The maxim attributed to Mohandas Gandhi – “be the change you wish to see in the world” – could act as a guiding principle when investors define their approach to impact investing.
According to the latest figures, this market is now worth over $500 billion, making it one of the fastest-growing parts of the investment industry. As more investors look to allocate capital with the intention of achieving a defined and measurable ‘impact’, the sector looks set to experience continued growth.
That’s great news for social and environmental innovators, who stand to benefit from money flowing into new technologies. It’s also great news for responsible businesses that should see their positive practices in environmental, social and governance terms rewarded.
But this rise in demand also comes with a risk: ‘impact washing’. Like its better-known cousin ‘green washing’, this is when a fund labels traditional investments as impact investments in an attempt to benefit from the positive attributes linked to the trend. Ensuring we don’t dilute or distort the definition before the market has really taken off is vital if investor appetite is to be sustained.
True impact investments must focus on transparency and accountability of the effects achieved by the investment. This makes an investor’s commitment to continuously measure and document the social and environmental effects one of the key features of impact investing.
Although investors seem to agree on the process required to carry out private impact investments, the quantitative and qualitative measurement itself and the techniques used are anything but standardised. However, promising initiatives, such as the IRIS+ of the Global Impact Investor Network, are looking to create such standards.
At AllianzGI, we have developed a stringent methodology in line with best practice that enables us to measure impact. This methodology grew out of our belief that impact investments can deliver significant benefits to institutional investors and that these benefits are most likely to materialise when impact investments pursue a holistic strategy.
For us, impact investments in private markets are guided by three principles: the strategy must aim to have a positive effect in social or environmental terms while generating an attractive financial return; there must be a causal link between the investment and the effect achieved; and the effect must be identifiable and measurable. In addition, regular documentation must be provided to ensure the validity of the effect. By following these guidelines, we believe we can report the positive effects of our investments in a transparent and comprehensible way.
“Being the change” demands that, as fund managers and investors, we can identify and measure the changes we are financing.
Deborah Zurkow is global head of alternatives at Allianz Global Investors