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by Martin Summers 1st May, 2019
3 min read

What lessons does the boom in impact investing have for other investors?

Impact investing – investments made with the intention to generate measurable social and environmental impact alongside a financial return – is booming.

Over $502bn in impact investing assets is now managed by over 1,340 organisations, according to a recent survey by GIIN – the Global Impact Investing Network – up from under $80bn in 2015

Impact investing and ESG or Responsible Investing are very different, as the former – to put it too simply – is more about intentions and impacts, rather than the application of ESG (environmental, social and governance) disciplines to systematically assess ESG risks and opportunities.

But they are all ultimately about reducing or minimising ESG risks and negative impacts but have different starting points and points of focus.

The many private equity firms committed to ESG can learn some valuable lessons from impact investing. We believe there are three main lessons:

Investors with ESG concerns should appreciate the focus on impacts and benefits when reporting on ESG to investors – and when pursuing ESG agendas in their portfolios

It would seem an obvious truism that it’s better to focus on impacts – rather than inputs or the maximisation of ticks in a due diligence exercise (such as ticks confirming the existence of audit committees, etc.). Moreover,  it’s important to focus on those areas (sectors or technologies or countries) where there is the greatest scope for positive and negative impacts.

But institutional investors’ rapidly increasing demand for ESG data and reporting across their portfolios is – somewhat understandably – incentivising the generation and dissemination of comparable cross-sector data that is relatively easy to collect and measure, such as energy efficiency and basic health & safety data.

This would seem to be at the expense of generating more meaningful and materially-relevant data that is more sector-specific and harder to measure.

For example, water consumption in beer production is important (and easy to compare with other sectors) but arguably less relevant for most policy makers and the public compared to, say, the health impact of product formulation & marketing and messaging to drive more responsible consumption of alcohol.

Investors should take care to ensure that the resource needed to develop and report on portfolio-wide indicators does not preclude the development of more valuable sector or asset-specific indicators.

ESG investors can also learn from impact investors’ focus on measurable impacts

Impact measurement has a long history in the assessment of development aid and, more recently, of certification schemes and voluntary standards. Impact measurement should also be conducted against any fund or company alignment with the UN Sustainable Development Goals.

The ISEAL Alliance – the global membership organisation for sustainability standards – has done important work in this area that impact investors and other investors could learn from in terms of understanding how to measure and report on investments and doing so at a sector-specific and cross-sector level.

Investors can also learn from the burgeoning social value agenda

Social value – the quantification of the relative importance that people place on the changes they experience in their lives (such as that deriving from a new building development) – now has some well-established measurement frameworks, such as the National Social Value Measurement Framework.

Social value is now applied beyond the assessment of proposals for new developments in the built environment to assessing bids for public sector contracts, to determine how a provider might boost local employment or encourage SMEs and social enterprises, for example.

Social value has given rise to a number of tools and metrics (such as those produced by UKGBC) that can, in particular, help investors seeking to measure and achieve positive impacts through investment in infrastructure, housing and other real assets.

Impact investing is a relatively new field, but all investors concerned with pursuing more responsible investment strategies should look to impact investing for lessons. Moreover, all investors should recognise that there is a myriad of well-developed tools and disciplines to help promote investments in activities that generate demonstrable and widespread social, economic and environmental value.

If you would like to discuss impact and ESG investing in more detail, please contact me at martin@gkstrategy.com

 

 

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