Why Impact Investing?

What is impact investing?

All investments have consequences—not just for individual investors, but also for 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.”

Operating Principles for Impact Management

What are the Principles?

Operating Principles for Impact Management (the Principles) describe the essential features of managing investment funds with the intent to contribute to measurable positive social, economic, or environmental impact, alongside financial returns. This goes beyond asset selection that aligns investment portfolios with impact goals (for example, the SDGs), to requiring a robust investment thesis of how the investment contributes to the achievement of impact.

The Principles have been designed from the perspective of an end-to-end process. The five elements of this process are: strategy, origination and structuring, portfolio management, exit, and independent verification. The nine Principles that fall under these five main elements are the key building blocks for a robust impact management system. As such, they aim to ensure that impact considerations are integrated into investment decisions throughout the investment lifecycle.

The Principles may be implemented through different impact management systems and are designed to be fit for purpose for a wide range of institutions and funds. Also, a variety of tools, approaches, and measurement frameworks may be used to implement the Principles. The Principles do not prescribe which impacts should be targeted, or how impacts should be measured and reported. They also complement other industry initiatives, such as IRIS, and green/social bond principles, which seek convergence towards common approaches to impact measurement and reporting.

 

How were the Principles developed?

The Principles were developed by IFC, drawing on its own impact management practices, and consulting with a range of asset owners, asset managers, asset allocators, multilateral development banks (MDBs), and development finance institutions (DFIs), including the collaborating institutions listed in this guide. The Principles draw on emerging best practices across a range of public and private institutions that are investing for impact.

These include MDBs and DFIs that have both financial and development impact objectives, and decades of experience investing for impact in emerging markets.

The Principles also draw on the more recent experience of specialist impact funds and asset managers that have developed robust impact management systems. In addition, they build on industry-wide initiatives around impact management, including the Impact Management Project (IMP).

 

How can the Principles be used, and by whom?

The Principles are intended to be a reference point for investors for the design and implementation of their impact management systems. They may be implemented through different types of systems, which are designed to be fit for purpose for different types of institutions and funds. They do not prescribe specific tools and approaches, or specific impact measurement frameworks. They do not provide guidance on how they are to be implemented. The ambition is that industry participants will continue to learn from each other as they implement the Principles. Each asset owner and asset manager would align their management systems to the Principles. However, the manner in which the Principles are applied will differ by type of investor and institution. Asset owners and asset managers may apply the Principles to the relevant parts of their portfolios. For example, asset owners and their advisors may use the Principles to screen impact investment opportunities. Asset managers and their advisors may use the Principles to assure investors that impact funds are managed in a robust fashion.

 

How does impact investing differ from mainstream investing?

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.

 

Why is impact investing important?

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.

 

What is the potential for growth in impact investing?

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.

 

What constitutes an impact investment?

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. About 400 million people in sub-Saharan Africa live in extreme poverty. The region also has more conflict-affected countries than any other. IFC plays a comprehensive role here.

We help businesses improve productivity and establish links to broader markets, expand financial and social inclusion, and boost prosperity in ways that help limit conflict.

Our investments across a range of sectors help drive the region’s development forward.

We collaborate with other World Bank Group institutions to support agriculture, power, job creation, health, education, and capital markets. Our priorities include bridging the infrastructure gap, helping build productive industries, and fostering inclusive business approaches.

In fiscal year 2018, IFC’s long-term investments in sub-Saharan Africa totaled $6.2 billion, including $4.6 billion mobilized from other investors. Clients supported more than 278,000 jobs, created opportunities for more than 1 million farmers, and treated more than 1.4 million patients.

Source: www.ifc.org

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