Tracking tool: The missing link in impact investing

From company CEOs to institutional investors, a more holistic view of stakeholder value is steadily taking root across the globe.

Investors are increasingly seeking opportunities to achieve social and environmental impact alongside financial returns and contribute to the Sustainable Development Goals (SDGs). This certainly bodes well for the growth of impact investing industry.

Businesses that continually strive to contribute to pressing development challenges are the ones guaranteed of existence into the future, of longevity. This is exactly what the field of impact investing is all about, and more players are needed in this field to collectively fight climate change, social inequalities and natural biodiversity loss.

By definition, impact investment is company spending with the aim of contributing measurable positive social or environmental impact, alongside a financial return.

Investing with an impact lens also helps drive revenue by tapping into previously undercapitalised markets. It propels operational efficiencies and, when engaging bottom-of-the-pyramid suppliers, it may stabilise the supply chain.

The International Finance Corporation (IFC) estimates the market size for assets of private impact investors to be slightly above $2 trillion in 2019, just about Africa’s total GDP.

In the light of Covid-19 pandemic, impact investing could become more relevant and go against tightening of liquidity conditions, widespread economic disruption, risk aversion and benefit from the portfolio rebalancing. To benefit from these factors, impact investors have to leverage on innovative strategies for resilience.

Yet while more people and investors alike are becoming aware of sustainability practices and increasingly entering the impact investing space, little thought has been given to measuring and tracking impact.

Despite growth in impact investing market in recent years, a lack of a common standard for tracking impact investing has slowed progress. After all, progress is only possible where a project and its impacts can be measured.

There is, therefore, urgent need for development of industry standards and tools that investors can use to track their progress. A few global players have recently come up with such standards but much more ground remains uncovered on this front. Such operating principles for impact management provides market standards for how to manage investments aiming to achieve positive impact alongside financial returns.

Studies indicate that financial inclusion leads as the sector that has attracted most impact investments in sub-Saharan Africa, followed by green technology while agribusiness comes in third in what offers a glimpse into investor interests. Health, water, education and housing follow next, in that order.

There are various ways in which impact investments are being made by both public and private stakeholders alike. Besides internally generated cash and credit lines from commercial banks and development finance institutions, bonds are yet another effective financing vehicle – green, social and sustainability bonds. Such bonds enable issuers to raise funds specifically for projects that enable positive change for society and the environment. They appeal to investors as a straightforward instrument to integrate environmental, social, and governance outcomes into fixed income portfolios.

Impact investing using green, social and sustainability (GSS) bonds is possible if an investor buys the bond(s) with the intent for positive impact, and the issuer measures and reports on the impact that is directly related to the funds raised with the bond. The Green Bond Principles (GBP), a set of widely accepted guidelines for green bond transparency, require issuers to disclose which projects have benefitted, the amounts allocated and their expected impact, and recommend reporting on the environmental impact of the funded projects.

A 2019 study by the Climate Bond Initiative on post-issuance reporting, however, shows that only 38 percent of green bonds report on the use of proceeds post-issuance, and one-in-five green bonds fail to report on environmental impact. This calls for stronger transparency commitments through timely reporting, be it through sustainability reports, prospectus or other avenues.

This is the time that impact investing can demonstrate its full potential. By focusing on impact as well as financial returns, impact investors can make decisions that not only benefit their portfolios but benefit their investee companies.