When we have funds to invest it is always going to be the case that investment managers will want to show us that their vehicles and funds are the shiniest and best around. In the past ten years or so one particular brand of investment polish has become increasingly prevalent: impact investment. International fund managers such as BlackRock, JP Morgan and UBS profess to offer impact investing and there are many smaller firms that claim this niche as their domain.
It would be forgivable to question whether impact investing is any different from the long list of other concepts that belong in the set of “ethical investments”. This set includes sustainable investment, ethical investment, ESG investment, responsible investment and so on.
I believe that there are four conditions that any investment must meet if it is to be considered an impact investment that form an excellent checklist when considering what any particular investment manager is offering.
1\. The business has a social purpose as its primary purpose.
The implication of this is that the motivation for management and investors is to create a benefit for society broadly. There is a profit incentive, this is a business, but that incentive is secondary to the pursuit of whatever the social purpose might be. At first glance it might seem challenging to find any such business that is more than just a quasi-charity. However, there might be a business for whom the mission is to help sufferers of back pain with orthopaedic beds; or a business running exceptionally high quality and caring elder homes.
2\. The business distinguishes between impacts and outcomes.
An impact is a real and long-term change in a person’s or community’s life conditions or prospects. An outcome is the current situation resulting from an activity. So, a business that is set up to create work for the long term unemployed (social purpose) will have as an outcome the identification of job roles and the placing of individuals into those roles. That business will then be seeking to understand and measure the impact that having that job role has on the person’s life conditions or prospects.
3\. The business has authenticity.
This means that a business cannot claim the status of an impact investment solely because it is situated in a particular geography (e.g. the Global South), or because it is in a particular sector (e.g. renewable energy), or because it is offered by a particular kind of organisation (e.g. a development finance institution). None of these aspects are on their own sufficient evidence that an investment is an impact investment.
4\. The business model is not philanthropy.
Philanthropy can be impactful but it not investment. Impact investment expects to generate revenues and profit from a business and is not a philanthropic activity.
Impact investment is not an asset class. Debt and equity instruments may be found in impact investments and such an investment may be privately owned or publicly listed. The key is whether we are looking at an investment with authentic social purpose, distinguishing its impacts and with a properly commercial business model.
Sometimes we make out impact investment to be something difficult and rare to achieve but in reality, with these guiding rules, it is quite simple. Where the complexity arises is for investment firms who want to quickly construct an impact investment fund to offer their clients. They tend either to do so by having only one type of asset in the fund (e.g. renewable energy projects) or they mix asset types. History would suggest there is a significant risk of including assets whose claim to impact is weak either because they offer a secure return, supporting the fund as a whole, or because there is too much pressure to build the portfolio quickly, or because demonstrably impactful investments are hard to find.
The term impact investment is just over ten years old. Every decision we make about where to invest our funds has an impact and the term is a challenge to us all to think about what that impact will be. We are all very aware of the geopolitical challenges facing our societies. The widespread adoption of impact investment strategies needs to become a key instrument in how we contribute to meeting those challenges. But it needs to be an authentic instrument. Vincent Neate is Founder and Director of Relationship Capital Strategies . relationshipcapitalstrategies.com/
