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Impact investing: Is it becoming just another ‘feel good’ investment?

In 2012, 99 impact investors reported, via survey, that they had committed $8 billion to impact investments, with the commitment levels expected to rise to $9 billion in 2013. The survey wasn’t comprehensive, but it reflects an emerging trend – the rise of a new asset class of investments known as impact investments.

Just how large can we expect that class to get? One November 2010 report – by the Rockefeller Foundation, JP Morgan and Global Impact Investing Network – estimated that it would hit the range of $400 billion to $1 trillion over the next decade. Wow, that’s a lot of Investment!

But there’s a problem with this broad-stroke, blue-sky picture. While “impact investing” may be all the rage, its intent remains fuzzy.  Too often, conversations about impact investing focus first on attractive financial returns and only second on the social good. Even the definition of impact investing put forth by the Global Impact Investing Network (represented by several leading impact investors) leaves too much wiggle room for comfort.

The challenge of an unclear definition

Global Impact Investing Network defines impact investments as:

Investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances.

The words sound like they focus first on social good and second on profits, but dig a little deeper and it becomes clear that it’s possible to make a case for classifying almost any financial investment as an impact investment. Why? Because most businesses offer some product or service that is socially or environmentally useful – telecom, software, infrastructure, electricity, personal hygiene products… you name it.

Could an investment in Unilever (makers of Lux soap, Lipton Tea, Flora cooking oils, Close-Up tooth paste, Ben & Jerry’s ice cream,  and a range of other items) possibly classify as an impact investment? Could an investment in Procter & Gamble?

Now take the rationale a step further: Most large businesses are a great source of employment and livelihoods, and therefore arguably “generate a measurable social impact.” Under this line of reasoning, you could categorize an investment in Walmart, one of the largest employers in the US, as an impact investment. After all, it offers employment to over 2 million people, many of them relatively low-income. But would that be fair?

The work ahead: Establishing a true ‘impact first’ frame of reference

Don’t get me wrong. I’m not a cynic about impact investments. On the contrary, I believe this asset class has the power to unleash commercial capital to drive real social progress. I also believe we’re at a critical juncture.

If those of us who hold this view approach the challenge correctly, we have the chance to ensure impact investing fulfills its true promise: To help us address trenchant social problems that stem from the twin issues of 1) escalating economic inequality and 2) mounting fiscal deficits that limit government ability to sustainably address some problems.

But the direction the field is currently tacking has me worried.

The danger is that the current focus on attractive financial returns poses a threat to “impact first” capital. On the spectrum of funding sources—with philanthropic funds on the extreme left and commercial capital on the extreme right—we are in the process of unintentionally shifting impact investing to the right. We need a new and clearer set of boundaries to help us better delimit what qualifies as impact capital and what is commercial.

Is the boundary defined by muted returns? Not at all! It depends on 1) a fund’s impact thesis, and 2) prioritization of that thesis over financial returns. Today, most impact thesis statements are generic and not very detailed. More troubling, most are not prioritized over financial returns.

Those of us who believe “impact” must be a differentiator with real meaning must put pressure on funds and impact investments companies to be more specific about their impact objectives. We must ask them to be clear about how they will be different from their competitors. We must likewise ask investors and boards to demand accountability on these metrics. Granted that simple, comparable metrics on impact measurement are hard to find, but that shouldn’t be an excuse for avoiding detailed discussions about how to best track social performance.

Social impact, clearly defined

From my seat at the table, I’d also urge those in the impact investment industry to start identifying sub-asset classes along the spectrum of impact, returns and risk. They must then set some boundaries to these sub-asset classes, to ensure their comprehensibility to funders across the entire spectrum. Otherwise, we will likely shift to the far right. (The Monitor Group’s 2012 report, “From Blueprint to Scale: Case for Philanthropy in Impact Investing,” clearly articulates the need for funders to exist across the spectrum if we seek to make markets work for people who are economically disadvantaged.)

The development world has helped shape impact investing as a potentially great tool. As it evolves and gains steam, we must be extremely cautious about undue emphasis on the promise of attractive financial returns and make certain that we are instead showcasing social impact, clearly defined.

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  • Kumar Nanjundaiya Ramesh

    Example of a potential “Impact Investment” industry – International Banks – See below:
    Your comment was called out!
    On this post: Is JPMorgan Chase America’s New Bad Bank?
    ” Here is my mantra for all the big and well known international banks who have done “very wrong financial deeds” in the recent past. Today the only hope for these banks (after duly paying all the fines!!!) is to follow this mantra (which will work) to win back “customer trust”. The example given below is that of a competitor bank. Total fines paid by well known international Bank in 2012 was USD 10.7 billion. They will have to pay another USD 4 billion in 2013. My mantra applies to all such banks to emulate: My personal research findings: The objective today for the bank is to rebuild its franchise and regain customer trust and business so that the group’s financials improve further going forward. There is a sustainable way of doing this to achieve success – “Impact Invetment”. Let’s take an example. Barclays Bank Group – Let’s do an out of the box thinking: How to re-build a dead franchise. While the global media bashing goes justifiably unabated, what Anthony Jenkins of Barclays is doing right now is to try and set a workable framework of an ambitious goal for the bank (give him a break) with all his timed initiatives to save and grow the franchise. In this process, he is informing the world that what is needed is a serious relook into the global financial banking system. As starters, he is cleaning up his house by timely communication to his staff that they better acclimatize and adapt themselves to the new morality (purpose and values) failing which … Here he is gearing to starting a long process of quality enforcement exercise of re-establishing trust among its customers, employees, investors and the society. He knows fully well that earning huge returns for their shareholders and executives at the expense of everyone else is since done and gone. Time has come to get the shareholders buy in to actually go deep into the business mechanism and build in ethics to give back to the community and the society at large so as to reduce the growing trust deficit. What can Barclays Bank do today to radically change its business model. A strong commitment to the citizens of the country (where they operate) that they will “stand by them” in assisting in actively managing the social and environmental impact of doing business there and that they will extend “full support” to the community where they operate for profit. Today, if Barclays Bank Group wishes to go forward with redefining its ethical approach and re-developing it’s very badly dented franchise and renew business relationship with their customers, what is needed is “empathy and a very very sincere effort to win back customer trust”. One of the excellent ways to jump start this initiative is by ably demonstrating their involvement in environmental and social consideration in the countries that they are operating currently. In order to make this happen, Barclays Bank need to create a mechanism with the sole objective to better assist their key clients for environmentally-friendly or socially-responsible transactions. What does it entail: It requires a change of mindset to bring about full integration of the needs for economic and social development with that to conserve the environment. His team members should be able to specifically address the banks customers needs with empathy and create an “impact investment” situation and help with financial support and advice about projects aimed at both financial profitability and social impact (poverty reduction, job creation in disadvantaged areas, environmental footprint minimisation, stock carbon, etc.). Examples include the integration of environmental criteria into lending and investment strategy and ! the development of new products that provide environmental businesses with easier access to capital. This will make it possible for the population concerned to increase their income in various countries where Barclays is operating. Going forward the bank should actually apply the Equator Principles, a voluntary credit risk management framework with a set of guidelines for environmental and social risk assessment in sustainable project finance activities. I strongly feel that by adopting these principles, going forward, Barclays Bank’s will be able to ensure their genuine intention to be among the foremost in social and environmental responsibility issues so as to fight against global warming and respect for human rights. This can be a major imperative for Barclays to be effective and prove that its stands by its commitment to the community by extending support to local sustainable development efforts. This is the only method to win back customer trust and rebuild the Barclays franchise and image on a global basis. “