Since the term ‘impact investing’ was coined by the Rockefeller Foundation 15 years ago, the approach has challenged the common discourse that investors have to settle for lower returns if they want to make change. .
But now there is another major hurdle to mainstreaming impact investing: standardizing impact metrics to allow investors to make choices that best match their goals.
“In the financial markets, we have a whole infrastructure that allows any investor to make financial comparisons. But to determine impact, we don’t yet have the same tools and resources available, ”says Sophia Sunderji, research manager at the Global Impact Investing Network, a nonprofit research and analysis group. industry.
Just as investors can compare mutual funds with similar styles and goals, investors should be able to make investment decisions by comparing the impact, Sunderji says.
The challenge is twofold. The first is to accurately measure the impact: it can take years for an investment to show results, and it can be difficult to prove direct cause and effect.
It is perhaps even more difficult to standardize the data so that the impact results of one investment can be contrasted enough with those of another.
But the industry is making progress. Sunderji is leading GIIN’s efforts to establish a benchmark industry resource for impact due diligence. This involves establishing baseline metrics for each type of impact goal, from infrastructure and education to climate change and ocean pollution. With a combination of industry research and detailed reporting by impact investments, the GIIN analyzes the data and quantifies the impact.
The aim is to standardize the data — using factors relevant to the area of intended impact — on GIIN’s existing database called Iris Plus (IRIS +) to make them easily comparable.
For example, for impact investors who want to help the 1.7 billion adults worldwide who lack access to basic financial services, relevant metrics may be the number of loans made to small businesses in underserved areas or the number of people who first accessed financial services. time. This data is finely sliced and sliced based on factors such as gender, region, asset or credit size to be more meaningful for comparison purposes.
The GIIN’s standardization process also seeks to assess future performance, Sunderji says. An investor can issue an impressive number of microloans, but how many of their beneficiaries have created successful businesses?
Tools are also evolving to measure the impact of investing in Opportunity Zones, which were created in 2018 as part of the Tax Cuts and Jobs Act. The law provides for capital gains tax incentives for investments in areas of opportunity, which are areas identified as economically struggling.
The industry has experienced average annual capital growth over the past three years of about 17% to just over $ 700 billion, in part thanks to growing interest from institutional investors. Last year, insurance companies and pension funds each accounted for about 4% of impact capital, up from nearly zero five years ago, according to GIIN.
“Institutional investors are fiduciaries – they prioritize finance and impact then because they can’t
sacrificing returns, ”says Vikram Gandhi, founder and CEO of New Delhi-based VSG Capital Advisors and senior lecturer at Harvard Business School. “They wouldn’t invest if they didn’t think they could generate returns at market rates. “
A next big driver of capital will be the estimated $ 40 trillion in wealth that will be transferred from baby boomers to young heirs over the next two decades, Gandhi said, adding that subsequent generations are more than three times more likely to ” include impact investments in their portfolios. .
As the tools for measuring and benchmarking impact are perfected, allowing investors to choose effective investments, it is not only capital that will be magnified, but its effectiveness in causing change.
This article appeared in the September 2021 issue of Penta magazine