- There is a huge shortage of capital going into the education sector, with impact investment strategies still a niche area.
- Organisations such as the UBS Optimus Foundation and the Education Outcomes Fund are working to develop more investable educational opportunities in developing countries.
- The Global Steering Group for Impact Investing is working with investors to try to bridge the trade-off between returns and impact.
Ensuring there is a sufficient number of people in the world with adequate education and training to fulfil the labour market’s needs is a huge challenge, and one that has only grown since Covid-19 hit in early 2020. But it is one worth addressing for the huge positive economic and social impact it would have, particularly in developing countries.
Closing the skills gap could add $11.5trn to global GDP by 2028, the World Economic Forum estimated in 2020. To realise this, says the non-governmental and lobbying organisation, education and training need to stay up to speed with technological disruption, demographic changes and the evolving nature of work.
But the world faces an intensifying education crisis, with pandemic-era students facing sacrificing as much as $17trn in lifetime earnings as a result of missed teaching, say the UN and World Bank.
The developing world has been hit especially hard: school closures in the first two years of Covid-19 lasted roughly twice as long in emerging markets as in advanced economies, according to an IMF analysis. On top of that, the proportion of children at school age in developing countries is nearly double that in advanced economies.
Learning poverty on the rise
Even before the coronavirus hit, 258 million children of primary and secondary school age were out of school and the learning poverty rate in low and middle-income countries was 53%, the World Bank said in January last year. In short, more than half of all ten-year-old children could not read and understand a simple text. In sub-Saharan Africa, the figure was closer to 90%.
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And while a rising number of children are entering school in emerging nations, the UN says, educational outcomes are not improving. UN chief António Guterres warned in January: “Unless we take action, the share of children leaving school in developing countries who are unable to read could increase from 53% to 70%.” (See chart below.)
Ultimately, the annual funding gap for education in poorer countries could reach $200bn as a result of Covid-related school closures and hits to economic growth, up from $148bn in 2020 and $39bn in 2015, estimates the UN Educational, Scientific and Cultural Organization (Unesco).
Accordingly, experts and practitioners in the sector are calling for more private capital to go into the sector, but the prospects for that happening are gloomy, as Capital Monitor reported recently.
There are, however, philanthropic institutions and impact-focused investors seeking to address the issue – with a particular focus on improving learning outcomes.
Since 2015, the UBS Optimus Foundation – a grant-making institution – has been working with the Swiss bank’s private wealth clients to tackle this global crisis by testing new types of financial products.
A key focus for the organisation is to explore ways to improve quality and deliver strong eductional outcomes for children, says Dhun Davar, global head of social finance and India head of UBS Optimus Foundation and of philanthropy services at the bank.
Development impact bonds
UBS Optimus Foundation – alongside the Children’s Investment Fund Foundation (CIFF), an independent philanthropic organisation with an endowment of $6bn – in 2015 launched the world’s first development impact bond (DIB) for the education sector. The results-based financing product saw UBS clients invest a total of $270,000 in improving learning outcomes for 7,300 children in the Indian state of Rajasthan. The CIFF promised to pay investors their original investment plus a return if agreed outcomes were met.
The Educate Girls DIB, which lasted three years, surpassed its target outcomes. These included that in the final year learning levels for female students in schools in the programme grew 79% more than their peers in other schools – almost the difference of an entire additional year of instruction. In addition, 116% of the final school enrolment target was achieved, and 768 eligible girls identified in the programme area were enrolled, against a target of 662.
UBS has since worked on similar products, such as a ‘social success note’ in Uganda to improve access to drinking water for schoolchildren. UBS Optimus Foundation lent money to Impact Water, which installs water filtration systems in Uganda. Under the structure, the New York-based Rockefeller Foundation made an outcome payment towards the loan repayment for each filtration system that Impact Water installed in Ugandan schools.
Education admittedly remains a niche investment, especially in emerging markets. As of 1 February, 225 impact bonds had been issued globall – totalling $463m of upfront capital – 29 of which were focused on education, according to the Brookings Institution think tank. But only 21 of the 225 were in developing countries, of which three are focused on education.
However, the Education Outcomes Fund (EOF) – created in 2018 by the Education Commission, the Global Steering Group for Impact Investment (GSGII) and EOF founding CEO Amel Karboul – is building on the DIB model, supporting governments to utilise a range of finance instruments at scale to improve learning and employment outcomes for children and young people by 2030.
The Education Commission is a UK-based high-level body focused on developing progress towards UN Sustainable Development Goal 4: Quality Education.
The focus of the EOF is to scale the results-based financing initiatives that have been emerging in recent years, such as the Educate Girls DIB, to improve their cost-effectiveness, says Miléna Castellnou, London-based chief programs officer. To do so, it aims to attract more capital from development partners, governments, foundations and the like, she tells Capital Monitor.
The EOF will launch two funds this year – one for Ghana and one for Sierra Leone, capitalised at $30m and $17m, respectively. The latter is funded by the government of Sierra Leone, the UK’s Foreign, Commonwealth and Development Office, the Korean International Cooperation Agency, Bank of America, and the Wales-based Waterloo Foundation.
Profit versus impact dilemma
Of course, more capital would flow in if it could achieve significant returns, but therein lies the rub.
Even charities looking to invest face tensions in respect of balancing profit generation against advancing their social mission, says Rebecca Perlman, a senior associate at UK law firm Herbert Smith Freehills, who has advised clients interested in these types of deals. And there are challenges as it is so nascent, she adds. “You kind of have to start from a first-principles basis.”
The GSGII, based in London, has worked with the EOF on designing financial products. They have spent a lot of time discussing with investors what they would see as an acceptable rate of return for high-impact investments, says Alasdair Maclay, GSGII’s chief funds officer. For instance, would a 10% internal rate of return be appropriate for a West Africa investment, or would investors accept 5%?
“We are getting into a true sense of how I see impact investment,” Maclay says – that is, being prepared to compromise somewhat on returns with a view to maximising impact.
That may help explain why, as he says, the scale of blended finance emerging market impact development work remains small. After all, Maclay notes, plenty of capital is going into areas like online workforce development training and education technology, or ‘edutech', via more mainstream ESG investment strategies.
Edutech investment suffering
But even such allocations have lost momentum recently, after China’s July crackdown on private tutoring, a profitable and fast-growing area, hit the edutech sector hard. The Bosera CSI Global China Education Thematic ETF (exchange-traded fund), only launched in 17 June, lost almost half its value in July to end the month on 0.534 yuan (around 8 US cents) and has still not recovered. It stood at 0.40 yuan as of 22 February.
Beijing’s move "upset investors”, says Mathieu Nègre, portfolio manager for emerging market impact at UBP Asset Management. The Swiss company runs an emerging market impact investment fund with exposure to China’s education sector. While UBP had avoided the more controversial tutoring and K-12 (kindergarten to the 12th grade 17 to 18-year-olds) segments, Nègre adds, all education-focused Chinese stocks suffered.
Such episodes may explain why some investors prefer to allocate capital to education in developed markets – but such projects tend to be small, too. UK-based Bridges Fund Management’s deal pipeline for its £55m patient capital fund – one of the strategies comprising its roughly £500m under management – includes a business providing healthy food in schools and skills training organisations, says partner Tom Biddle.
Though the lack of investment in education, particularly in emerging markets, remains an issue, there are pockets of promise – especially as impact investing is gradually gaining momentum.
