Mention ‘Investment Market,’ to the average person, and they will either squirm with uncertainty and lack of knowledge, or react angrily. That anger is usually directed at the big investment banks who they believe caused the market crash of 2008 through a vast act of greed, and the corporate fines they continue to incur.
What they fail to realise and what news reporters fail to broadcast is that investments have an impact on people and on our environment. But how do we insure that this impact is positive? There is a solution: a part of the investment market that has social and environmental change as its core mission. This is the market of Impact Investment.
This market has the potential to unlock vast sums of private investment capital to supplement the public resources and philanthropy to combat pressing global challenges. The mission is to generate social and environmental change alongside a financial return. It challenges the status quo that market investments should only achieve financial return and that philanthropic donations should only address the most pressing social and environmental problems:
- Sustainable agriculture
- Renewable energy
- Affordable & accessible basic services (e.g. housing, healthcare & education)
There is a difference in the nature of a normal investment and an impact investment. Whereas a normal investment has two core characteristics (the return on investment & the range of return based on risk), an impact investment has two more additional characteristics. They are ‘the intention of the impact’ and ‘the measurement of that impact.’ The latter has caused problems in how an investment can be measured quantitatively to demonstrate a numerical change in impact.
Two organisations have tackled the problem of creating an impact measurement tool. ClearySo, an investment bank based in the UK has developed the ‘ClearlySo Atlas,’ which they label as ‘your impact navigator.’ Its aim is to aid investors within private firms to track positive and negative impact in a meaningful way, for example their data is mapped to UN Sustainable Development Goals (SDGs). Another organisation, the Global Impact Investing Network (GIIN) has developed a tool called IRIS metrics that allows the user to measure certain aspects of impact of the investment, for example if an organisation reports its social and environmental performance to stakeholders. It has over 5,000 organisations using the system to evaluate, communicate and manage social and environmental performance.
Why is it important to be able to measure impact investment? It seems like a fairly obvious question, but one that many may overlook. By setting a social and environmental objective, performance metrics have to be created to evaluate, monitor and manage that performance so it can be outlaid to relevant stakeholders. Furthermore, just like financial performance metrics can be distorted by clever accounting to create the illusion that a company is financially performing, the same could be true for impact investment measurements. External entities are needed to ensure accountability to other firms and to give the customer transparency in what they are investing in and the impact that an investment has had.
It is important to address the topic of financial performance. Just as normal investments have different returns based on risk, the same can be said for impact investments. Based on a study conducted by GIIN in 2016 on 158 impact investments, 16% performed below the market rate (closer to capital preservation), 25% performed below the market rate (closer to the market rate) and 59% performed at risk adjusted market returns. In addition to the above survey GIIN also included the performance of the investment relative to expectations on impact and financial performance. It found that 99% and 89% out of the 151 surveyed were in line or outperformed in respect to impact and financial performance.
The impact investment market is growing too. In another survey by GIIN from 156 respondents, they manage a total of $77.4 billion impact assets. $15 billion was committed in impact investments in 2015 with a further $17.7 billion in 2016 committed – a 16% rise from 2015. Although the market is growing, challenges still remain for the impact market. The lack of appropriate capital across the risk/return spectrum, high quality investment opportunities and suitable exit options all remain an ongoing problem that hinders potential growth in this market.
There are institutions that are not only looking to tackle this problem but also to profit off them too. Triodos, an ethical bank with its British branch based in Bristol are launching customer current accounts on the 26th of April 2017 alongside their ethical savings, ISA and investment platforms. They are fully committed to the ideology of sustainable banking where the power of change lies within capital. There are many mainstream banks that will hide behind pictures and images of impact projects but many of these institutions do not have cultures that correlate to these mirages. Triodos prides itself on its ethical, transparent and honest culture, which helps them align their mission with their values and more importantly their actions.
Another bank – Green Investment Bank (GIB) – that is currently government owned was set up in 2012 to help raise capital for renewable energy projects. In 2015/2016 the bank managed £3.7 billion with £770 million of its own committed capital for which it recorded an income of £58.8 million and a £9.9 million profit. These results do not jump off the page with much excitement, which illustrates the problems that impact this sector. Macquarie Bank has put in a bid to purchase GIB, and this acquisition by the Australian bank would allow GIB to access more capital and further increase its scope in the market. However the problem arises to the UK government and taxpayer, whether the mission of Macquarie Bank meets the scale and credibility of the ambition matched by GIB.
Why is this so important to us? This is important because – whether we are aware or not – investments shape our lives everyday either positively or negatively. Just as you invest time in your personal development through education or whether you invest time in your own happiness, the money placed in investments not only affects your future but the future of everyone. The impact investment market provides us with an investment in our future alongside financial return. We have a choice. Where do we invest our savings? Where do we preserve our capital? Do we invest or preserve our capital in institutions or funds that provide negative impact or perceived positive impact? Or do we invest our capital in funds that provide a measurable positive impact socially and environmentally to the world around us? We can all make an impact on this world, just through a simple choice in where we invest our capital.