Impact Investing - Fact or Fiction?
Is Impact Investing a form of Philanthropy or Investing?
As we continue to march towards global problems on climate, fresh water, food, jobs and income (as per the World Economic Forum's Global Risk Reports) among other environmental and social issues of concern, a recent lens which has emerged is that of so-called Impact Investing.
An example of this would be say a First Nation in Canada receiving funding for a wind farm. Such would provide a local benefit, an environmental benefit from a lower footprint of energy generated and used, and a financial benefit.
This lens has received much attention, with the same World Economic Forum seeing US$50B in assets invested in such a manner, and calling for this to grow to US$1T to help fix problems such as those listed above.
There is one big problem with this.
All companies (and all of us individually) have both positive and negative impacts, and the value of investing in large companies is in the hundreds of trillions of dollars when you look at the value of all assets. This makes so-called Impact Investing less than a drop in the bucket as the construct totally ignores over 99% of the value of other assets including all of the world's largest companies.
Only $10B of new investment went into Impact in 2014 according to JP Morgan's most recent report on the subject.
Efforts that seek to only measure positive impacts make no impression then, because there are potentially significant negative impacts which could more than outweigh positive minded efforts, and so the first thing to say is that net impacts need to be measured across all environmental and social areas of concern.
By estimating the material nature of the positive and negative impacts, and calculating the net benefit or loss, one can see if a company truly is creating positive impacts from an overall standpoint. Efforts to just focus on the positive can therefore easily otherwise become just one more form of greenwashing.
That's the first thing to say. The second is how do you actually measure environmental, let alone social impact benefit if not through an Impact lens?
Actually, that's pretty simple if you think about it.
Environmental impacts are typically negative and can be listed - greenhouse gas emissions are a negative as accumulate in the atmosphere and cause potential global warming with related effects.
Therefore, companies can be evaluated on how environmentally efficient they are. This requires goal setting, measuring over time, and reporting and forecasting. See our Value Driver Model work at the UN Global Compact and Principles for Responsible Investment (PRI) Publications websites for case studies, a report and toolkit, for one example.
Efforts to reduce impact can be considered and ranked, and encouraged.
Strategies can be considered, and metrics on progress as our Model shows can be followed.
Fortunately, the post-2015 UN agenda & PRI ESG Integration efforts have been encouraging just this, but with all of the focus on Sustainable Development Goals, and Climate Week in New York City now underway, specific solutions strategies can get a bit lost.
From a social perspective, however, it is the opposite case - positive benefits such as job creation, income equality, human rights remedies, supply chain minimum standards and much more need to not only be positively encouraged, but can be measured in terms of increased efforts, strategies and specific impact categories.
Here is where Impact has had some utility, providing access to healthcare, financial services and education for the poor, but isn't this just another form of philanthropy? Some companies do try to rise up to solve societal problems and that is certainly welcome.
B Corps attempt to just that, for example, being scored on their Community benefit, Employee relations, Governance and Environmental considerations, on a Scale from 0-200, with 80 being a minimum Score to get certification.
And so the Impact Investing lens isn't quite what we need, much as it is interesting and we can learn from it. This helps explain the ongoing scaling challenge this construct has faced, as the basic foundation is wrong. Its fine for philanthropists to use an Impact lens to guide some of their investments, but is it really anything more than asking for a return on what would otherwise be a charitable donation, and so is Impact Investing merely a less charitable form of giving?
Lets applaud the utopian vision of Impact Investing, but also recognize that all companies need to pass through this lens. Impact Investing is not separate, neither is Sustainable Investing or Responsible Investing. There is only Investing.
Companies need to minimize their environmental impacts, while maximizing their societal benefits, and can demonstrate progress on both, while maintaining if not maximizing financial returns.
Let this be a lens then for which all companies can compete on, be measured by, and succeed or fail accordingly for the benefit of society and shareholders alike. Lets also applaud philanthropy for the important role it plays, but not exaggerate what it is and is not.