Investors can address our most pressing needs, from fighting climate change to better healthcare. Image: REUTERS/Nacho Doce
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More and more businesses are taking an enlightened view of their role in society. A simple idea -- that you can do well by doing good -- has created exciting new business opportunities and inspired investors to rethink where they put their money.
Impact investing – which consists of private equity and some specialty bonds such as green bonds -- has traditionally been the domain of the development institutions and specialist funds. But it is growing rapidly as investors look for ways to generate benefits for society alongside financial returns. The impact market expanded fivefold between 2013 and 2017, reaching $228 billion globally last year. That’s impressive growth. Yet impact investing can potentially grow much larger, with dramatic implications for the world’s development agenda.
Today, development financial institutions and specialist fund managers account for three-quarters of the impact investing market. Asset managers make up the rest of the market. We need to flip this ratio and grow the market exponentially by bringing large numbers of institutional investors into the impact market.
We cannot achieve this without greater clarity on what is – and isn’t -- impact. Impact investing needs to offer investors a transparent basis on which they can invest their money to achieve positive measurable outcomes for society in addition to adequate financial returns. It must give them a clear understanding of the specific environmental, social, and governance impacts their investment is expected to generate.
Without such clarity, a wide range of investments could be labeled as impact investments when they probably should not be. Now is the time, while the market is still young, to develop common principles to manage investments for impact. If we do it right, institutional investors who hold around $100 trillion in assets under management, will have even more reason to invest for impact. Citizens, pension holders, and shareholders can demand that their assets are managed for their future as well as for society’s benefit.
Bringing impact investing further into the mainstream would provide new firepower in the push to achieve the Sustainable Development Goals. The cost to meet the goals is steep -- $7 trillion annually, including $4 trillion for Emerging Markets alone. We must be creative in mobilizing private capital. Impact investing has the potential to raise trillions to address the world’s most pressing development needs, from preventing and mitigating climate change to delivering the health and education services needed for lasting prosperity.
Asset owners and managers today face a key constraint: They don’t have a common set of principles to guide the design of their impact-management systems. This creates complexity and confusion and makes it hard to differentiate among labels such as “sustainable,” “responsible,” and “impact investing.” It also feeds concerns about “impact washing,” which involves describing funds as “impact” vehicles without verifying what they do for society.
We need a common discipline and market consensus on how to manage investments for impact to address these concerns and establish shared best practices. IFC, with 62 years of experience in promoting private sector development, is one of the original impact investors in developing countries. We’re also the largest, with a $57 billion portfolio under management.
Fifteen years ago, IFC worked with leading commercial banks to set standards for environmental and social risk management in project finance called the Equator Principles. We now see an opportunity to take a similar role for impact investing.
This month, we have unveiled a set of draft principles to bring clarity and discipline to the world of impact investment. We have developed these in consultation with some of the world’s most influential investors. Over the next few months, we will expand the discussion with additional investors, academics, civil society and governments to receive their input to finalize these principles. We hope to announce the final principles and the first set of signatories in the spring of 2019.
These principles will be comprehensive. They integrate impact considerations into investment decisions throughout the investment lifecycle: from setting investment strategy, through asset origination and structuring, portfolio management, all the way to portfolio exit. They will draw on the collective experience of all development finance institutions while incorporating emerging best practices across a range of public and private institutions that invest for impact.
It is important that we get these principles right. I call on institutional investors, asset managers, companies, governments and civil society to join us in shaping a credible set of principles. If we’re successful, these principles will mark a major step forward in the evolution of the impact investing market.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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