Impact investing: Time to capture market potential
Tags: Impact Investing, Sustainable Development, Sdgs, Social Impact

By Philippe Le Houérou

Sometimes one bottom line isn’t enough. Many investors are no longer satisfied simply by turning a profit. More and more also want their investments to generate a positive impact in the world.

That means additional capital can be devoted to the globe’s most urgent challenges — like tackling poverty, confronting climate change, and providing access to clean water and power. But whether investors achieve a double bottom line — profit plus impact — depends on how funds are invested and managed for impact.

Today, 60 global investment firms and development finance institutions will take the first historic step, embracing a new set of standards that will bring discipline, transparency, and credibility to the impact investing market. We now want many others to join us — it will be good for business and good for the world.

Here’s why. Impact investing, now a relatively small market, is poised to grow rapidly as financial assets move from Baby Boomers to Generation X and Millennials. These younger investors are keenly interested in environmentally and socially motivated investment — and they are willing to put their money to work in ways that benefit society. According to Accenture, $30 trillion in wealth will be transferred from Baby Boomers over the next three decades in North America alone.

The opportunity is clear, thanks to this potentially transformative alignment between the demands of investors and the world’s development needs — estimated to cost several trillion dollars annually for the Sustainable Development Goals, endorsed by all United Nations member states four years ago.

We still need more data on whether impact investing can bring the same profits as other investments — but there are some promising examples. For instance, the long-term performance of IFC’s own portfolio shows you can achieve impact in a wide range of developing markets without having to accept lower returns. On average, IFC’s realized equity returns outperformed the MSCI Emerging Market Index from 1988 through 2016. Even more interestingly, our average returns were higher in lower-middle-income countries than in upper-middle-income countries.

The private impact investing market is now measured in the billions, but it should be in the trillions. IFC estimates that investor appetite for impact investment could today be as much as $26 trillion — $5 trillion in private markets (private debt, equity, and venture capital), and $21 trillion in public markets.

But investors will need to have confidence that “impact” isn’t just a marketing slogan. They need to know exactly what constitutes an impact investment, how their funds are being managed, and how the impact is measured. Until now, there have been no clear market standards — and that’s keeping investors from putting funds into impact products.

The new Operating Principles for Impact Management are designed to address these roadblocks and help bring impact investing further into the mainstream. They provide the first-ever common market standard — defining impact, creating consistency for asset managers, and easing concerns about “impact washing.” As a result, investors will finally have a transparent way to achieve adequate financial returns and positive measurable outcomes for society.

The Principles reflect best practices across a range of public and private institutions. They were refined over a three-month public stakeholder consultation, which included input from investors, industry associations, development finance institutions, and non-governmental organizations. The Principles integrate impact considerations into all phases of the investment lifecycle: strategy, origination and structuring, portfolio management, exit, and independent verification. Critically, the Principles call for annual disclosure of how they have been implemented, thereby enhancing their credibility in the market.

Can this work? We believe so. Other similar initiatives are working well. Fifteen years ago, we worked with international banks to establish the Equator Principles, which are now the most tested and applied global benchmark for sustainable project finance in emerging markets. The Equator Principles have been adopted by 94 institutions in 37 countries and have greatly increased the attention and focus on environmental and social standards and governance.

Another example involves green bonds. This market, which started from nothing in 2007, now has the Green Bond Principles, established in 2014 to promote market discipline and transparency. Since then, annual green bond issuance has grown from $10 billion in 2013 to over $180 billion in 2018.

The 60 asset managers and institutions that adopted the impact investing principles today collectively hold over $300 billion in assets invested for impact. These founding institutions have committed that their current — and future — impact investments will comply.

This is a major first step. Other asset managers, asset owners, asset allocators, development banks, and financial institutions are welcome to join us to create a powerful market. We need an impact investing market in the trillions of dollars that gives profits to investors, helps protect the environment, creates good jobs, and creates a better world for everyone.

Philippe Le Houérou is CEO of the International Finance Corp., a member of the World Bank Group and the largest development finance institution devoted to private sector investment.