Sarah Johnson CA: Why it is time to shun “impact-washing” and embrace local knowledge
By CA magazine
31 March 2021
The Collaborative for Frontier Finance is reshaping impact investment by building networks so that cash flows to small and growing businesses. Director Sarah Johnson CA explains why it is time to shun “impact-washing” and embrace local knowledge
While the widespread growth of “profit for purpose” in recent years is undoubtedly a welcome development, it is vital that businesses walk the talk if good intentions are not to be met with cynicism. Terms such as green- and pink-washing (companies trying to appear progressive with hollow support for sustainability or LGBT+ rights respectively) are already part of the lexicon. Sarah Johnson CA, Director at Collaborative for Frontier Finance (CFF), says she has detected a new strain in recent years: impact-washing.
“You see big organisations making grand sweeping statements on their websites about moving trillions of dollars [to developing nations] and you just don’t see it happening. These funds don’t trickle through or affect the bottom line,” she says. “I don’t believe much of what I see plastered across [corporate] websites these days.”
CFF is challenging big business to put its money where its mouth is. Rather than cosying up to huge brands, the multinational multi-stakeholder initiative takes a more targeted approach – helping grassroots, local fund managers in emerging markets, who invest in promising entrepreneurs and projects, to access capital from deep-pocketed investors.
According to Johnson, sustainable development is undermined by “fund managers sitting in London or New York, who do a deal [in developing countries] using all their advisers and accountants from their home market, before flying out again. It doesn’t invest in the local ecosystem at all. Local context is paramount. I question it when I see big development finance institutions make headline statements saying they’ll deploy billions of dollars in certain markets, because the only way they can do that is working through local fund managers, who know the territory and can identify problems when they arise.”
If there is a lodestar to CFF’s modus operandi, it’s arguably EF Schumacher’s seminal Small is Beautiful, the 1973 collection of essays credited with shaping modern environmentalism and development theories. By working with local fund managers, CFF takes on the mantle of Schumacher’s idea that small-scale, localised solutions are the key to helping those trapped in poverty. “Big is better” economics it is not.
Room for growth
CFF likes to keep things small. The recipients of funds aren’t huge – CFF aims to help small and growing businesses (SGBs), defined as businesses typically seeking financing of between $20,000–$2m (£14,500–£1.45m), which can be as tiny “as a business supporting just one family”. Meanwhile, the $50,000 cheques written by investors are infinitesimal compared with some of the sums floating around in international development. Even CFF’s operation is lean. The virtual organisation comprises just three: Newcastle-based Johnson, US-based founder Drew von Glahn and their colleague in Copenhagen.
Much of Johnson’s work involves building a network of fund managers, “connecting them with like-minded peers so they can share resources and best practices”. CFF has aided WIC Capital, which recently announced a partnership with Dutch entrepreneurial development bank FMO, to support the participation of women in the economic growth of west Africa. Likewise, it works with South African private equity firm Secha Capital, which ploughs money into “bread-and-butter” local businesses making biltong, wigs and shoes.
If foreign investment is to flow smoothly to those that need it, then building such networks is crucial. As Johnson explains, part of the problem with impact investment is that “the capital is there, but the linkages aren’t. There’s a ‘missing middle’ where capital isn’t flowing. We need to build the plumbing to make these linkages work.”
The “missing middle” that Johnson references are SGBs, which rarely receive foreign investment despite creating 80% of formal employment opportunities in emerging markets. Traditional investment methods often overlook them because they’re too small for private equity, too big for microfinance and too risky for commercial banks and venture capital. “They’re stuck in a financing gap [CFF estimates this to be $940bn] and can’t scale or grow,” says Johnson.
Small payments are integral to helping SGBs grow to a point where later-stage investors can get involved. Johnson estimates CFF’s network of early-stage capital providers typically write cheques of $50,000–$500,000. “If there’s nobody writing these $50k cheques in start-up or early-stage businesses, there’s never going to be a £1m or £100m investment, [and that] could cause them to fail,” she says.
