In recent years there has been rapid growth in the volume of capital being invested in impact strategies. This growth has led to concerns that there has concurrently been a weakening of the standards of impact investing.
There is broad agreement that there are two levels of impact in the investment value-chain. That being delivered by the underlying asset (‘enterprise impact’) and that delivered by the investor (‘investor impact’ comprising investor ‘intention’ and ‘contribution’).
A traditionalistic view of impact investing focuses on the individual investor’s investment and holds that an investor’s impact needs to be ‘additional’. That is, any positive outcome would not have occurred but for that investor’s specific investment.
This traditionalistic view is necessarily restricted to philanthropic activity or at best to situations where new capital is invested in markets with very poor liquidity.
A ‘holistic’ approach focuses instead on investments as part of the financial system, emphasising the interdependencies between different asset classes. This view holds that investor impact is founded in the investor’s intention to deliver positive impact and is then delivered through investor contributions.
This holistic view recognises the ‘intense’ impact generated by investments demonstrating additionality, but also embraces a spectrum of more ‘diffuse’ positive impact delivered through other mechanisms. These include changes in the cost of capital, engagement and wider signaling.
WHEB’s investment decision is explicitly rooted in the enterprise impact of the business. Our intention is to contribute to positive impacts through enterprise and system-level contributions. We document and report on our investment intentions and contributions to underpin our claims to positive impact (see below).
Establishing demanding but pragmatic standards that require clarity in investment intentions, and evidence of investor contributions, is essential if impact investment is to retain its potency. These standards will enable impact investors to harness the full potential of capital markets as a whole to drive positive impact at scale. A system level view of impact investing in listed equities
Introduction
The term ‘impact investing’ was first coined in 2007 by the Rockefeller Foundation. 1 The practice of impact investing however pre-dated the formal terminology by many years. Prudential Financial, a US-based financial institution, established a business unit in 1976, for example, that sought investment opportunities alongside social change as a core objective. 2 WHEB’s own strategy, launched in 2005, focuses on investing in companies providing ‘solutions to sustainability challenges’.
However, the approach took time to develop in a world still dominated by the 1970s doctrine of shareholder primacy. Over subsequent decades the practice attracted more support and in 2009 the Global Impact Investing Network (GIIN) was set-up to ‘champion impact investing’ and ‘increase its scale and effectiveness around the world’. The word “impact” itself played an important role in crystalising the movement.
Expanding scope and scale
The original focus of impact investing was primarily on private markets. In a GIIN/ JP Morgan annual impact investment survey in 2011, public debt and equity together accounted for just 3 out of 2,213 investments.3 In fact, as recently as 2016, impact investments in public markets were still only receiving cursory attention in the GIIN’s annual impact investor survey.4 Of the 158 respondents to that survey, only 19 (12%) were allocating to public equity and only 13 (8%) to public debt. In terms of asset allocations, less than 4% was deployed into impact investments in public equity and less than 6% into public debt. The vast majority of the US$49.5bn of impact investments covered by the survey was being allocated to private equity and debt which accounted for nearly two-thirds of all assets. By 2019 however, although public markets still only accounted for 34% of the capital invested by respondents to that year’s survey, impact investing in public equity and debt had become two of the fastest-growing asset classes.5 Philanthropy and impact investing Traditionally, foundations and charities separated their investment portfolio from their grant giving. This meant that most of their financial assets were not actively aligned with their mission. The first steps in blurring these boundaries were loans or investments in place of or in addition to grants. This meant that more of an organisation’s assets could work in pursuit of its mission.
By making a loan or an investment, the impact achieved might not always be as great as through making a grant, but it meant that more money could be put towards achieving the endowment’s mission. This became known as impact investing. By moving into new asset classes, return profiles and risk exposures, there has been a trade-off between the ‘intensity’ of […]
source Impact investing in listed equities – WHEB’s perspective
Protected by Patchstack