Jackie Robinson, an American professional baseball player who became the first African American to compete in Major League Baseball once said ‘A life isn’t significant except for its impact on other lives’. Impact is nowadays a quintessential component of our society and more recently, the recurring mantra for investors, who rank it at the same level of importance as returns. Impact investment per se already features in the sustainable investing dictionary; it is the most ambitious and fast growing sustainable investment strategy. Impact investors represent a special category of investors as they simultaneously seek quantifiable measurement of their investment impact, coupled with financial returns.
It Is Hard to Make an Impact
The social and environmental challenges our society faces today call for organisations that can tackle these obstacles in a flexible and innovative fashion. Social enterprises and social purpose organisations (SPOs) do this through the implementation of new business models. They represent increasingly vital actors in the sustainable investment space, and they can drive real change. There are some pressing challenges facing these organisations, such as a lack of stable funding or capacity, as well as uncertainty in their partnership models. But social investors seeking returns and impact choose SPOs. Systemic change is achieved through growing impact, and so this has gained traction among social investors over the past couple of years.
These investors rely on a mix of financial models to help them achieve their goals. There is an increasing reliance on blended finance options, coupling development finance such as grants, donations, or micro-loans, with more traditional financial instruments. The risk-return profile of their projects is therefore shifted and can become more attractive for commercial investors. Blended finance can also help in mobilising additional finance towards Sustainable Development Goals (SDGs), as highlighted by the OECD in a recent publication.
The Value of Impact Metrics
If aiming for impact is a noble goal, measuring impact remains a headache. The evaluation of the impact of an investment is only the last phase of the investing framework. Research conducted by the Harvard Business School defined three more phases in the framing of impact: the estimation phase, the planning phase, and the monitoring phase. After completing the due diligence work to assess the potential social return during the estimating phase, the planning phase looks at defining the actual metrics which will allow for a final judgement. Most importantly, the research also highlights that there is little similarity between the different measurement methods used by investors, and therefore no way to classify them.
The European Commission is finalising its blueprint for an action plan on sustainable finance. This is part of its commitment to better integrate sustainability through ratings and research. The aim is to produce a study on sustainability ratings and research in the second half of 2019, which will play a concrete role in clarifying definitions and metrics. This work is much needed, as investors require as much guidance as possible in their investments. Redirecting more and more capital to sustainable projects can only happen after these necessary clarifying and standardising steps have taken place, as part of de-risking this category of investment and strengthening its credibility. In the current circumstances, characterised by an absence of clear and agreed metrics, there is nothing which enforces compliance with an investor’s impact objectives. There needs to be a mechanism in place to create alignment among all players in the impact value chain. If this does not happen, we will be faced with a race to the bottom, which will never lead to ambitious impact goals being met.