It’s hoped CFF’s funding paradigm will tackle another problem that bedevils impact investment. “A lot of investment gets concentrated on ‘poster-child’ countries such as Nigeria or Kenya,” says Johnson. “But there are so many other countries that don’t hit the headlines, because it’s not trendy to invest there.”
The 'a-ha' moment
Johnson has been at CFF for little more than 18 months. CFF is itself a nascent initiative, founded in 2016 by Wall Street veteran von Glahn (previously manager of the World Bank’s venture philanthropy fund) after discussion of impact investment glitches at a US social impact conference. For Johnson, in a convoluted way, an ICAS competition set her on the path to her present role. While working in her first job at EY in Newcastle, she won the chance to spend three months with an NGO in Puducherry, a former French colony in India. The placement taught her many things, not least that international aid is wasted if it isn’t properly directed.
One way the NGO generated money was by selling cakes and cookies. On discovering the cakes were selling for 300 rupees (£3) each, Johnson itemised the cost of materials and found that the overheads for electricity and labour meant they were being sold at a loss.
“[Realising] they were frittering away hard-earned donor funding was a real ‘a-ha’ moment. It made me think the planning skills I thought were usually confined to an audit room could be applicable to the broader world,” recalls Johnson. The spell in Puducherry also sowed “the seed of restlessness” that has defined her career since. After India, she worked for EY in Abu Dhabi and New York, where she sought out programmes “that allowed me to do something aligned with my skills”.
After one such secondment to a logistics firm in Benin, Johnson returned to EY feeling it was time to follow her passion, which meant pulling the plug on her 10-year corporate career. She opted for a master’s in development practice at Columbia in New York, which included internships researching climate change in Bangladesh, working for an ethical sugar cane platform in India and conducting fieldwork in Mali.
Since landing the CFF job in summer 2019, Johnson has doubled the size of its network of early-stage capital providers to over 60 members. She arranged an inaugural convening in Nairobi in January 2020 and a virtual one in February 2021. Her tenure has also coincided with the disruption of Covid-19 – a major setback for impact investment. With many vulnerable countries dependent on tourism, commodity exports or international aid (all floundering during the pandemic), the UN Development Programme has projected income losses of $220bn for developing nations.
“Our members are struggling because of Covid,” says Johnson. “Their fundraising has dried up, conversations have stopped, while investors are focusing on current portfolios, which also might be struggling.”
To support them, CFF is currently developing a capital bridge facility. “We hope it’ll get funding to those businesses in emerging markets that are struggling due to Covid-19,” explains Johnson. “Many of them have a liquidity crisis, so there’s a real need to get affordable working capital to them so they can weather the storm.”
Covid-19 isn’t the only obstacle for impact investment. “Investors often look at early-stage investing and write off the sector saying that it’s too early-stage or risky,” says Johnson. To assuage these doubts, CFF regularly produces research to improve transparency and demystify the sector for investors.
Johnson believes the skills picked up during her CA education equip her to deal with such challenges. “A large part of CA training is problem-solving – looking at a problem holistically and not getting overwhelmed when information is coming at you from a multitude of different sources,” she says. “That five-hour case study of the final TPE exam is so useful.”
Johnson also predicts impact investment will swell in importance over the next decade. “In a few years’ time we won’t be talking about impact investing or ESG investing: it’ll just be investing,” she says. “This will become mainstream. Even now, it’s not something that sits under a CSR department – it’s part of strategy and on the CEO’s mandate.”
The rise of impact-weighted accounting – where companies reveal the full social and environmental cost of their operations – will profoundly alter the way accountants work. “The ability to measure impact is something auditors and accountants will need to add to their toolkits,” she says. “It won’t be enough to have a financial P&L and balance sheet any more. An auditor will be able to get under the skin of a company’s performance, look at the substance of what they’re reporting and gauge whether it’s impact-washing or if they’ve simply employed creative accounting to massage numbers.”
CAs, perhaps currently working for a Big Four firm as she once did, have many transferable skills for the field of sustainable development. “I took a leap of faith to go back to university and work in a start-up environment,” says Johnson. “Life’s too short. It’s better to regret things you’ve done, not things you haven’t.”
Find out more about how ICAS is promoting sustainability by accessing the ICAS sustainability hub.