Moving from its current status to a more mainstream one is not just a matter of bragging rights for impact investors. To address urgent social and environmental problems, impact investing needs to grow more. Reaching the United Nations’ Sustainable Development Goals requires an estimated annual global investment of $3 trillion to $8 trillion, and that means impact investing must move closer to the mega-scale of conventional assets.
What will it take to move impact investing from niche to mainstream? Among the various developments industry players are working on, the following three are among the most critical.
Impact investors need to develop standardized methods to measure both financial and nonfinancial returns. Without a consistent approach, investors cannot evaluate whether they are delivering impact effectively or making informed decisions. Plus, reliable, comparable metrics can help build greater transparency and accountability in impact investing. In turn, this could attract more interest among potential investors, according to Fran Seegull, Executive Director of the US Impact Investing Alliance.
While several universally accepted metrics assess business performance, no comparable impact measurement approaches exist for social and environmental results. For one thing, creating a uniform measurement system is highly complex—from impact initiatives’ unique characteristics to the preponderance of approaches already proposed from key industry players.
Still, efforts are under way to tie these solutions together. For example, the Impact Management Project was formed in 2016 to coordinate impact measurement standards in private equity investments. Also, the Rise Fund and the Bridgespan Group have developed a six-step methodology to estimate the potential return on an impact investment, which they refer to as the “impact multiple of money.” This methodology determines the financial value of the social and environmental good that is likely to result from each dollar invested.
Consistent measurement is also key to building the market’s credibility. Consider the basic matter of definitions—there is no single agreed-upon understanding of what impact investing means, which causes confusion among potential investors. Fortunately, multiple organizations are trying to produce uniform definitions and principles. For example, the Global Impact Investing Network (GIIN) has published a four-fold definition of the “core characteristics” of impact investing. In 2019, 60 investors and institutions managing $350 billion in impact investment assets adopted the Operating Principles for Impact Management, nine principles for what constitutes an impact investment.
Then there is the problem of “impact washing,” the use of impact investing as a marketing ploy to raise money or enhance a corporate profile without delivering real impact. To address this practice, leaders are calling for a concerted effort to increase transparency. In the GIIN’s 2018 Annual Impact Investor Survey, 80% of respondents pointed to a need for more transparency around strategies and results.
Finally, while a growing number of business schools have expanded their impact investing curricula, providing a critical path toward greater industry credibility. Though gaps remain in educational infrastructure around impact investing, many schools continue to refine and grow their foundational offerings. More universities are also offering impact investing clubs and undergraduate courses.
A third factor hindering further growth is a lack of products for a wide range of investors. Just 25% of sustainable investments are held by retail investors, according to the 2018 Global Sustainable Investment Review. To “propel a long-term shift” toward impact and “translate . . . latent demand . . . into a higher volume of activity,” the GIIN’s 2018 Roadmap for the Future of Impact Investing calls for an expansion of products for retail investors and institutional investors.
At the same time, more choices for individual investors are becoming available. According to Morningstar, the number of environmental, social, and governance (ESG) funds continued to increase in recent years. In addition, new digital platforms for retail impact investors are emerging.
Of course, these are not the only issues that need to be addressed for the impact economy to enter the mainstream. For example, experts point to the need for more public policy innovation. “Embedding impact investing principles in major areas of the economy such as government procurement, trade agreements and stock exchanges” is key, according to Jonathan Wong, Chief of Technology and Innovation at the United Nations Economic and Social Commission for Asia and the Pacific.” That is where government can play that role in moving this to a massive scale.”