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Why is impact investing suddenly so hot?

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If you’re like me, it seems like the phrase “impact investing” is everywhere these days – outside of COVID-19, it has become this year’s must-have investment strategy. Unleashing the power of money for good has suddenly become the rage.

New investment funds with an impact focus are launched weekly, not just in the US but in Australia, Singapore, China, and beyond. Celebrities such as Lady Gaga, Matt Damon, and Serena Williams are investing in companies that are “doing well by doing good”.

Even the asset management and private equity big boys such as Black Rock, Goldman Sachs, and KKR have launched funds focusing on impact investments in the past year.

But it wasn’t always this way … In fact, just a few years ago, for civilians not working in the investment world or at specific NGOs, impact investing was a euphemism for charity or signified investments in companies that did good things but didn’t make any money.

This was certainly my view. But rather suddenly, that’s not the case anymore.

So what’s changed?

What is impacting investing?

Let’s begin by defining what impact investing is. The Global Impact Investing Network (GIIN) succinctly defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.

This is a small but important difference from impact investing’s predecessors – socially responsible investment (SRI) and environmental, social and governance (ESG) – which focus primarily on philanthropy and/or companies avoiding doing harm. Neither of these is bad by any means, but they are different from impact investing’s twin goals of:

  • Deliberately deploying capital to address specific social or environmental objectives, AND
  • Generating financial returns.

Lately, this specific focus has struck a chord amongst corporate, institutional, and individual investors. In their latest global survey, GIIN estimates that US$502 billion in funds were deployed in impact investments by the end of 2018, roughly double the amount from the previous year. As we enter the new decade, there’s no reason to think this trend is going to change – we can count on more capital being deployed with an impact focus.

So, again, why the sudden change? I believe this shift is due to the recent convergence of three key elements:

Awareness

First is awareness. Over the past few years, (almost) all of us have grasped the size, scope and urgency of the problems we’re facing on the planet. It’s not just rising temperatures, but it’s rising water levels, radical shifts in weather patterns, lack of clean drinking water or air to breathe, diminution of species, dying bees, decimated koala populations and plenty more.

And it’s more than just a Greta Thunberg moment, we are all increasingly aware of the nearly eight billion people living on our planet and their subsequent impact. And as a response, rather than dismay and resignation, more people and institutions are looking at ways they can actively help.

Common plan of action

The second element was the establishment of a common plan of action: More specifically the 17 Sustainable Development Goals (SDGs) agreed upon by the members of the United Nations in late 2015. The SDGs, as they’re known, set quantitative and qualitative targets and delivery timelines for impact-focused action through 2030.

Sustainable Development Goals (SDGs)
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From eradicating poverty (Goal 1) to ensuring the availability and management of clean water access (Goal 6) to combatting climate change (Goal 13) and others. The SDGs – and their associated targets and actions – provide a common roadmap and paths for tackling many of the world’s biggest problems.

These goals provided a well-needed definition and framework, moving us from confusion over what we can do to a set of defined paths for action. In short, the SGDs provided a focus or framework for action, an organised methodology.

This doesn’t diminish any of the important work done prior to the SDGs, it’s simply that by establishing these goals, the UN has helped to focus and standardise the problem and solution sets so they can be addressed by more people globally.

And this has been surprisingly effective. Unlike many previous multinational proclamations, the adoption and subsequent application of the SDGs have become business planning requirements for a broad spectrum of users. From cities to countries to universities, large corporations, SMEs, etc., a cursory glance shows that project planning, budget allocation, and product design are taking these guidelines into account.

On a more personal scale, I see this in my work with Asian startups looking for investment and pitching at competitions. I’d say half the 400+ early-stage companies I reviewed over the past year in Southeast Asia have indicated which SDG(s) they are addressing in their business plans and company pitches.

Not as investor-attractive buzzwordy add-ons (“Now with Blockchain!”), but as an integral part of their solution and product offering. This is new; you didn’t see this a couple of years ago.

Measurement

The third component of this new impact model is measurement. Until recently, impact investing had suffered from the lack of an effective way to measure success.

While we’re all familiar with financial statements and how they can help us understand the financial health of a company, there was no corollary for impact investing.

In order to become viable on a large scale, impact investing needed the equivalent of what the Generally Accepted Accounting Practices (or GAAP) were for accounting. A global methodology of measurement and evaluation that could provide investors with a needed way to understand if their investments in clean air, gender equality, or education were successful.

One such solution has been developed by GIIN and partners over the past decade. Called IRIS+ it combines commonly accepted impact performance metrics with implementation guidelines to measure the effectiveness of impact initiatives.

That’s a bit of a mouthful, but ultimately the goal of IRIS+ is to provide a generally accepted impact evaluation system – the impact version of GAAP – which in turn can help pave the way for additional impact investments.

The combination of these three elements – awareness, action, and measurement– is key to the recent surge in impact investing.

Our collective heightened awareness of the problems at hand, the tight focus of the UN’s Sustainable Development Goals, and a generally accepted impact measurement tool like IRIS+ give us the framework upon which we can start to build and fund companies of impact; that both do well and do good.

What to expect ahead

As of this writing (April 2020), the COVID-19 pandemic is still making its first circumnavigation of the planet – affecting the lives of millions, upsetting economic systems, and generating new political and public health problem sets.

Obviously it’s too early to predict what our lives will look like in six or 12 months, much less make predictions on long term investment trends. But, in my view, investing with an impact focus will become much more the norm in the coming years.

The virus has forced us to look at our global inter-dependence in ways we haven’t done previously – how the virus moves across borders, how information and assistance have flowed from country to country, how so many of us are more aware of what’s going on in countries other than our own. A cursory view of the situation through the SDG lens proves this: Access to health care and medical treatment? SDG 3. Sanitation for virus prevention? SDG 6. Home-based education? SDG 4. And so on...

It’s easy to see, using this lens, how problems brought to light by COVID 19 can become the catalyst for new companies with new solutions, anywhere in the world, with funding that could easily be termed “impact investing”.

It’s not at all a stretch to think that some of these solutions can grow into viable – profitable – companies while addressing some of the major issues we now face. And, I believe, that’s what impact investing is all about.

This article was first published on e27, on May 4, 2020.