Quantifying impact investments important in supporting growth in the market
Impact investing might be an alternative investment vehicle that carries the baggages of social or moral motives, but they can still match other forms of investment.
This is the view of Hannah Schiff, senior research associate at the Global Impact Investing Network. Speaking to GreenBiz, she said: “The data shows that market-rate returns are achievable in impact investing.
“Impact investing could be a great way for companies to create positive changes in society and the environment while still producing financial returns.”
Ms Schiff’s confident statement is supported by figures from the Impact Investing Benchmark, which is the first index of its kind to provide comprehensive analysis of the financial performance of private impact investments. It examined 51 different impact investments – investments that have the focus of making a positive social or environmental change – from 1998 and compared their returns against 705 funds with no social impact objective in the same industries, geographies and asset classes.
The Benchmark found that the impact investments posted a net internal rate of return of 6.9 per cent as of June 2014. Comparatively, the private investment funds that had no social or environmental objectives returned 8.1 per cent.
However, while the data is undoubtedly positive for impact investing as an alternative investment vehicle, there are still calls for better measurements. Usually when talking about financial investments this would refer to better ways to monitor and measure the monetary returns, but in this instance the calls are for better methods of measuring the social impact of the investments.
After all, impact investors want to know that they are both making money and making a difference – this is the very reason they choose this route to potential profit. Whether it is renewable energy, healthcare products or educational services, investors are looking for their investments to fuel growth in a particular company while that business they invest in makes some kind of positive change.
William Burckart, the CEO of Burckart Consulting, wrote an article in July 2015 in which he stated that investors today want to make money and have a positive change, rather than make money then give some of the profits to charity. However, he believes that impact investments would become far more popular alternative investment vehicles if their impacts were easier to see.
“Even managers who are aware of impact investments are wary to suggest them, for lack of metrics,” he wrote.
In a new report by the Money Management Institute entitled ‘Bringing Impact Investing Down to Earth: Insights for Making Sense, Managing Outcomes, and Meeting Client Demand’, financial experts say that addressing limitations in reporting on the effects their money is having would help satisfy the growing demand for impact investing.
Learning from the Third Sector
One approach Mr Burckart suggested is to take inspiration from the third sector. “We should be using the tools and firms the non-profit sector relies on to evaluate their programs and communicate outcomes,” he said. “Sometimes it’s as simple as setting clear, long-term objectives and getting the right information technology to capture certain data.”
Charities must constantly be analysing the effects of the work they do, both to show donors that their money is being well spent, and to ensure they are being as efficient as possible with the often limited resources they have at their disposal. By adopting their tools and techniques for doing, investment firms could better demonstrate the impact their client’s investments are having.
Progress is already being made in this respect with agencies like, Thomson Reuters, MSCI and Bloomberg all now offering environmental, social, and governance research data with the view to helping in the analysis of impact investment.
Mr Burckart stressed that the responsibility is now with the organisations receiving the investment for them to produce data that clearly illustrates that their work is having the desired impact but the investors need to push for it. He explained: “Investors and their advisors need to demand better data on an investment’s holistic impact, and companies need to gather it.”
Having better metrics to quantify returns would in turn encourage more people to view impact investing as an attractive form of alternative investment.