- Impact investments make an enduring, positive change to communities and/or the environment.
- The Operating Principles for Impact Management establishes a common standard for managing and reporting on an impact investment portfolio, and reassures investors that a project is legitimate.
- Globally, US$1 trillion is held in impact investments, but that could grow to US$26 trillion.
Australians and New Zealanders are increasingly looking to invest their money in ways that also do right by people and our planet. Figures from the Responsible Investment Association show Australasia’s responsibly invested assets under management rose 13% over the course of 2018 to reach A$980 billion.
Millennials are among the most enthusiastic about investing their money in ways that address important global and local issues, such as a changing climate, lack of education, poverty, poor health and lack of opportunities for women. This is where impact investing comes in.
A common framework for impact investing
Impact investing goes beyond screening out ‘bad’ companies or screening in ‘good’ companies. It aims to enable good companies to do more.
But asset managers face a challenge. How do they assure clients their investments really contribute to creating positive impact? How do they avoid the suspicion that ‘impact’ is just a marketing gimmick?
The Operating Principles for Impact Management, a framework developed by the International Finance Corporation (IFC) and leading asset managers, addresses these concerns. It establishes for the first time a common standard for what it means to manage an investment portfolio for impact as well as financial returns.
The framework covers the entire investment process, from selecting assets to managing and reporting on their impact performance. Signatories must disclose how they implement the principles, and submit processes to independent verification.
More than 80 investors have now signed up to the Principles, including Australian superannuation fund Christian Super and asset manager LeapFrog Investments.
Christian Super, which counts about 10% of its funds under management as impact investments, says many members join its fund because of its commitment to impact investing.
The companies that LeapFrog has invested in reach 188 million people with health care or financial services across 35 countries; 155 million of these people are low-income consumers in Africa and Asia living on less than $10 a day.
Transparency increases total investments
We know the value these kind of transparent principles can bring. Both the Green Bond Principles, created in 2014, and the Equator Principles, introduced in 2003 to assess environmental and social risk in projects, helped to establish trust in the sustainable investment sector.
Before the Green Bond Principles were introduced, there was no way for investors to know whether green bonds genuinely financed projects that were environmentally friendly. The Principles’ guidelines on disclosure and reporting provided confidence that they were.
As a result, US$171 billion was raised for environmental purposes through green bonds in 2018, up from US$10 billion in 2013.
The Equator Principles are now the most applied global benchmark for financing sustainable projects in emerging markets. They have been adopted by 101 institutions in 38 countries and have focused attention on environmental and social standards and governance.
We hope that the Operating Principles for Impact Management will achieve a similar effect in terms of increasing the market for impact investments. IFC figures show that impact investments globally stand at some US$1 trillion today but have the potential to grow to as much as US$26 trillion, based on investor appetite.
Impact investing at that scale could have seriously positive effects in achieving the United Nations’ Sustainable Development Goals in areas such as health care, education and infrastructure.
Impact investing can direct the forces of the market economy to help fight poverty and save our planet. The benefits are for everyone, in a world to be inherited by generations to come.
“Impact investing can direct the forces of the market economy to help fight poverty and save our planet.”
Download the IFC’s Creating Impact report at ifc.org/creatingimpact
What you should know about green bonds
Green bonds first came on the market in 2008 and the World Bank says they have changed investor behaviour.Read more on green bonds
Sustainable investment gains momentum
Why a more ethical approach to investment can help combat climate change and better drive social change.Read more on the ethical divestment drive