As ESG investments are becoming mainstream, the market of impact investing is getting increasingly structured. Two recent initiatives have been set up recently to support impact data industrialization and the legal framework that can be associated with impact.
The Global Sustainable Investing Alliance (GSIA) estimated in 2018 that almost USD 4tn is flowing annually into sustainable investments. Most sustainable investment strategies currently either exclude firms operating in environmentally and/or socially harmful industries (Negative/exclusionary screening, Norms-based screening) or focus on companies that have in the past performed well on metrics of ESG performance (Positive/best-in-class screening, ESG integration). Impact is not, in these approaches, the primary investment objective.
The notion of impact in an investment context originally arose in development finance, philanthropy, and foreign aid. It describes a change against a baseline, relates to a clearly defined parameter, and implies causality. Hence, the concept of impact is fundamentally about change.
Impact investments are made with the intention to generate positive, measurable social and environmental impact, and in most cases, alongside a financial return. It goes beyond the traditional fiduciary duty of investors to integrate financially material factors, including ESG criteria.
The United Nations estimate that every year until 2030, around USD 2.5tn in additional investment will be needed in key sustainable development sectors, such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services–including housing, healthcare, and education. The growing impact investing market provides capital to address the world’s most pressing challenges in these sectors.
With the Paris Agreement and the UN SDGs (Sustainable Development Goals), investors’ awareness about global sustainability challenges has ramped up, making them increasingly considering “impact duties” such as decarbonization targets, commitments to quality of life, gender equality or integrating the impact of their investments on wider society. They are beginning to measure, account for and integrate the real-world sustainability impact of their investment activity.
The impact investing market is growing rapidly: according to the annual survey of the Global Impact Investing Network (GIIN), impact investments have seen their AUM increase by 86% between 2016 and 2019. It valued the impact investing market at more than USD 500bn (EUR 460bn) as of end-2018.
Contingent to the increasing interest from investors, several initiatives are being launched in order to standardize and increase the visibility of the impact market.
In January 2019, UNEP FI (United Nations Environment Program Finance Initiative), the PRI (Principles for Responsible Investment) and The Generation Foundation launched the Legal Framework for Impact in order to understand how investors can manage the dualities of their fiduciary and sustainability impact duties and what should happen in case of conflict. The initiative is especially trying to answer the following fundamental legal questions:
- Are there legal impediments to investors adopting ‘impact targets’—for example—that an investor’s investment activity is consistent with no more than 1.5 degrees of warming?
- Are investors legally required to integrate the sustainability impacts of their investment activity in their decision-making processes?
- On what positive legal grounds could or should investors integrate the realization of the SDGs in their investment decisionmaking?
In October 2019, UNEP FI and the PRI appointed the law firm Freshfields to analyze whether and how legal frameworks allow for investors to consider sustainability impact across 11 jurisdictions: the EU, Australia, Brazil, Canada, China, France, Japan, South Africa, the Netherlands, United Kingdom and the United States. According to the project timeline, engagement of investors on the integration of impact in investment decision-making should have started in Q1 2020.
UNEP FI also launched at the start of April 2020, with Positive Impact Initiative (PII), two new tools for impact measurement, one of them especially towards investors: the Corporate Impact Analysis Tool. It helps banks and investors gain a cross-cutting view of the impact status and possibilities of their clients and investee companies by involving a 360-degree review of economic, environmental and social impact areas systematically looking at both positive and negative associations. Please refer to our newsletter A Month in Green of April 2020 for more information on current impact assessment methodologies.
On April 2019, the Operating Principles for Impact Management (OPIM) were launched with the aim to standardize the market, led by the International Finance Corporation (IFC, a World Bank Group company) in consultation with leading impact asset managers and asset owners, drawing on their expertise and experience. The Principles provide a framework for investors to ensure that impact considerations are purposefully integrated throughout the investment life cycle, and a set of clear market standards for how to manage investments aiming to achieve positive impact alongside financial returns. The initiative is gaining ground as IFC estimates that a total of over USD 350bn in impact assets are managed collectively by the 95 signatories in alignment with the Principles, 17 of them having joined since January 2020.
Last, it is also worth to note quantitative data to assess impact is of a growing interest among investors as evidenced by APG and PGGM, the two largest Dutch pension managers, who are working on the launch of a Sustainable Development Investments (SDI) Asset Owner Platform. The aim is to fill the gap in impact data and harmonize the assessment of “positive impact”, as they consider this is still poorly analyzed by main ESG research providers. The platform will use artificial intelligence to analyze the extent to which about 10,000 listed companies, and therefore the investments realized, contribute to the UN SDGs.
Nowadays, the so called "sustainable investors" are expected to go the extra mile to deliver direct impacts and contribute to the SDGs by systematically engaging with companies to change their ESG practices, and by allocating capital to particular financial assets–such as green, social and sustainability-linked bonds and loans.