Is impact investing efficient?
In his annual letter to global business leaders at the beginning of 2021, BlackRock CEO Larry Fink, argued that the “climate transition presents a historic investment opportunity” (1). With BlackRock being one of the biggest names in finance, Fink’s words on climate risk and other environment, social and governance (ESG) themes, clearly reflect the extent to which sustainability issues have become central to financial markets. In fact, the sector of finance is experiencing an essential shift to more sustainable development, based on a more inclusive and sustainable economy.
At the heart of conversations about sustainability finance, individuals are increasingly hearing and talking about impact investment. Indeed, impact investing has seen tremendous growth in the past decade and it is increasingly gaining in popularity. Today, the Global Impact Investing Network (GIIN) defines impact investment as a market of $715 billion assets under management (2).
But, what is impact investment all about ? And, does it really have an impact, or is it just another buzzword in finance ?
Impact investment: what is it and why should we care ?
The GIIN defines impact investments as "investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return” (1). Impact investing covers a wide range of asset classes as well as returns, from below-market to above-market, according to investors' strategic preferences.
The United Nations estimates that, in order to meet the 17 Sustainable Development Goals (SDGs), $3.9 trillion a year will be needed a year between now and 2030 (3). The rapidly growing impact investing market has the potential to provide capital to meet these goals. Indeed, impact investments identifies and makes long-term investments which aim to address the world's most pressing challenges in areas such as renewable energy, microfinance, sustainable agriculture, as well as accessible and affordable basic services, including healthcare, education and housing.
These investments can potentially "have greater social impact than mainstream financial attempts at integrating environmental and social concerns into portfolio management because this type of investment strategy focuses directly on areas of real social need," states Professor Mehrpouya from HEC Paris (4).
Demand for more impact investing
More and more people are becoming aware of impact investment and wish to use their money to make a difference. A report by the Rockefeller Foundation highlighted that retail investors are ready to allocate a larger portion of their assets to impact investments. Indeed, 78% of retail investor respondents were aware of impact investing and 55% of those respondents expected their allocation to impact funds within their portfolios to increase to 6%-20% over the next two years. This clearly illustrates that there is demand for more impact funds (5).
The future of impact investment depends on impact measurement & data
For impact investment to truly be successful, and achieve its great promise of having a positive impact for society it must be accessible, transparent and relevant. While the impact investment market is booming, it still has considerable limitations, the most important one being a lack of efficient impact measurement tools, which hamper knowledge of whether impact investment actually achieves its goals.
The need for more efficient measurement tools
Indeed, today, the state of measurement of impact remains far from satisfactory. Some frameworks and tools exist such as the SDGs, SRS+ and the Impact Management Project (IMP) and have helped build a global consensus on how to qualify, categorize and measure impact. However, impact measurement is still seen as fragmented, and efforts are underway to align leading sustainability and integrated reporting organizations (6).
As such, the increased popularity of impact investment has also brought some skepticism about “impact washing,” or attributing impact to investments when it is not justified. The Rockefeller Foundation, in fact, found that eight out of 10 investors admitted that they find it difficult or extremely difficult to measure impact and are confused about what is a “genuine” impact investment (5).
At present, only a limited number of true impact funds exist on the market. Thus, for the industry to grow over the next decade, it is essential to develop a common language around impact and make improvements in measurements and standards in order to minimise investors’ fears about the integrity of the field (6).
Data is the key to better impact measurement
In his open letter, Fink mentions that data is ever more important to communicate and expose companies’ efforts on sustainability (1). Considering there is no actual standardised form of reporting, it is critical that investment managers provide clear measurement for each investment. Commitment should really be made from institutions to improve the disclosure of data.
Overall, we believe that there is room for improvement for impact investors in the way capital is allocated and returns are measured. While the sector is moving in the right direction to achieve this, SDG Monitor can surely provide some value by filling in the gaps today.
(1) BlackRock. 2021. Larry Fink CEO Letter | BlackRock. [online] Available at: <https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter > [Accessed 27 May 2021].
(2) The GIIN. 2021. What You Need to Know about Impact Investing. [online] Available at: <https://thegiin.org/impact-investing/need-to-know/ > [Accessed 26 May 2021].
(3) Sustainabledevelopment.un.org. 2021. Sustainable Development Goals .:. Sustainable Development Knowledge Platform. [online] Available at: <https://sustainabledevelopment.un.org/?menu=1300 > [Accessed 28 May 2021].
(4) HEC Paris. 2021. Finance with a positive social impact. [online] Available at: <https://www.hec.edu/en/news-room/finance-positive-social-impact> [Accessed 27 May 2021].
(5) Rockefeller Foundation, 2019. THE INDIVIDUAL IMPERATIVE RETAIL IMPACT INVESTING UNCOVERED. [online] Available at: <https://www.rockefellerfoundation.org/wp-content/uploads/FT_Focus-IMPACT_V10.pdf > [Accessed 26 May 2021].
(6) Stanford Social Innovation Review. 2021. The Next 10 Years of Impact Investment (SSIR). [online] Available at: <https://ssir.org/articles/entry/the_next_10_years_of_impact_investment# > [Accessed 28 May 2021].