Article 9: Where ESG Ambitions Meet Actions – A look at Impact Investing
Impact investing represents a major revolution in finance, by providing capital to address the world’s pressing challenges while generating financial returns. This article examines its growth and provides the best ways for asset managers to measure the impact of their investments.
The Rising Tide for Impact Investing
Impact investing represents a major revolution in finance, by providing capital to address the world’s pressing challenges while generating financial returns. Thereby, it challenges historical views that investments should only aim to deliver maximum returns, while private sector actors can address social and environmental issues solely through philanthropic activities.
The popularity of impact investing is on the rise due to increased global awareness and regulation (SFDR Article 9) where reputation is at risk. SFDR Article 9 funds should make a positive impact on society and the environment through sustainable investment and have a non-financial objective at the core of their offering.
Furthermore, we are seeing widespread desire to positively influence environmental and social issues across the globe - such as mitigating climate change and increasing access to healthcare.
Insufficient public financing has fueled a business imperative to tackle these challenges. Article 9 is designed to help close the significant funding gaps and solve these issues by providing regulatory guidelines for investing that will help us all to achieve sustainable development goals.
In addition, companies and investors that manage to differentiate themselves by demonstrating impactful outcomes and data integrity can access new streams of capital in a highly competitive market as well as attracting top talent.
The launch of impact funds by large assets managers such as BlackRock and Vanguard in 2020 and 2022 sent strong signals to the market that impact investing is becoming a high-agenda item. Recent figures also show that the impact investing market is maturing, with its size estimated by the IFC at $2.3 trillion in 2020. The size of this market also registered a continuous growth over the last decade, with impact investments increasing by 17% from 2015 to 2019 alone according to the Global Impact Investing Network (“GIIN”).
Four Ways to Identify Impact Investments
The GIIN sets out four core characteristics defining impact investing:
- Intentionality: Impact investing aims to address social and environmental issues. This differentiates it from ESG investing, which tends to focus on the impact of environmental, social and governance factors on an investment’s financial performance.
- Impact measurement: A key aspect of impact investing is a commitment to measure and report its social and environmental performance.
- Financial returns: Impact investments seek returns ranging from below market rate to risk-adjusted market rate. This differentiates them from philanthropy.
- Range of asset classes: Impact investments can be made across all asset classes.
Impact measurement can be difficult
Despite growing demand for impact investing, rigorous measurement and interpretation of impact performance have hampered the effective integration of impact into strategic decision-making. This is primarily due to the complex and multi-dimensional nature of impact.
Indeed, impacts vary in their difficulty to measure. For example, while there are well-established methodologies to calculate greenhouse gas emissions, the impact of a firm’s operations on biodiversity is hard to capture.
This creates challenges for meaningfully measuring impact in industries where biodiversity is a material issue, such as crop production that relies on pollinating insects.
In addition, impact requires a range of qualitative and quantitative data to assess comprehensively. The analysis of impact performance metrics needs to happen in conjunction with contextual data, including the type of stakeholders affected and characteristics of the market in which investments operate. This introduces nuances and complexities and reduces scope for clear-cut interpretations.
Lastly, the quantitative and qualitative data required to assess impact performance varies across companies, depending on their sector and context. This means that there is no set of impact performance metrics that can be used across all companies, rendering impact assessment resource-intensive and highly tailored.
How can Apex Group help?
We are passionate about leaving a legacy to be proud of and driving positive change in the financial services space. We support ambitious companies and investors by providing the most comprehensive impact investing solutions for the private markets – enabling leaders to stand out from the crowd by demonstrating meaningful, measurable positive outcomes with integrity.