The term “impact investing” was coined a little over a decade ago to describe an investment strategy intended to bring about not only social or environmental impacts but also financial returns. Since then, the movement has helped shape the conversation about the future of finance. But impact investing still faces many challenges that require strategic solutions.
To help the industry approach those obstacles, the Global Impact Investing Network (GIIN) has recently published its Roadmap for the Future of Impact Investing: Reshaping Financial Markets. The GIIN’s roadmap for impact investing outlines the following six critical areas of need and proposes an action plan for each.
Although, as the report points out, impact investing is rising in popularity—especially among women and millennials—the concept is not always well understood, and people often have misconceptions about how it differs from other financial movements.
But achieving a coherent identity and public recognition is difficult when industry stakeholders have not fully agreed on standards or definitions for impact investments. The World Economic Forum has called impact investing “fragmented” and asserted that in order to reach its potential, it first needs to go mainstream.
There’s disagreement on how to best clarify the movement’s identity, with some advocating for formal drafting of criteria and others arguing that a top-down process could impose overly narrow and restrictive definitions on the industry.
2. Behavior and Expectations
The GIIN asserts that investors should reevaluate expectations for capital, giving more weight to social impact. In addition, the roadmap for impact investing calls on the financial system to align incentives with impact, making the social value of investments a matter of course instead of a niche interest.
There has been progress in this area, for instance when the BlackRock CEO Larry Fink penned a letter to executives in early 2018 urging firms to engage with social issues to avoid long-term risks. However, as impact investing advocates work to make environmental, social, and governance (ESG) considerations commonplace in investing conversations, the movement’s goals may risk becoming diluted. If that happens, investors could limit the effectiveness of their investments—for instance, checking off “impact” perfunctorily without seriously investigating the social and environment impact of projects. Paul Brest, a scholar of constitutional law, has already suggested that some investors overestimate the impact of their investments, settling for investing choices that do not truly add value.
In order for impact investing to thrive, there needs to be significant expansion of the products available, according to the GIIN. The roadmap identifies four key actions needed for impact investing products to accommodate a wider range of investors and investees:
- Expand the number and range of retail products available in the market
- Expand institutional-quality investment products covering a wide range of themes, sectors, and geographies
- Commit capital to emerging fund managers to accelerate their development
- Advance blended-finance vehicles that combine capital with different risk-return expectations to meet investee needs while furthering objectives of different investors
Although the range of products may grow as innovations enter the space, reaching the full potential of the market may require regulatory reform.
4. Tools and Services
Investors need impact ratings, analysis tools, and other resources to maximize their impact. Accordingly, the roadmap calls upon ratings agencies, investment banks, and data providers to expand their services to accommodate the needs of impact investing.
Suggestions for possible resources that could be of use to investors laid out in the report include strategies for rating the impact of investments; tools for
risk, return, and impact analysis; and assistance with, among other things, capital raising, syndication, and securitization.
Some tools are already in development—the Impact Investing Network Map, for example, aims to make impact investing data accessible and transparent. As more tools and data sources are published, investors should be able to leverage them to achieve greater impact.
5. Education and Training
Interest in impact investing is apparent at the university level; many schools, among them the University of Chicago, the University of Oxford, New York University, and Columbia Business School, have created courses, seminars, or research programs focused on impact investing. But as the GIIN points out, most educational opportunities are geared toward students and do not meet the needs of managers and advisers who want to integrate ESG values into their work.
While programs such as the Mission Investing Institute are beginning to fill that gap, more are needed. The GIIN report also highlights the need for incubators and accelerators to support social entrepreneurs and develop a pipeline of new companies pursuing impact. The Techstars Impact Accelerator is an example of a new entrant to this space, and there is likely room for many others to follow.
6. Policy and Regulation
The GIIN outlines various beliefs that many experts hold concerning regulations, including the role regulations play in safeguarding political and economic stability at a governmental level, key for supporting strong impact investing. Ultimately, the roadmap describes several specific recommendations: According to the report, clarifying existing regulations, removing regulation barriers, and adjusting policy incentives are all actions that work to create a supportive regulatory environment—one with the potential to spur new impact investment.
Together, these six areas of improvement break down the problems facing impact investing and provide sustainable, manageable strategies for guiding the movement toward more widespread adoption.