According to data from Principles for Responsible Investment (PRI), more than 450 investors allocated US$1.3trn to impact investments worldwide in 2016, and the increasing demand for impact investing products and services has opened a new commercial avenue for asset managers, fund managers and service providers interested in this growing market.
Part of this growth is driven by the changing profile of wealth distribution. Globally, we’ve started seeing a huge transfer of wealth to women and millennials. According to the Boston Consulting Group, women are likely to hold $72trn of private wealth by 2020; that’s about a third of the global total, and more than twice as much as they held in 2010.
Similarly, UBS estimates that $7trn globally will pass into the hands of millennials between 2017 and 2020. This is significant because research suggests that both women and millennials are more likely to invest in line with their values. Typically, when asked about their investing strategies, a majority of women and millennials indicate that they want to invest with purpose and that social and environmental concerns, for example, are extremely important to them.
Social impact investing offers financial exposure to the many organisations that carry out socially valuable activities, from providing clean water to fighting poverty and encouraging healthier lifestyles. Its emergence echoes the trajectory of a better-known counter-part, focused on environmental, social and governance (ESG) investing. That market has seen billions of dollars of inflows in recent years, reflecting changing attitudes across society.
For social impact investing to be set along the same path, appealing to a broadening range of investors and savers, the market must address some tough challenges, including the need to cement its unique identity and develop a set of tools to support growth, educate consumers and raise awareness.
A recent article in CNN Money noted that Michael Baldinger, head of USB Asset Management’s sustainable and impact investment, referred to impact investing as a “$250-billion market and it’s growing fast. It might really be a game changer for the finance industry.” He further noted: “In the past you sold products to your client, now you empower your client to create a desired impact.”
Trustee and asset-owner boards can guide an executive towards impact investments and fiduciary goals. They can also improve organisational strategies related to impact investments, the circular economy, sustainability and the UN Sustainable Development Goals (SDGs). And they can further improve their compliance and understand the regulations or certifications related to thematic investments.
But there are still many gaps and issues that need to be addressed. For example, there is a lack of a common language as well as definitions of impact investing and in areas such as energy efficiency, affordable housing and inclusive finance. This variation makes it difficult to identify benchmarks and best practices. As a result, the current impact investing landscape is broad and fragmented.
The lack of uniform definitions, market concepts and methodological baselines ultimately creates a difficult environment in which to assess the quality and relevance of impact investing products and services. This causes challenges for institutional investors interested in investing in this field.
Maps and investors
In order to address these challenges, the PRI launched the Market Map to bring more clarity to the process of identifying impact investing companies and thematic investments. It is the first tool available in the market to support asset owners, fund managers and companies identifying opportunities in this industry, as well as providing relevant information on common definitions and methodologies of ten types of thematic investments. The methodology for the market map was designed using common definitions, methodologies and market practices established by international organisations such the UN, the World Bank, Netherlands Development Finance Company (FMO), International Finance Corporation (IFC), OECD and market leaders including MSCI and FTSE.
The Market Map focuses on medium and large impact investing companies (privately owned or listed equity firms) in the real economy. The thematic investments that it examines are: energy efficiency; green buildings; renewable energy; sustainable agriculture; sustainable forestry; water; affordable housing; education; health; and inclusive finance.
The Market Map provides five main benefits to the investment community:
- A common language of impact investment themes;
- A basic and practical methodology that can be used by asset owners, asset managers, fund managers and organisations interested in mapping and identifying companies that generate revenues based on one or more investment themes;
- Resources to asset owners interested in discussing how asset managers and fund managers design and manage their impact investing funds;
- It helps asset and fund managers to collect, measure and report on basic and common impact investing metrics used by market leaders and international organisations; and
- It aligns impact investing companies and themes with core SDG targets and indicators.
Boards can use tools such as the Market Map to develop a strategy for impact investing within their organisations. It is a great opportunity for them to steer the organisation towards projects that provide a social or environmental benefit while also creating a return on investment. They can, therefore, play a vital role in advocating for impact investing.
Regarding business sustainability, impact investing concepts and frameworks help board members to assess investment opportunities in thematic areas such as affordable housing, inclusive finance, health and identity and, most importantly, better manage the potential pitfalls related to an organisation’s fiduciary risk.
Looking long term, impact investing helps the board to improve the company’s strategy formulation by providing a sense of purpose beyond profitability, and help the company establish a sense of connectedness to the communities in which it operates. Impact investing can further send a strong message to staff that the organisation prioritises environmental, social, and governance (ESG issues as well as the SDGs).
In this sense, board members can use impact investing concepts and tools to make the board more effective and create positive disruptions in the organisation, making it more resilient and sustainable in the long run.
Regulations and incentives
The Market Map includes crucial questions that every board member should consider when engaging with the executive and designing organisation’s impact investing strategy. The 17 SDGs are helping to drive impact investing as companies seek to find solutions that ensure returns while also helping to promote long-term growth strategies. They provide a useful framework against which to measure the impact an investment may have in relation to the achievement of the goals.
At the same time, governments across the world are introducing regulations and incentives to promote the SDGs, and companies are adopting more sustainable business practices and seeking to innovate to deliver sustainable products and services.
For example, French law requires asset owners to disclose how they are assessing carbon risk, while the 2016 version of the UK Corporate Governance Code, published by the Financial Reporting Council, asks company boards to consider strategy beyond a minimum of 12 months.
This demonstrates an interest in wider long-term benefits over the narrow aim of short-term financial reward, an approach perfectly suited to long-term investment vehicles such as pension funds. With regulators increasingly determined to align business/investment practices with the interests of society, investors with a long-term outlook should be giving serious consideration to joining governments and businesses on this journey.
If boards do not have experience or in-depth knowledge of impact investing projects, or are resource-constrained, there are external providers and consultants who can help to tailor an impact investing model that is right for their organisation. Boards could choose to partner with established community programmes, for example, supporting educational opportunities or entrepreneurship in the city or the area where their business is located. External advisers can also point out any risks to the investments that boards and senior managers should be aware of.
Impact investing provides a great opportunity for boards to steer their organisations towards projects that provide a social or environmental benefit while also creating a return on investment.
Fiona Reynolds is chief executive of Principles for Responsible Investment (PRI).