Funds flowing into impact investing strategies continue to grow, with $2.3 trillion in assets invested for impact globally and £58 billion here in the UK. But what exactly is impact investing?
GIIN Definition of Impact Investing
The often-used definition provided by the GIIN is: “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. This is a deliberately ‘big tent’ concept, and one which has blurry boundaries with the wider – and larger – universe of sustainable finance and ESG investing (at a ballpark $35 trillion). However, the time may have come to tighten up the wording.
So far it has been left to market participants to self-identify and to a variety of industry-led initiatives to check whether investors are ‘walking the talk’. That has helped spread a powerful movement, but also sowed seeds of confusion. Now regulators such as the FCA, SEC and ESMA are proposing new rules for using the term ‘impact’ in investment product labels.
What Differentiates Impact Investing?
What then differentiates impact investing as a strategy? Two different elements can be stressed.
Profile of Underlying Assets
The first is to focus on the profile of underlying assets. What is being invested in, and how is this leading to improvements in the wellbeing of communities and the health of the environment? Are companies managing material risks (ESG)? Or are they generating positive outcomes for people and the planet (sustainable)? Or are they contributing to solving specific social or environmental needs (impact)?
While on paper a definition anchored in the real-world effects of companies sounds sensible, in practice it can be a challenge. Every business contributes to both positive and negative effects, so identifying which companies are ‘impactful’ is far from straightforward. Solving it would require a identifying a taxonomy of outcomes linked to agreed-on needs. But the experience in the EU shows that reaching such agreement can be fraught with politics and values – with a social taxonomy by some estimates a decade away from finalisation.
Investor Contribution
The second is to focus on investor contribution. What actions are investors taking that lead to positive outcomes that would not have been delivered otherwise? Here, impact investors make a difference by deploying their financial and non-financial resources in a way that traditional investors would not.
Emphasising the additionality of capital and/or value addition introduces a clear distinction, is easier to ‘account for’ – at least conceptually – and builds on emerging industry norms. However, this type of counter-factual thinking has implications for mainstreaming impact (as impact investing will always be positioned on the periphery) and there is little currently guidance and few empirical examples about how to evidence contribution in a rigorous way. It also risks an overly technocratic definition – that investors can make a difference to outcomes that, ultimately, may not that important in addressing pressing global-to-local challenges.
So Which Framing Wins Out?
Ultimately, impact investing is more than just ‘buying’ exposure to already impactful companies and needs to encompass the role of investors in ‘enabling’ that impact. We also think it’s important that definitions push beyond intentionality (what investors say they do) towards real-world change (what they actually do). For that reason, a hybrid definition may work best – one which includes aspects of both the enterprise and investor contribution to solving specific social and environmental challenges (Figure 1). One thing for certain is the scrutiny of regulators who have impact investing in their sights. Both established and emerging impact investors will need to make sure they stay ahead of the curve.
Are You Getting It Right?
However well intentioned, investing for impact without fully considering your impact measurement and management system can result in both reputation damage and negative outcomes.
Impact Assured is The Good Economy’s leading methodology to verify alignment with good practice impact measurement and management. Our SDR assessment helps investors use the ‘sustainable impact’ label with credibility and confidence.
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