ESG Investing

What Are the “Core Characteristics” of Impact Investing?


As sustainable investing attracts more capital, some worry that financial firms may try to exploit that success through “impact washing,” promoting offerings whose social or environmental impact goes no deeper than marketing. In fact, in its 2018 investor survey, the Global Impact Investing Network (GIIN) highlighted “industry integrity” as a key consideration.

With that in mind, in April 2019 the GIIN introduced what it calls the “core characteristics of impact investing.” These four fundamental practices are intended to provide clarity around the nature and aims of the industry, with an eye toward “scaling the market with integrity.”

1. Intentionally Contribute to Positive Social and Environmental Impact

Intentionality is about making a concerted effort to focus on socially and environmentally oriented investments. Doing so requires establishing transparent goals and developing an investment thesis to achieve those objectives.

It is an imperative other investors embrace. Take Jonathan Needell, president and chief investment officer of Kairos Investment Management, who was quoted in Pensions & Investments: “impact implies that you are more proactive around a theme,” he said. “Impact has to be embedded in your strategy.”

2. Use Evidence and Impact Data in Investment Design

The second core characteristic calls for investors to draw on high-quality quantitative and qualitative data in designing investments. This entails identifying a need backed by evidence, as well as using data to set targets and indicators for gauging performance. Such an approach could boost investor trust; 80% of respondents to the GIIN’s 2018 survey said that improving transparency around impact investing strategies and results would help reduce the risks of impact washing.

But according to the GIIN, an identified need also should be supported by the community the investment targets. A recent report by the International Finance Corporation (IFC) found that investors often identify a priority that is not necessarily one the intended community would choose. For example, investors may target providing clean water in an underserved area, while residents place more importance on employment. “Incorporating the voice of the beneficiary is increasingly a key aspect of many investors’ approaches to impact measurement,” the IFC report said.

An identified need also should be supported by the community the investment targets.

3. Manage Impact Performance

Robust data is also important for managing active investments, from identifying risks to reporting outcomes. By disclosing their reporting methods, impact investors can demonstrate their bona fides, say industry experts. One approach is to use thematic reporting for environmental, social, and government (ESG) risks in such areas as fossil fuels and gender diversity, according to Bob Smith, co-founder, president, and chief investment officer of Sage Advisory Services. “What services and methodologies do you have to manage risk and construct portfolios that are focused on these specific themes or objectives?” he said in FundFire.

There are many systems for measuring and reporting impact. One notable example: in May 2019, the GIIN introduced IRIS+, a new version of its widely used system with core metrics around such themes as financial inclusion, health, and housing.

4. Contribute to the Growth of Impact Investing

The final fundamental practice involves everything from committing to using standard approaches to sharing nonproprietary information.

For many investors, relying on trusted third parties who can vouch for an investment’s validity and following standardized practices are critical to combating impact washing. According to the GIIN, 41% of impact investors favor “third-party certification of what qualifies as an impact investment,” while others support “shared principles” or a “code of conduct.”

A report published by the Organisation for Economic Co-operation and Development (OECD) earlier this year discussed another party that can play an important role in setting standards: policy makers. “Policy makers as market regulators must ensure impact is not just a marketing brand,” the OECD said.

Ultimately, the GIIN’s “core characteristics of impact investing” are part of a larger effort to create a set of standards that can help give the industry the stability it needs—from its basic identity to its wider credibility—to keep growing. This spring, the IFC published nine principles for impact investors broken down into an end-to-end process with five elements, including strategic intent, origination and structuring, portfolio management, impact at exit, and independent verification. And in March 2019, in an effort both to curb impact washing and boost sustainable investing, the European Union agreed on uniform standards for how financial firms should disclose environmental and social investment risks and opportunities.


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