youth)
  • Non-financial incentives (information programs, marketing campaigns, inclusive infrastructures)

• Stanfield, James (2011) Impact investment in education, Institute of Economic Affairs, Blackwell Publishing, Oxford – UK
• D. Capital Partners (2013) Impact Investing in Education: An Overview of the Current Landscape, Open Society Foundations, Education Support Program, New York – USA
• Marchetta, Francesca & Dilly, Tom (2019) Supporting Education in Africa: Opportunities and Challenges for an Impact Investor, [Technical Report] FERDI, Clermont-Ferrand – France