However, challenges remain in a field that is not yet clearly defined, standardised or regulated. Despite various attempts, there is still no consensus on what precisely constitutes Impact Investing or how to quantify non-financial (i.e. social) returns.
The words and terminology, used in this space, are themselves used too interchangeably: impact investing; socially responsible investing (SRI); environmental, social and governance (ESG) investing; ethical investing; sustainable investing and so forth. Even within trusted media outlets and publications, definitions are often used irregularly and without consistency.
The size of the global impact investing market itself is contentious. Some place this figure at $228bn1, others provide a considerably higher figure at $1.3tn2, and yet others “value the current impact investing market at nearly $9tn in the US alone”3.
Dual edge of Impact Investing
At one extreme, there is what I call the ‘broad view’ to impact investing, which simply requires an investor’s inclusion of some social or environmental factors (however so defined), when taking investment decisions, along with some social/environmental impact measurement (again, often loosely defined).
By contrast, the ‘narrow view’ to impact investing looks for ironclad consequential links between an investment and, say, a clearly measurable and tangible social return such as increased literacy, better life expectancy, reduced recidivism or lower child stunting rates. The narrow view is clear about specific social/environmental returns and demands they’re quantified rigorously.
When the financial media, asset managers, and those in the foundations and philanthropy worlds don’t necessarily use the same definitions, it is no surprise that many aspiring philanthropists and potential impact investors are confused.
Constraints & solutions
The challenge is further aggravated by the fact that ‘Impact investing’ is becoming a buzzword, all too often used loosely and with questionable objectives, which is driving public scepticism forward. This, in turn, is detrimental to those who truly want to leverage the virtues of impact investing as well as to those who could benefit from it.
Unless we adopt clear definitions, embrace rigorous standards and introduce some form of oversight that holds those who prepare social impact return figures to account, we will not witness the sort of deep, fluid, efficient and transparent impact investment markets that have the potential to transform our world as we strive to achieve the UN Sustainable Development Goals (SDGs).
An attempt to bell the cat
Encouragingly, there are various efforts to define this space more clearly. The International Finance Corporation (IFC) introduced impact management principles4 in October 2018 and others, such as the UN-backed Principles for Responsible Investment have been setting guidelines in this space as well.
Part of the challenge is that while quantifying and reporting on financial performance has severe regulatory consequences for those who improperly play with the numbers, the quantification of social returns, by contrast, can be highly subjective and has relatively little regulatory oversight. Accountability is, therefore, quite limited other than reputationally.
Idealistic approach for heads up!
Investment appraisal can be relatively straightforward when analysis and decisions are based on financial figures published within a sensibly regulated market. By contrast, the investment appraisal exercise becomes much more challenging when decisions are based on social return figures that are not standardised, not clearly defined nor appropriately regulated.
While the direction of travel in the world of impact investing is positive, the current state of affairs is keeping many potential investors – particularly those who seek tangible, clearly measurable impact – from taking the plunge and making a difference.
Today, within the public equity markets, there is an increasing range of investment options for institutional investors who seek ESG-integrated investing opportunities and there are numerous indices such as MSCI ESG that provide asset managers with a universe of target companies from which to choose.
However, the piece of the puzzle lagging behind is for those potential investors focused most strongly on results measurement and on clearly defined, direct, consequential links between funding and social/environmental impact. The more narrow view of the impact investment market is calling out for more discipline.
The conversation around impact investing is further complicated by the diverse nature and expectations of investors. Some are willing to forego some financial returns as long as these are offset by social/environmental returns. While others, by contrast, seek to ensure their financial returns perform as well, if not better, than traditional investments.
Interestingly, there is some academic literature showing how sustainable investing (let’s say, Impact Investing in its broader sense) can meet traditional and expected market rates of return, but there is by no means a consensus on this topic and, of course, much depends on how one defines impact investing.
Types of Impact Investors
At a basic level, one could segment funders into two groups:
(1) the philanthropist who is looking at impact investing as a more narrowly defined activity, with tangible and clear mission-aligned outcomes; and
(2) the institutional investor who defines impact investing more broadly, where the mere consideration of ESG factors and some form of measurement (possibly quite removed or tenuous) are sufficient.
There is a room for both types of funders and they would both benefit from improved markets to meet their needs. The key to developing the right opportunities to meet everyone’s expectations rests with clearer definitions, more rigorous standards and increased accountability.
Word of caution
For now, here’s some sensible advice: it’s important to have clarity of thought and to determine precisely what social/environmental impact one wants to achieve – what is it about this world you wish to change?
Start small, identify funding opportunities that can be measured as robustly and as accurately as you feel appropriate for your taste. You may find that the more direct the link between funding and output the easier it is to secure accurate measures of your actual impact.
Ask yourself: what would a counterfactual universe look like if I had not invested in X, Y or Z? If the answer is obvious to you, great. If it’s not, then ask yourself whether you’re ok with that. Be diligent and ask probing questions of those who provide you social impact figures. How were these figures derived; how much do you agree with any assumptions made in the calculations?
Lastly, don’t neglect the reality that vast spheres of our global society are underserved, not catered to by government nor by private enterprise. This has implications for the sort of impact investment opportunities you may wish to pursue.
The more clearly defined this space becomes the better informed you’ll be to formulate answers to all of the above.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
