Tricky, but worthwhile
Impact investing is a hot topic in mainstream institutional investment these days. According to the International Finance Corporation (IFC), in the past three years there has been substantial growth in the use of the word “impact” as a brand for mutual funds and exchange-traded funds, and the number of impact-branded funds in public markets – not traditionally an impact investing venue – has grown from 13 to 62 since 2008.
Definitions of impact investing are fairly straightforward.
Impact investing, according to the Global Impact Investing Network (GIIN), a non-profit organisation, and the IFC, is making investments “with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
This explicit dual intention and the commitment to track and measure investments’ non-financial impacts distinguish impact investing from other approaches broadly housed under the “ESG” heading. In ESG integration, for example, environmental and social factors are inputs heeded in the decision-making process with a view to achieving better risk-adjusted returns, and generally not targeted as outputs in their own right.
A key point is that with impact investing, any positive environmental and social impacts are intended from the outset, and not side-effects. In this sense, impact investing should not be a label applied retrospectively.
But there is confusion about impact investing, which can mean different things to different people even if they agree on a definition. The concern is that this will put people off and prevent it from growing. In a speculative top-down exercise, the IFC recently estimated that asset owners’ appetite for impact investing could be as much as $26trn.
Help is at hand for institutional investors interested in pursuing, or deepening their efforts in impact investing. Last month the GIIN published its “core characteristics” of impact investing to provide more clarity and set a “baseline of expectations”. Not long after, the IFC announced the “Operating Principles for Impact Management”, a set of nine principles that it developed in consultation with other stakeholders, including the GIIN and the Impact Management Project (IMP). The IMP is a group doing important work to improve the understanding and practice of impact investing or, to use a looser phrase, investing for impact.
Announced just as the final touches were being put on this report, the operating principles unveiled by the IFC – with a 60-strong group of development finance institutions, mainstream asset managers and impact specialists as inaugural adopters – aim to “establish a common discipline and market consensus around the management of investments for impact and help shape and develop this nascent market”.
With the work done by the GIIN, IFC and IMP there are plenty of tools out there for aspiring and maturing impact investors. They must approach impact investing with humility and sincerity, and should be treated this way by the veterans as well. After all, we’re talking about growing the impact investing pie rather than cutting it up into smaller and smaller pieces, right?
Susanna Rust, IPE