Family businesses and impact investing in Nigeria

Family businesses have been described as better positioned to lead on sustainability because they are more trusted and reportedly free from short-term market concerns. One could say that the emotional attachment in setting up one’s business helps one withstand the odds presented by short-term shocks.

Sustaining this drive beyond generations, however, requires another level of grit and a structured approach.
The economy slowed down after COVID-19 and will need family businesses to pick up. With developing companies experiencing a funding deficit of US$2.5 trillion, the struggle to deliver the United Nations Sustainable Development Goals (SDGs) is apparent (World Investment Report, UNCTAD, 2014). This presents a great opportunity for family businesses to step in and contribute their quota to impact through investing in the SDG goals. The recent flooding in several states in Nigeria, resulting in the loss of lives, agricultural produce and livestock may have taken us further back. This means we can no longer continue as usual. Infrastructure gaps in Nigeria, like poor drainage systems and pot-holed roads, must be fixed. Impact Investing can do this. These present opportunities for family businesses to take action and make an impact.

Sustainable investments are – by definition – better aligned with societal needs than unsustainable ones, meaning they’re more likely to be successful and outperform other opportunities in the long term. Therefore, impact investing is an increasingly important feature of the overall investment landscape.

Specifically, on sustainability, PwC’s Family Business Survey 2021 found that only 18% of family businesses in Nigeria engage in impact investing. This is quite similar to the global report that indicates that 22% of family businesses engage in impact investing. As family businesses in Nigeria contribute to half of Nigeria’s GDP and a significant fraction of the workforce, it is more beneficial to the economy that these businesses embrace a longer-term and more sustainable approach to investing.

What is impact investing?

Impact Investing is being intentional about expecting good social and environmental returns in addition to financial gains. Impact Investing also sets out to achieve financial and social goals in a manner that is acceptable for the investor and society.

It makes sense for a family business to give back through impact investing because this is more sustainable. It also helps the business arrive at a fair midpoint between social upliftment and financial gains. This is helpful because Nigeria is a developing country faced with many socio-economic challenges. As social causes abound, family businesses should consider the sector of operations and how to introduce impact investing within that space. For example, if a family business is engaged in footwear manufacturing, impact investing may mean producing the best quality, low-cost footwear for indigent students. This sectoral analysis can help the business identify its tangible impact as well as note how the financial returns will be gained to ensure a sustainable model.

What are the building blocks to achieve impact investing?

The Global Impact Investing Network (GIIN) identified the core characteristics of impact investing. These are:
Intentionality: Impact investing is being intentional about contributing to a social or environmental benefit that can be tracked.

Use Evidence and Impact Data in Investment Design: Impact Investment requires evidence and data to drive sound investment design that contributes to society.

Manage Impact Performance: This means having feedback systems that communicate impact investment performance to stakeholders.

Contribute to the Growth of the Industry: GIIN adds that credible impact investors share their experiences with others on what contributes to social and environmental benefits.
A Snapshot of Traditional, Impact-Driven, and Philanthropy Businesses

NextGeners and Impact Investing
Family Businesses can no longer sideline impact investing because NextGeners are beginning to take the helm of several family businesses.

PwC’s Impact Investing Family Guide Survey indicates that millennials and GenZs are more concerned about and influenced by non-financial metrics when deciding on work satisfaction because they grew up more enlightened about issues like People Profits & Planet, ESG, and Impact investment. The guide also states that over the next two decades, trillions of wealth will pass on to the millennial generation, who, as the new leaders, will shape their families’ investment goals and agendas for many decades to come. Therefore, family businesses must take a stand and begin to define the roadmap for what impact investing means to them.

Impact Investing Case Studies in Nigeria

The German Organization GIZ commissioned a research project in 2019 that examined impact investment in Nigeria. Several impact investment business case studies were examined including – Babban Gona; One Acre Fund; Hello Tractor; Farm Crowdy; AFEX Commodity Exchange Limited; Kinabuti; and Andela.

