How to be Credible as an Impact Investor
Impact investing is all the rage. Experts say it is a strategy worth hundreds of billions of dollars, trillions even. Madame Lagarde, head of the IMF, talked passionately about it at a packed lecture in The City of London’s Guildhall. Clearly, the collective shift by asset management - and by financial services more generally - towards an investment approach that is meant to deliver greater positive outcomes for society and our environment, but can still generate appealing returns for investors, should be viewed as a good thing.
There is already broad agreement that there is a positive correlation between ethical, values driven investment decisions and improved returns. This is also what many retail investors, particularly a younger generation who are starting to invest for the first time, want to see from their investment managers. If they don’t, they won’t put their money with them.
Now this all sound rather encouraging, but one wonders just how deep an understanding of having impact the financial sector actually has. It’s not exactly their traditional modus operandi. There are legitimate concerns around the credibility and commitment some firms are able to provide around impact investing – and just hiring a head of ESG or impact is not enough. It is a welcome start but not evidence of delivering impact in and of itself.
There are two key questions this new wave of so called impact investors need to answer to assuage the sceptics: How do they define impact; and, how do they measure it? They also need to be specific. Unfortunately, neither have easy answers.
Defining exactly what having impact entails is tricky. Some believe it’s making a net economic contribution or growing employment. That seems reasonable but people have been doing that for centuries without attaching an impact label to it. Plus, achieving those sort of results does not necessarily mean wider society is benefiting; a problem that we see playing out in our current politics.
Others believe impact is returning something more valuable to the societies and communities their investments are directly touching. That could mean funding cleaner water, better access to healthcare and education, social housing, renewable energy, more localised development and critical infrastructure, or just not investing in products deemed harmful: guns, tobacco, alcohol and the new super-villain, single-use plastic.
A smart solution to this conundrum would be to collaborate and share ideas. Some agreed, standardised, and importantly universally understood definitions would go a long way help avoid accusations of ‘impact washing’. A handful of firms have been impact investing for decades and have a lot to offer the industry as a whole. They just need to be willing to talk publicly about what they’ve learnt, and others prepared to listen.
Measuring impact is difficult too, and arguably more sensitive from a competition perspective. Some firms have developed their own proprietary metrics to assess the impact of their investments and portfolios, often related in some way to the UN’s sustainable development goals. But not many methodologies are made public.
From a transparency and reputational standpoint, there is a lot to be gained by going open source with your methodology to measure impact. You can help lead, shape and influence the industry standard now and into the future, and you can allow peer review to strengthen your overall approach, which should also mean better commercial performance.
Of course, being open with commercially sensitive definitions and metrics will feel strange and it takes some courage to do. But it is starting to happen. An initial group of 60 investors have just signed up to the International Finance Corporation’s admirable attempt to deliver an industry-wide approach. They should all be commended for that.
But, ultimately, there is still a long way to go for most in financial services. If other money managers and late comers to this impact trend want to overcome the credibility and commitment test, they too are going to have to get into the sharing spirit.