Impact investing is making waves in the financial world. Based on the idea that asset managers invest “to positively contribute to social or environmental solutions”, the strategy has already attracted some big-name fund managers.

This week came news that impact investing has reached a major milestone. The Global Impact Investing Network (GIIN) said the latest research showed that impact assets under management are now valued at $502bn. That’s roughly the same as the economy of Belgium.

Financial writers and observers are quick to rave about impact investment and its growing importance. After all, it’s one of the fastest growing areas of the fund management industry and it is aimed at doing good. It’s good for business and reputations.

So what implications will this have for board members who have to answer to asset managers?

It’s interesting to note that though GIIN says the impact market has become “increasingly important”, its size is still small compared with the total $85trn under management globally. That figure is expected to grow to $145.4trn by 2025, according to professional services firm PwC.

But impact investing represents a growing trend among fund managers to direct their activities towards societal good. This is driven, not least, by the UN’s Sustainable Development Goals which, together with the financial crisis, had focused minds on how institutions rebuild trust in business.

Writing for Board Agenda, Fiona Reynolds, chief executive of Principles for Responsible Investment, says: “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.”

According to Reynolds and GIIN, impact investing is especially popular with women and millennials and is now generating large sums of capital to be managed. That money needs a home, which means companies coming under the microscope as they are scrutinised to see if their stocks can provide an appropriate destination.

Boards interested in pleasing impact investors will need to be clear on two things, according to David Shammai, corporate governance director (cross-border) with consultancy Morrow Sodali: knowing how the shareholders on your register are interested in impact investing; and how their reporting and disclosure activities would support a claim for impact capital.

He adds, however, that there is good news in the impact approach because it represents an “upside opportunity” for boards and shareholders alike.

“When you talk about traditional ESG [environmental, social and governance investing], it’s about optimising and controlling risk associated with non-financial factors,” says Shammai.

“With impact its all about the upside, and that’s true from the perspective of shareholders, who are looking to show their clients that their portfolio has a positive impact. And it’s true also for boards and for companies to be able to demonstrate they have societal and environmental impact with their activities and their products.”

Measuring impact

According to Suwen Chen, a researcher at Edinburgh University exploring impact investing, boards can expect increased engagement on impact issues.

She agrees it means thinking about the kind of information that will be presented to investors. That’s tricky because the process of defining impact measures is in its infancy. Some investors have clearly defined their own metrics, but they are far from being standardised.

The point is echoed by David Shammai when comparing interest in ESG measures with their close cousins in impact investment.

“The challenge for boards is that we sort of understand how ESG works and what ESG risks look like—we have some issues to refine, so it’s not settled—but we understand what we’re talking about,” says Shammai.

“With impact we are just starting to see the emergence of a taxonomy and reporting frameworks.

“When we talk to clients, that is the main issue boards are facing: to understand how their investors are looking at impact, how they are measuring and, therefore, what the board can do in order to be helpful shareholders in understanding how ‘impact’ is created by the company.”

Displaying your ‘impact’ credentials is, therefore, an issue. This is helped to some degree by the use of UN SDGs as a framework for modelling impact. However, the SDGs present broad brush principles and offer little by way of detail on what impact activity might look like, or how it might be measured.

Suwen Chen issues a warning here on seeking to ostentatiously display impact qualifications—“impact washing”.

“If everyone labels things with the word ‘impact’ it may dilute the concept a little bit. We need to be careful,” she says.

There is one other issue boards might consider before sitting down to make their claim to impact status. Chan believes impact investors might increase the demand for more diverse boardrooms.

“If you are doing impact, you need to have knowledge of specific areas in the boardroom, to communicate with investors and to make sure you have impact in that field,” says Chen.

The GIIN expects impact investing to continue growing, and this week published a comprehensive definition of its core characteristics to help its expansion. Board directors would do well to take note.