All investments have consequences—not just for individual investors, but also for whole communities and for the economy at large. In addition to creating financial returns for the investor, investments can create jobs and expand the provision of goods and services. They may also have positive and negative effects on society and the environment.
Investors increasingly recognize the need to avoid negative effects and to follow international norms and principles designed to address Environmental, Social and Governance (ESG) risks. Some investors avoid investments in specific industries that they see as causing harm—for example, tobacco and gambling. Impact investing goes well beyond avoiding harm and managing ESG risks. It aims to harness the power of investing to do good for society by choosing and managing investments to generate positive impact while also avoiding harm.
Impact investing can be defined as “investments made into companies, organizations, vehicles and funds with the intent to contribute to measurable positive social, economic and environmental impact alongside financial returns.”
In today’s capital markets, there is a broad universe of investors who seek to do good or avoid harm. These range from those who negatively screen for ESG risks, to those that actively seek ESG opportunities, to those who seek positive social, economic, and environmental impacts across their portfolios.
Impact investing adds a second objective to managing an investment portfolio. In addition to aiming for financial returns, the impact investor also aims to achieve positive impact on targeted social, economic, or environmental goals. This requires integrating impact considerations, alongside financial considerations into the portfolio’s investment strategy, into decisions about whether to buy and sell assets, and into the information and data that investors monitor and manage.
As with other forms of investing, impact investors have different appetites for financial risk and different targets for financial returns. They may also target different impact goals, and scale of impact that they aim to achieve. Investing for impact does not imply having to sacrifice financial performance—an important consideration for investment managers who have fiduciary duties to their investors.
Foundations and philanthropic organizations, development finance institutions, and specialist impact fund managers were the pioneers of impact investing. Today, a much wider range of asset owners is seeking to achieve impact with their investments. To meet this demand, asset managers increasingly offer impact investment products alongside their mainstream investment products.
One segment of the impact investing market focuses on investments in social enterprises, or social enterprises that have explicit intent to achieve impact. However, many impact investors also find opportunities to achieve impact by investing in commercial enterprises that may not, themselves, have the intent to achieve impact. For this reason, the definition of impact investing rests on the investor’s intent to have impact, not on the intent of the investee enterprise.
Investors are increasingly looking to invest with impact, and this is especially the case with women and millennials, who will control a greater portion of wealth in the coming years. A growing number of investors are adopting the Sustainable Development Goals (SDGs), and other widely recognized goals such as COP21, as a reference point to illustrate the relationship between their investments and impact goals. Within these global frameworks, private investors have been identified as a critical source of funding.
Global assets under management (AUM) in 2016 amounted to close to $100 trillion. Directing some of these assets into impact investments provides an opportunity to take sizable steps towards the achievement of global goals such as the SDGs. The market for impact investment—currently estimated at $228 billion AUM—is still relatively small, but is scaling up. However, the growth trajectory for impact investing shows significant momentum, with the industry growing fivefold between 2013 and 2017. And more than a quarter of AUM worldwide already are held in socially responsible investments that take account of Environmental, Social, or Governance (ESG) issues—a first step to financing with positive impact.
There is a compelling case for impact investing: doing well by doing good. The question for many investors is how to capitalize on these opportunities. What is needed to facilitate a higher percentage of investments that target impact? What are the gaps that need to be filled?
Despite greater interest in impact investing, and more product launches claiming to target impact, there is no common discipline for how to manage investments for impact and the systems needed to support this. This has created complexity and confusion for investors, as well as a lack of clear distinction between impact investing and other forms of responsible investing.
Having a common discipline and market consensus on how to manage investments for impact will, for example, help asset owners differentiate impact investments from other opportunities, and enable asset managers to follow best practices in managing funds for impact. The Principles have been developed by a group of asset owners, managers, and allocators to enhance discipline around impact investing, mobilize more funds for impact investments, and increase the potential impact that such funds could achieve.