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Impact investing – investing in a way that delivers both attractive financial returns and measurable social or environmental benefits – has come a long way in the last decade.

When we launched Bridges in 2002, the concept didn’t even exist. While we were raising our first fund, many of the investors we spoke to were sceptical about the idea that you could achieve returns and impact at the same time. ESG screening was still in its infancy, and there was still a widespread view that creating positive social or environmental change was a matter for philanthropy, not investment. “You have to choose,” as one investor told us. “Either you focus on social good and sacrifice on returns, or you focus on returns and sacrifice social good. You can’t have it both ways.”

But times have changed. Now almost every large investor has a sophisticated ESG screening process in place. And more and more are starting to experiment with investing for impact. Some of the early pioneers – such as the UK local authority pension funds and family offices which backed our first fund back in 2002 – now have more than a decade of returns data to prove that it is indeed possible to have it both ways. And as this evidence mounts, other investors are getting much more comfortable with the idea.

It helps that impact investing clearly has some strong tailwinds behind it. More and more asset owners (including pensioners) want their investment portfolio to better reflect their values, which is driving ever-greater interest from wealth managers and other fiduciaries. Equally, more and more business people want their work to reflect their values, which is driving a greater supply of impact investment opportunities. Given the likely transfer of wealth in the next 20 years to women and millennials – who are more likely than average to care about impact and purpose – these trends should only accelerate.

But although we have seen great progress, there is still some way to go. While impact investing is one of the fastest-growing areas of finance – impact assets doubled to £228bn (€260bn) last year, according to the Global Impact Investing Network – it still accounts for a tiny fraction of the about $90trn (€80trn) of global assets under management. 

And the challenges we face are vast, as the UN’s Sustainable Development Goals remind us. So how do we unlock more private capital to support impactful investments? There are three important ways in which the impact investing sector can become more accessible to investors.

The first is around product development. Investors looking to allocate to impact still have a limited range of options, so we must keep innovating new products to meet investors’ needs. Some want more flexibility and control than a standard blind pool fund allows. Others want to hold income-generating assets for longer, without the need to exit – which is why we developed a permanent capital vehicle to sit alongside our traditional growth capital fund. 

michelle giddens

Other managers are raising funds dedicated to a particular impact area or theme – sustainable forestry, for example, or dementia – to suit mission-driven investors with a specific focus. Importantly, we must also stay focused on raising vehicles of scale, partly so we can tackle the biggest challenges, and partly so we can meet the needs of larger investors that want to invest for impact but need to deploy capital at scale.

Policymakers also have a role to play. We have seen the US and UK move to clarify the concept of fiduciary duty – so investors can incorporate social and environmental considerations into their investment decisions without fear of the consequences – while France is experimenting with fiscal incentives to support impact businesses. 

Governments can also actively participate in the market, by commissioning and procuring impact products and services. And governments can act as a market facilitator: in Argentina there are state-funded incubators to help impact-driven entrepreneurs, while a number of countries (including the UK) now have a public wholesaler to provide catalytic capital to impact-driven funds.

The third priority – and perhaps the most urgent – is to try and find a more consistent way of defining, measuring and reporting on impact. Over the last few years, the impact investment market has seen a huge number of new entrants, including some of the world’s biggest financial institutions – including BlackRock, Barclays, UBS, Goldman Sachs, AXA, TPG and Bain Capital. 

This is hugely positive news for the field, and can only accelerate its adoption into the financial mainstream. But all these different investors come with their own ways of talking about and reporting on impact. Inevitably, this has created confusion and made it harder for investors to make sensible comparisons.

We have also spent many years developing our own tools and methodologies. But we came to realise that rather than everyone competing over whose methodology was best, it makes far more sense for the whole field to come together and agree some definitions and standards that are accepted across the market. 

This is why over the last couple of years we have supported an initiative called the Impact Management Project. Growing out of a client project carried out by our field-building and advisory arm, Bridges Impact+, the IMP has since developed into a global, sector-wide effort, supported by a diverse group of funders and shaped by the input of over 2,000 organisations and practitioners from across the investment value chain. So far, the IMP has focused on agreeing some standard definitions of impact. But in September, it moved into a new and even more ambitious phase: developing a set of shared principles, reporting standards and benchmarks for impact. To achieve this, it has brought together nine of the world’s leading standard-setters, including the UN Development Programme, the OECD, the Principles for Responsible Investment and the World Benchmarking Alliance.

If this initiative succeeds in establishing some shared norms it will make it much easier for investors to make like-for-like comparisons between fund managers and businesses, because they will be able to assess financial and impact performance against this common framework. Coupled with an improving policy and product environment, we hope this will facilitate much greater flows of capital to tackle our most pressing social and environmental challenges. 

Michele Giddens is partner and co-founder of Bridges Fund Management and chaired the UK National Advisory Board for Impact Investing from 2016–18

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