The Babban Gona agriculture franchise sets out to eradicate underlying structural problems that keep the Nigerian smallholder farmer members poor. Its vision is to become the earth’s highest impact business while its mission is to make more money for 1 million smallholder farmer members by 2025. Babban Gona has raised funds from several foundations and Development Financial Institutions including Global Innovation Fund, Nigeria Sovereign Investment Authority, ROPO (funded by UKAid, Bill & Melinda Gates Foundation, and First City Monument Bank), and other private investors. This business has been reported to generate $21.6m annually.

Similarly, OneAcre Fund deals with supplying smallholder farmers with the financing and training required to grow and earn more money in farm income. As of 2021, OneAcre had 40 staff in Nigeria and over 8000 staff across Sub-Saharan Africa. Its mission is to serve smallholder farmers and put farmers first. They’re funded by grants from private foundations and impact investments from organizations like Ogun State Property & Investment Corporation (OPIC).

Andela was founded to connect opportunities to talented individuals, irrespective of race, gender, and nationality. Andela trains software engineers and affords them opportunities to work with countries all over the world. Andela has supported the career acceleration of thousands of young people in Nigeria. The company has investors across the world including Chan-Zuckerberg Initiative, Spark Capital, and Salesforce Ventures.
Legal Structures and Impact Investments
Legal structures for many organisations in Nigeria take the form of Business Names, a Limited Liability Company (Private or Public), Company Limited by Guarantee – LTD/GTE, Partnerships (Limited Liability or Limited), or Incorporated Trustees. Depending on business objectives, some structures are better suited for what the owner intends to achieve.

For non-profit making ventures to which many family foundations fall within, the options often lie between LTD/GTE and Incorporated Trustees. Other than their different registration requirements, Incorporated Trustees are inherently non-profit making while LTD/GTE are permitted to make profits but cannot distribute these profits to its members.
Given that an impact-driven business can still enjoy the benefits of profit-making, such a business may consider using a Private Limited Liability Company for its main business activities while it establishes a foundation on the side through which the company carries out impact activities. This will enable the company to make profits alongside its impact projects.

A Corporate Affairs Commission (CAC) registered foundation is typically more attractive for donors who share similar causes with the business and would like to co-invest. This has the benefit of allowing them a tax deduction, validating their contributions to society and indeed their total tax contribution which should be reported.

Legal & Regulatory Landscape of Impact Investing in Nigeria

The legal and regulatory frameworks that govern businesses in Nigeria include – the Companies and Allied Matters Act 2020, the Finance Acts, Tax laws, and other laws. We expect the Climate Act 2021 and other Laws such as the Petroleum Industry Act 2021 (with provisions for Host Communities Development Trust) to play a bigger role in the way businesses are run. Principle 26.3 of the Nigerian Code of Corporate Governance 2018 already mandates companies to report in their Annual Reports, the extent of compliance with their sustainability policies. It is only a matter of time therefore before more stringent regulations begin to come to the fore. In other jurisdictions like Europe, increased regulations such as the EU Sustainable Finance Disclosure Regulation are now taking front-burner seats.

Measuring, Monitoring and Reporting of Impact Investments

PwC has a useful framework for measuring and managing impacts. The Total Impact Measurement Management framework focuses on the difference between inputs, outputs, outcomes and impacts. The inputs are the resources and capital infused into a business; the outputs are activities that have been done; the outcome is the immediate feedback that occurs as a result of the investment, and the impact is how much of the outcome can be attributed to the investment.

Other measures of impact that may be considered include the Organisation for Economic Co-operation and Development’s (OECD) well-being framework; the UN’s Sustainable Development Goals (SDGs); and the five dimensions of impact created by the Impact Management Project. Reporting helps companies to inform stakeholders about their impact investing activities.

Takeaways for Family Business
The advice of Peter Englisch, PwC Germany’s Global Family Business Leader, is very apt – “…the starting-point for impact investing is to treat it not as just another alternative financial investment, but as something that’s aligned with your values and contributes to your family legacy.”

This means that Family Businesses must be willing to define what matters to them and document how they intend for their resources to be allocated. Since many causes exist to which impact investments may be considered, it becomes imperative to use family values as a guide to prioritising how the business’ limited resources are deployed.

How PwC can help

To have a deeper discussion about how the topic might impact your business, please contact your engagement partners or members of PwC’s ESG, People and Organisation team.