Introduction

Growing interest in impact investing has prompted leading alternatives investment firms to launch dedicated funds. The “impact-at-scale” space is new: it was only in 2017 that firms such as Bain Capital and TPG closed their first investments. While vibrant, the space is also fluid, with each firm using a different approach to measure impact. Impact Delta concentrates its client work on firms that seek to deliver market-rate returns for the asset classes in which they are investing. Impact investing that seeks positive, but below-market rate, returns has been around for longer. This group of investors are sometimes referred to as “impact-first” or “concessionary” investors.

The bottom line: to achieve the UN’s SDGs, an additional annual investment of $2.5tn is required — capital that can only be sourced from substantial private sector engagement.

History and Terminology

The term “impact investing” is generally traced to a 2007 conference organized by the Rockefeller Foundation, and is used by most market participants to label investing activity that seeks to realize social and environmental benefits alongside financial return.

In some cases, the term “impact investing” conveys a sense that an investing activity can and should exist, even if target returns are below market-rate returns for investments with similar risk. In other cases, “impact investing” conveys market-rate returns, with an unusually high social or environmental benefit.

Impact investing is related to, but today generally distinguished from, the Socially Responsible Investment (SRI) movement and investment decisions that account for environmental, social, and governance (ESG) factors. SRI has been around for much longer than impact investment, and focuses on moral and ethical exclusions from portfolio (e.g., landmine manufacturers or tobacco-related companies). ESG is now a mainstream investment consideration.

Current Market Landscape

What was the catalyst for the entry of capital at scale? Most analysts point to a) increasing urgency around climate change; b) changing social norms and expectations around gender equality; c) ongoing economic inequality, and growing political will to address it; d) an interest in reputation management by investors; and e) changing preferences associated with millennials seeking to do good and growing in influence. The 17 UN Sustainable Development Goals (SDGs) are a widely accepted framework for what “doing good” might entail.

With the entry of globally relevant GPs has come increased activity from other parts of the ecosystem. Global auditing firms, such as KPMG and EY, have recently established impact auditing practices, and impact investing market associations and information-sharing forums have grown in scope. Examples include the Global Impact Investing Network (GIIN), and the Impact Management Project (IMP). In September 2019, former Financial Times journalist Sarah Gordon became the first CEO of a newly created U.K.-based entity named the Impact Investing Institute.

How significant could the market be?

The International Finance Corporation estimates that investor demand could reach $26tn, while the GIIN’s April 2019 report “Sizing the Impact Investing Market” estimates assets under management by impact investors to be $502bn as of the end of 2018.

Impact Measurement

Consumers increasingly vote with their buying power, and are increasingly asking for impact claims to be verified by independent third-parties. Impact investing benefits from impact measurement and management approaches that involve third-party solutions. Frameworks developed by the GIIN – such as the IRIS impact metrics catalog is a good place to start, while other resources are available through the Impact Management Project, as well as the IFC’s Operating Principles

Tools that impact investors use include: the B Impact Assessment, Y Analytics, and the new SDG Indicator Tool developed in partnership between B Lab and the UN Global Compact.

Impact Delta works with clients to ensure that the impact measurement and management solutions we suggest, or help implement, result in the most robustly documented impact results the market can offer. For more, contact us.