Impact Investors Must “Get Closer” to Avoid Entrenching Inequality
Investors’ measurement and management tools need to better account for environmental and societal outcomes, says Oxford report.
Investors’ impact monitoring and reporting processes may contribute to worsening equality, with those most in need of financing finding it harder to access, according to new research.
The report – published by from Oxford University’s Smith School of Enterprise and the Environment – investigated current approaches to impact investing measurement and management, drawing on feedback from impact investors and intermediary organisations across eight countries.
It found little cross-industry consistency in impact measurement and management by investors and investees. There is also wide disagreement on who should define the goals and methods of impact, fuelling ‘impact-washing’ concerns.
In addition, the report said there is a lack of support for investees in emerging and developing markets, where collecting and reporting impact data can be expensive and time-consuming. As such, there is an increased risk that the wider use of impact measurement and management tools by investors could channel funding to investees who can afford the costs – meaning those most in need of investment stand to lose out.
“The impact measurement frameworks that have become more mainstream are still not fit for purpose when you try to empirically understand the actual impacts on people and projects,” report co-author Dr Alex Money told ESG Investor.
“A big global climate fund is trying to standardise [several factors], because it wants to keep due diligence low and scalable to make disbursement efficient – which makes sense – but generalising in this way means that fundamental impact considerations are lost.”
Many impact investment vehicles operate like traditional return-seeking funds, with measurement and management tools being designed and implemented accordingly. However, this ultimately contradicts the true motivation of an impact fund – delivering positive environmental and/or societal impacts, Money added.
“If impact investment funds [operate like traditional funds], there is a risk that they end up being sub-optimally allocated in terms of the projects they support, because these projects may not be the most attractive in terms of actual impact,” he noted. “They will then become even more marginalised as funding goes elsewhere.”
Closing the gap
To address impact-washing risk, governments should set clear boundaries and principles for impact standard development, the report noted. It added that policymakers should also mobilise private capital by investing in better education around impact strategies.
Impact investing been high on the agenda of policymakers in recent years. The Impact Taskforce was established under the UK’s Group of Seven presidency to improve the measurement of business and investment impact and identify investment structures that drive capital towards projects delivering positive real-world outcomes.
More recently, the Group of 20 Sustainable Finance Working Group published a paper outlining the latest impact investment figures and trends. This included identifying select impact finance vehicles that were proving most effective in addressing key social issue areas last year, as well as key policy levers and developments in the impact transparency and data space that can best scale private capital in related areas.
Money noted that there is also a capacity gap at the ground level – especially in emerging markets – with people closer to impact-focused projects often lacking the ability to synthesise, integrate, aggregate and communicate impact.
Investees in emerging markets therefore need more support in measuring and managing impact, the report said. This can be achieved by investors and investees working more collaboratively to ensure that the goals and methods of impact measurement and management are co-defined towards optimal outcomes for both parties.
“The provider of capital probably needs to be closer to the outcome [of an investment] to really understand what it looks like – which is time-consuming, expensive and has shoe leather costs,” Money added.
The Global Impact Investing Network’s (GIIN) 2020 impact measurement and management survey found that 99% of surveyed investors considered measurement to be important for tracking progress towards impact goals and for reporting on impact to key stakeholders. In addition, 90% reported growth in impact management and measurement guidance and tools, with 87% stating that they use impact data to assess their impact-related performance – specifically, the relationship between money invested and perceived social returns.
Fast-growing market
Impact investing is one of the fastest-growing investment markets, reaching an estimated US$1.1 trillion by the end of 2022. The impact investing market is expected to grow another 18.6% per year between now and the end of the decade.
Bodies focused on impact investment, such as GIIN, have contributed to this growth by developing strong overall principles on impact.
“But one of the key things we have recommended is the need [for these organisations] to get closer to the potential recipients of impact investments, to provide them with education on how to go about impact management and capacity building,” said George Carew-Jones, Research Associate at the Smith School.
Investors responding to the 2020 GIIN survey also disclosed their concerns over the quality of impact management and measurement. Eighty-nine percent of investors said transparency and comparability were a ‘significant’ or ‘moderate’ challenge. Meanwhile, 84% said they were uncertain as to how impact management and measurement results were best integrated into financial decision-making.
A report published earlier this year by the non-profit Financial Inclusion Centre warned of a growing risk of impact-washing, due to social impact-focused vehicles not properly conveying the extent to which finance is actually delivering positive real-world outcomes.
More broadly, a new report by GSG Impact identified some of the major challenges for emerging markets that the global trend for greater impact transparency could bring, including a lack of emerging market input in the development of standards by the International Sustainability Standards Board (ISSB).
Grounds for optimism
The Smith School research team demonstrated the practical relevance of the report’s findings through the case study of Zambia’s Constituency Development Fund (CDF) – a publicly funded US$200 million programme of decentralised growth projects and community development.
It is currently composed entirely of public finance, with the money allocated evenly to each of Zambia’s 156 parliamentary constituencies in an annual budget. Supported projects include the construction of schools and health centres, as well as the installation of solar-powered boreholes as a climate adaptation-related measure.
The fund is constructed to reach the communities most in need, the report said, and has potential to act as an aggregator of impactful, community-led growth projects by mediating between those wishing to finance impactful community development projects and the project developers.
To do this, the CDF needs to establish an effective monitoring and evaluation system that fully demonstrates the fund’s impact.
“If a rise in impact measurement and management were to exclude emerging or developing market investment opportunities from being funded or financed, then the entire investment strategy will fail to drive the systemic gains that it seeks to create,” the report said.
However, the rapid growth of the impact investing market offers grounds for optimism, according to Money.
“The ability of locally owned and locally led organisations to understand, measure and communicate on impact is much greater today than it was even a few years ago,” he said.
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