Special Report: Investing for Impact
New language, new metrics
A fascinating development is underway in institutional investment. Place it under the heading of responsible investment if you like. It is about asset owners wanting to make a positive societal and/or environmental impact with their investments, alongside financial returns. As PGGM says, it is no longer just about dollar, sterling or euro amounts, but “crop yields, kilowatt hours or the number of people affected”.
Although relatively new, impact investing is still the term that has been around the longest to describe investing with the explicit purpose of achieving positive non-financial impacts in addition to financial gain. The 2017 Annual Impact Investor Survey from the Global Impact Investing Network (GIIN), which will be published in the middle of May, puts the size of the market at $113.7bn (€107.2bn).
However, twists on the impact investing label have been emerging as the ambition of achieving positive non-financial impacts has gained traction among asset owners. These include terms such as investing for impact, investing in solutions, or SDG investing, after the UN Sustainable Development Goals. Indeed, the SDGs are catalysing interest in impact investing, as you will read this report. They have been referred to as a potential new language that investors, corporates, policy-makers and others can use to communicate about and report on impact. Doing so requires breaking the goals down into metrics, and having data to measure performance against these. This is not easy. Investors recognise this, and that it will take time and effort for meaningful data to be produced. But progress is being made, and there is a recognition that data difficulties should not prevent investors from trying to integrate the SDGs or other inpact goals into their investment approach. As PGGM also says, this is about building the car while driving it.
Impact investing has been associated with the private markets. Evidence that impact investments in these markets can generate financial returns alongside non-financial impacts has fuelled interest. A key development in this regard was the 2015 launch of an impact investing benchmark by Cambridge Associates in collaboration with the GIIN, said to be the first comprehensive analysis of the financial performance of market rate private equity and venture capital impact investing funds. It showed that impact funds that raised under $100m returned a net internal rate of return of 9.5% from 1998-2004, outperforming similar-sized funds in the general private market universe.
But what about the public markets? Can investing in public equity legitimately be billed as impact investing? The answer is a mixture of ‘it depends’, and ‘not yet’. In this report, you will read an argument about five key tests that public equity investing needs to pass before it can be considered impactful. This feels like a welcome honest assessment, and a useful guide. Harnessing the public markets to channel money towards solving the world’s most pressing environmental and social problems would bring important scale into the equation. But, as you will also read, this must be done with integrity.