Impact investors seek to contribute by providing funding to achieve solutions – and generate positive outcomes for people and planet. They see themselves as ‘doing well by doing good’ – and invest with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investors are therefore a potential powerful force to shift corporate purpose towards sustainability - and corporate behaviour from being a fundamental part of the problem towards contributing to a sustainable future. Climate change and increasing global inequality underline the necessity for change.
No longer a niche market, these investors include a diverse group of individuals as well as institutional investors and pension funds, and their investments span a range of asset classes including public and private initiatives, equity and debt, and infrastructure. The industry has grown significantly – in 2020 the Global Impact Investing Network held a database of 1720 investors with USD 715 billion assets under management. In the paper we will present at the Daughters of Themis Corporate Purpose Conference on 16 April, we investigate the potential for impact investment to support a shift towards sustainability-oriented corporate purpose and current limitations to realising this potential.
Creative disruption: a multi-stakeholder model
Impact investing aims to pursue positive outcomes for people and planet alongside financial rewards. It is often presented as a key feature of Multi-Stakeholder Capitalism – looking beyond a shareholder primacy model with the goal of social and environmental benefits for a broad range of stakeholders (Heath et al., 2020). Indeed, a variety of projects are supported by impact investors in the UK: social housing; green and sustainability bonds; lower carbon construction materials (e.g., concrete); waste treatment and recycling businesses; microfinance; private Emerging Markets Infrastructure (e.g., gas power station, water management); place-based impact investing.
A ‘transition mindset’
Key features of impact investing are presented as intentionality, positive and measurable social and environmental impacts, financial return and, importantly, engagement and a patient approach regarding financial returns. Pension funds are big pools of capital that show the potential to become leading impact investors. Operating on the basis of fiduciary duties, they are expected to adopt a ‘transition mindset’ in which they manage risks and seize opportunities presented by changes to specific assets or sectors and/or from macro or systemic developments:
‘seeking financial opportunities by identifying companies that may be more resilient, future-fit and able to benefit from the shift towards more sustainable economies as a result of their positive impacts’. (Impact Investing Institute: Impact Investing Principles for Pensions).
This requires impact investors to manage and review the impact of their investments with integrity by monitoring progress, identifying relevant indicators and benchmarks, and pursuing a stewardship role, engaging and voting to make change.
Supporting the corporate purpose paradigm
Purpose matters for trust, legitimacy in the corporate and financial markets and is relevant for investors and investees. However, the question remains: can impact investors contribute towards the pursuit of corporate purpose and a multi-stakeholder model?
In the context of impact investing, purpose requires investors and investees to ask why they are pursuing their particular goals and investments? The investor may be concerned to establish whether the investor’s and investee organization’s purpose correspond with each other? Will investing in the organization help to achieve the impact investor’s purpose within a transition mindset? If the answer is yes to any of the questions, the impact investor may be confident in their investment. The investor might also collaborate with the investee organization’s stakeholders to support it as a purposive enterprise by engaging, voting and following a stewardship role.
How can impact be measured?
Yet, how can we be certain of the efficacy of impact? Some progress has been made in measuring impact. The Impact Measurement Project (IMP) has done valuable work in looking at measurement. It sees impact measured across five dimensions:
- What tells us what outcome the enterprise is contributing to, whether it is positive or negative, and how important the outcome is to stakeholders
- Who tells us which stakeholders are experiencing the outcome and how underserved they are in relation to the outcome
- How Much tells us how many stakeholders experienced the outcome, what degree of change they experienced, and how long they experienced the outcome
- Contribution tells us whether an enterprise’s and/or investor’s efforts resulted in outcomes that were likely better than what would have occurred otherwise
- Risk tells us the likelihood that impact will be different than expected.
IMP also coordinates the Structured Network – a global collaboration of organisations to provide harmonised standards for impact measurement, management and reporting. Recent developments at a regional and international level promise more transparency through regulatory reporting – with new initiatives from the IFRS and IOSCO, and an extension of the EU Non-financial Reporting Directive.
Blending, cherry picking and ‘impact washing’
Alongside the challenges related to measurement and reporting, there are also other issues that may limit the potential of this growing investing industry. Impact investing can be characterised by blending: blended goals of financial return and positive social or environmental outcomes; blended collaborations of public and private actors; blended portfolios that mix of financial and social or environmental goals; or funds that blend a variety of causes. This blending risks ‘goal dilution’ (Caseau and Grolleou, 2020), where outcomes either are not being fully achieved or having only limited benefit in terms of scope or time.
Other potential challenges include cherry picking and subjective goals of investors following their own emotions and personal values (Roundy, Holzhauer and Dai, 2017), as well as mission-drift towards more financial goals. This leads to the risk, as identified by the OECD (2019), of some issues being left without access to funds and a lack of balance in addressing the world’s problems. Reflecting this is the fact that some UN Sustainable Development Goals tend to be favoured over others despite the fact that they are interconnected. Unless meaningful targets are addressed, we could be left with ‘impact washing’ which further threatens the integrity of impact investing, as does the lack of standardised or coherent measures on impact outcomes.
These are challenges to acknowledge and address. Notably, until measuring impact has become more rigorous, with a common language and verifiability, with robust reporting and disclosure, there remains a risk of impact washing and reduced strength of accountability and governance. These, and other challenges, also stand in the way of the goal of scaling with integrity.
There is much cause for optimism. Impact investors have great potential to change the shape and expectations of investment and to contribute to corporate purpose - but further progress is needed. We are excited by recent momentum and look forward to the next stages – always mindful of the challenges ahead.