From ‘investing with impact’ to ‘impact investing’

Posted by Karen Maas - Apr 20, 2020
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‘Impact investing’ is a wonderful concept that can really help to solve social issues. But we must go beyond simply believing others’ good intentions. We actually have to measure impact and make it a key focus of our efforts. Money plays a crucial role in society: investment drives the action. When the vast majority of capital is allocated to polluting – or primarily profit-driven – businesses, these companies continue to grow and flourish. If more capital were invested in the circular economy, the idea of circularity would form the basis for development.

All investments have a social, economic and environmental impact, be it positive or negative, direct or indirect, intended or unintended. Nevertheless, investors still focus mainly on the financial consequences: returns. The attention paid to social and environmental aspects has, however, increased significantly over the past decade. Investments that factor in ESG considerations have grown strongly in recent years and now account for almost half of total capital invested (USD 30 trillion in 2018, source: Global Sustainable Investment Review, 2019). From ‘do no harm’ to ‘doing good’ This type of investment involves looking for opportunities that ‘do no harm’ within the current return and risk-return ratio environment. Investors expect such investments to have less negative social impact. A small subset of these ESG investments is referred to as impact investing and represents a major step forward, as they actively generate a positive and measurable social impact. The focus here is on ‘doing good’. However, the Global Impact Investing Network (GIIN) estimates that the current market for impact investing is USD 502 billion, which is less than 0.01% of assets invested worldwide (USD 66.4 trillion AuM in 2019, i.e. 66.4 million times one million, source: IPE, 2019). This may sound like a semantic distinction, but in essence it concerns investments that also require a different mindset, approach, set of calculations and management. Impact investments are investments with the primary aim of generating positive and measurable effects.

Here the pursuit of financial returns is important, but is not the main objective. If no positive impact is expected, no investment will be made. The best financial returns can then be pursued from the opportunities that remain. For ESG investments, the reverse applies. A selection is made based on the expected financial return and investments are sought within that spectrum that would have minimal negative impact. In order to claim that investments do indeed have a positive social impact, you have to measure their total impact: economic, social and environmental.

Social impact can be measured in a number of steps. First, the key indicators need to be identified and selected. This allows you to determine what you want to measure. Impact measurement can then be used to assess the impact of existing investments on the indicators selected. It is important to consider what contribution the investment makes compared to a comparable situation, also known as a counterfactual. As an example, you could compare an impact investment with a traditional investment. The results of this measurement show whether there is a positive impact.

Nowadays, almost all financial parties claim to be involved in impact investing. However, there are few examples in which impact is measured properly and where social impact drives investment. The question is how seriously we can take impact investing at this point in time. The intentions and opportunities are there; now we have to take the next step: to measure and manage, so that we can put our money to work and really help to solve social issues.

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