Take a closer look at Impact Investing
What you will get from this article:
What is impact investing?
What are the potentials of impact investing?
SDGs & Impact Investment
What are the disputes on the topic?
With the rising of a socially responsible mindset and the severity of some social and environmental issues, investors in both public and private sectors start to find ways to achieve both financial returns and positive impact. One avenue to approach this is through “impact investing”
“A financial undertaking that aims to generate specific and measurable beneficial social or environmental effects in addition to financial gains.” — KPMG International (2018)
More investors start to recognize that making a positive impact on the world and receiving financial return doesn’t have to be mutually exclusive. While the main difference between “Value-aligned Investing” and “Impact Investing” lies in the intent. The former, for example, buy stocks in companies that provide environmentally friendly products. The latter, according to International Finance Corporation (2019), are made with a specific intent to make a measurable contribution to social and environmental goals.
The Potential of Impact Investing
According to the annual impact report from GIIN (Global Impact Investing Network), the impact market expanded fivefold between 2013 and 2017, reaching USD 228 billion globally in 2018. While in 2019, the amount of impact investing reached the market size of USD 502 billion.
IFC also proposed that investor appetite for impact investing reach USD 5 trillion in the private market, and as much as USD 21 trillion in the public market. This result also matched with 2018 McKinsey’s forecast that impact investing may grow to more than $300 billion by 2020. This indeed is staggering market size. Why is impact investing receiving so much attention?
The SDGs & Impact Investing
With the rising awareness to achieve SDGs, the society is seeking durable solutions to approach the problem. Impact investment can potentially mobilize additional resources and generate momentum toward approaching the 2030 SDGs. According to IFC, even though not all the impact investment has the same impact on society; still, continued development of the industry improves the prospects for achieving the SDGs.
The Key Challenges
Even though impact investing sounds ideal to address many societal and environmental issues; still, it brings just as many challenges as it does opportunities. The key challenge of it is the lack of clarity.
“Impact” is a rather abstract term that can hardly be measured. Accompanied by the lack of recognized metrics make it harder to assess the impact across different projects. IFC (2019) also noted that the limited comparability of measured impact poses a great challenge to investors who try to allocate capital in this field. Since the assessment has not yet evolved to a point where there is a Generally Accepted Accounting Principles (GAPP). Without such clarity, a wide range of investments could be labeled as impact investments when they probably should not be.
Moreover, multiple stakeholders are involved in each project; this makes it even harder to evaluate the overall impact performance since there’re tradeoffs among different stakeholders. For instance, the famous American company Toms launched the “Buy One, Give One” business model. The original intent is commendable and received support from all over the world. Still, it also brings the concerns of influencing the local shoe businesses, and whether donating shoes could actually address the poverty issue in these low-income countries.
In addition, the fear of impact washing is also one of the challenges. Companies have to provide investors with a clear understanding of which specific environmental and social impacts their investment is expected to generate, and further offer them a transparent basis to examine the results.
The rapid growth of impact investment worldwide has aroused questions such as how to assess impact, concerns about unrealistic expectations of the investment, and the potential illusions that social impact and financial returns can be simultaneously achieved. With such concerns worldwide, impact investing can not yet reach its full potential as the research estimates.
Nevertheless, with the rising awareness and the urge to solve these problems; we can expect a more structured and widely accepted system will be formed and followed. And thus impact investing, with its fullest potential, could further approach the SDGs and really make some differences to our society and environment.