Amid current global challenges, there’s an increasing focus on creating a new normal based on sustainable living. In turn, more and more investors are looking to environmental, social and governance (ESG) and impact investing, seeking long-term profitability while not only ‘doing no harm’ but ‘doing good’ ( having a positive impact on people and planet by contributing to solving environmental and social problems).
These impact claims are likely to attract more investment, as well as consumers and potential employees.
With this, however, comes the risk of ‘impact washing’ (claiming impact with no evidence to support such claims). Indeed, in the 2020 Global Impact Investing Network (GIIN) Annual Impact Survey, 66% of impact investors said impact washing is the greatest challenge the industry will face over the next five years.
And so, as this movement grows and the private sector increases its explicit role in matters of public interest, support is needed to ensure that the industry delivers on its impact and ESG promises.
We propose that think tanks are well-positioned to support this endeavour. To complement and strengthen the investment industry’s skills and capacities. And to help nurture this young industry to grow in a sustainable manner, and to deliver impact. In this article we look at how.
Impact investing: a growing but young industry
GIIN define impact investments as those ‘made with the intention to generate positive, measurable social and environmental impact alongside a financial return’. They should meet the following key characteristics:
- Intentionality: to intentionally contribute to social and environmental solutions.
- Financial returns: to generate a financial return on capital that can range from below market rate to risk-adjusted market rate (this distinguishes them from philanthropy).
- Impact measurement: a commitment to measure and report the actual social and environmental impact of the investments.
GIIN estimates the current size of the impact investing market to be USD 715 billion. Out of 1,200 organisations, asset managers account for about 54% of industry assets under management (AUM), and 50 development finance institutions manage about 36% of total industry assets. Diversified financial institutions manage 3% of total directly invested AUM, as do pension funds and insurance organisations; while foundations and family offices account for a smaller proportion of the total AUM. The median organisation manages USD 37 million, while the average manages USD 542 million (GIIN 2020).
The industry has been growing over the past few years and is expected to continue to do so. The five-year trend from 2013 to 2018 showed a 32% increase in yearly capital invested. There continues to be growing demand by investors for impact options.
Notwithstanding its size, the impact investing sector is a young industry. As such, it still faces many challenges. Central among these is its capacity to effectively plan for, measure and account for impact.
Since the Sustainable Development Goals (SDGs) launched in 2015, more and more investors have recognised them as the dominant framework around investing with impact.
Many commendable efforts have been made to help the industry grow with integrity, and to step up to the challenge of delivering the SDGs by 2030 and to help address climate change. This is not surprising as many of the main investors, individual and institutional, are leading players in the international development sector (for instance: the European Bank for Reconstruction and Development, the MacArthur Foundation, The Rockefeller Foundation, the International Finance Cooperation, the IDB Invest, and others).
So far, most efforts have focused on strengthening the sector from within.
These efforts, however, have not been enough.
The current COVID-19 and racial discrimination crises have only deepened and confirmed the urgency to act. It has also become clear that the magnitude of the industry’s challenges cannot be solved by a single actor. Cross-collaboration is needed more than ever.
In such spirit of collaboration, we propose that think tanks would be perfect to help nurture this young industry and help it to learn in a more systematic and sustainable manner.
How think tanks can help address the challenges the industry faces?
Think tanks include a broad range of organisations with the shared purpose of informing policymaking and debate on issues of public interest with research-based evidence. Yet they remain largely absent from the impact investing ecosystem.
In delivering their missions, think tanks fulfil several functions that may be helpful in addressing the challenges facing the impact investment industry.
The table below provides a high-level illustration of how think tanks are able to meet some of the challenges, and their root causes:
|Challenge facing impact investing||How think tanks can contribute|
|There is an absence of a robust standard impact measurement and management (IMM) framework and benchmarking. What counts as ‘good enough’ remains subjective.||Think tanks’ extensive experience in monitoring and evaluation in relation to impact makes them well placed to help design, deliver and manage IMM systems across the industry through data collection, analysis and advice.
As independent actors, think tanks can also play the role of trusted broker in the impact investment ecosystem. For instance, as an independent arbiter to verify adherence to the IFC principles, undertaking ex-ante, mid-term or final evaluations and or identifying lessons learned for future investments.
|There are limited meaningful learning and evaluation activities.||Think tanks can conduct ex-post evaluations with a focus on accountability and learning for future impact investments. These evaluations can provide investors and foundations with a clear assessment of the results achieved by their portfolios and individual investments. Think tanks are also well positioned to do systems evaluations and/or evaluations by sectors, countries, region, asset class or a group of impact investors.|
|There is limited evidence that investments can generate both financial returns and positive environmental, social and/or governance impact.||Think tanks can identify, gather and systematically review individual cases to generate evidence of this dual impact, where it exists. Thinks tank can contribute to the creation of databases as first step for broader analysis.|
|The voices of beneficiaries are not yet systematically heard or included in impact investing.||Think tanks can raise the voices of groups or sectors whose needs and interests are not often heard, but that are affected by. Think tanks are well-positioned to raise the needs and interests of intended beneficiaries of impact investments. Think tanks know the national realities of where investments are made and have experience collecting data and engaging with beneficiaries and stakeholders at the national and local level.|
|Perverse incentives hamper the industry’s ability to grow with integrity.||Think tanks can act as arbiters between the multiple and conflicting incentives that exist in any policy arena. Similarly, they can help reduce knowledge and information asymmetries between actors in the impact investment ecosystem and reduce perverse incentives.|
|This is a new industry that is still learning, mostly through self-reflection.||Think tanks are particularly well placed to identify and draw evidence-based lessons of relevance to the industry. Most importantly, they have vast experience in IMM from their work in monitoring, evaluation and learning performed for decades for international aid and public sector organisations. Although the impact investing industry is different, we believe much can be applied and learned from other sector successes and failures.|
|Investors’ expectations sometimes lead to conflicts and challenges in terms of different priorities and interests.||Think tanks can help legitimise investment decisions by providing evidence and credibility. This can help identify and manage expectations for all parties: investors, fund managers, businesses, and other stakeholders.|
Three other important reasons for think tanks to participate in impact investing
First, the impact investment industry is actively affecting matters of public interest. Their interventions are expected to have an impact on the welfare of individuals, communities and societies. It ought to be part of think tanks’ mandates to care about any intervention that has the potential to affect the public interest.
Second, funding for impact investments is being drawn from sources that are of interest to think tanks: private individuals or foundations, international development agencies, and public funds at the national level (either directly or indirectly through grants or subsidies to investors and entrepreneurs). Certainly, in relation to the latter, there are matters opportunity costs related to the use of public funds and to the need to ensure an adequate level of public accountability. Promoting public accountability is central to think tanks’ missions.
We think these are compelling reasons for think tanks to play a more central role in this sector. And as sustainability and impact investing gain momentum, the time to act and collaborate can no longer be delayed. Beyond accountability, we need to work together, learn fast, adapt as needed, so we achieve our shared goal: sustainable impact at the pace the planet needs it.