Responsible investors wrestle with what ‘impact’ really means
Measurement vital to build track records, but broad objectives make it difficult and unreliable
What good is impact investing? This question, raised in the Harvard Business Review in 2014, highlights increasing international interest in this booming responsible investment strategy.
In SA, President Cyril Ramaphosa’s special economic envoy on investment has recently been paying particular attention to the opportunities impact investment provides. A national task force was launched in October to direct capital towards underfinanced impact projects.
Impact investing has been defined by some as an investment approach that intentionally seeks to create both a financial return and a positive impact that is actively measured. These dual goals can be achieved by investing in entities offering products and services ranging from microloans to affordable housing, renewable energy and sustainably grown crops.
Given its scope, impact investing can be used to tackle a wide range of social and environmental challenges.
However, some scholars claim ambiguity of definition is a barrier that reduces the attractiveness of this responsible investment strategy. To complicate matters further, there is no universally agreed set of metrics to actively measure and compare impact.
The lack of a standardised definition has been at the centre of much academic debate since the term was coined at the 2007 Rockefeller Foundation convention. Nonetheless, role players in the impact investment market do agree on four elements of the definition: it should be an active and intentional deployment of capital; the impact created by the investment should be measurable; there should be a positive correlation between the intended impact and an investment’s expected return; and it should have a net positive effect on society and the environment.
Though there are four common elements in the process of impact investing and an understanding of the dual motives of impact investors, much of the uncertainty lies in defining impact. A review of the literature reveals that impact identification and measurement are two of the most complex elements of impact investing and could represent a barrier to the wider adoption of this strategy.
ACADEMIC RESEARCH
Though impact investing has become more recognised and researched globally, limited academic research has been undertaken in emerging markets where more than two-thirds of impact investment transactions occur. Given its sociopolitical history and status as an emerging market, SA presents a unique setting in which to investigate the phenomenon. The country also has the fastestgrowing impact investment market in sub-Saharan Africa.
We set out to investigate local role players’ views of the definition of impact investing, their motives for adopting this strategy and their understanding of what social and environmental impact actually constitutes.
We interviewed 13 experts. In line with previous scholars, they agreed that impact investments should be intentional, measurable and have a positive impact alongside financial return.
Some impact investors prioritise market-related, riskadjusted financial returns over social and environmental impact, while others are of the opposite opinion.
They also deliberated the importance of adopting a standardised definition of impact investing. The majority did not consider it to be a barrier to growing the local impact investment market.
The lack of clarity about what actually constitutes social and environmental impact was not deemed to be a debilitating barrier either. Instead, we found the real barrier was an unclear method to establish and balance clear and detailed impact objectives regarding financial objectives. Many investors (in this study and further afield) have broad impact objectives that make the measurement of impact difficult and unreliable.
The measurement of impact is vital to build track records for asset managers. Investors know how to report financial returns as there is a standardised format for doing this.
However, we found there might be a dearth of knowledge on how to report social and environmental impact, as there is no uniform format for doing this. Therefore, the disclosure of social and environmental impact would be inconsistent and not comparable across investment time horizons.
As such, a standardised format of reporting should be researched and developed, not in terms of social and environmental impact metrics but in terms of consistent measurement categories within the reports across multiple years.
In addition, research could be conducted on the methodologies of successful impact investors that managed to establish and achieve impact alongside financial return objectives.
Though the debate on what constitutes impact investing is likely to continue, it seems as if the role players actively pursuing this approach have a genuine desire to drive social and environmental change.
This change will probably be revealed incrementally over time. Therefore, it is crucial that the impact investment community be open to documenting and sharing their success stories and methods of impact measurement and reporting.