How to set up an impact investing strategy?

Nicolas Deltour. – “Given the fragmented nature of the impact investing market, setting up an investment strategy requires considerable preliminary research. Using the UN Sustainable Development Goals (SDGs) framework, one can identify the relevant and investible gaps in financing for some of the world’s critical social and environmental challenges.

A crucial component of impact investing is the measurability of these targets. A clear and concise measurement framework with material indicators will allow investors to track the performance of their impact alongside their financial reports. For example, the number of gallons of water saved or purified, the number of new jobs created, or the number of new schools opened. These specific indicators can be measured, monitored, and mapped against UN SDGs. A good reporting framework will encourage the same frequency of reporting for impact and financial results.

What are the criteria to be taken into account?

“Impact investing represents a new paradigm since it is different from its predecessors, ESG and SRI investing, which work on reducing companies’ and investors’ risks and/or assessing companies’ non-financial performance. The GIIN (2009) taxonomy, considered the most significant standardisation in the field, describes impact investment as investments made into companies, organisations, and funds to generate social and environmental impact alongside a financial return.

The four key criteria that differentiate this strategy are:

- intentionality: setting measurable indicators before the investment;

- measurement of impact goals: indicators much also be measurable, monitored and reported regularly;

- alignment of interest: both for the financial performance and the impact performance;

- assessment of projects against the SDGs: to ensure the financing gap tackled.

Is impact investing suitable for all types of companies?

“Traditionally, impact investment was taken to mean unlisted investments with a social or environmental goal. This is still largely the case, with the largest part of the impact universe consisting of privately issued debt, or ‘green bonds’, followed by private equity. More recently the share of public equity impact investing has increased to reach one third of the impact of investment assets.

In private markets, investors are focused on tangible projects on the ground in areas such as affordable housing, education, food, and clean energy. This generates a direct impact on the real economy.

On the public market, impact investments are more common in specialised companies where the underlying business activity is well aligned with the impact goals. Typically this is found amongst the mid- to small-cap players working on themes such as climate or circular economy. With a less tangible impact on the real economy, the latter has the advantage of scaleability and liquidity.”

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