Clear definitions are essential to well-functioning markets. In the case of impact investing, agreement on what it means for funds and enterprises to seek intentional, measurable social and environmental benefits is essential to further innovation, standardization, and growth.
We propose a market-driven solution, grounded in the fundamental need for transparency.
Any fund or enterprise that seeks recognition as an impact investment, not least for soliciting third-party capital, should meet two requirements in addition to providing the usual documentation regarding expectations for financial return:
1. Providing an “Impact Plan” to investors
The Impact Plan will be a standardized form used to document a fund or enterprise’s intentionality in generating social or environmental benefits. Key elements include:
- The impact goals sought by the fund or enterprise, presented in part as a set of metrics from the internationally recognized Impact Reporting and Investment Standards (IRIS) platform (examples of metrics currently in use are available at the IRIS Registry)
- A description of the way in which the fund or enterprise’s particular strategy for deploying capital, or providing goods and services, is expected to generate these impacts
- A discussion of the risks that might prevent these impacts from being realized, or that might lead to negative social or environmental consequences
Every fund or enterprise self-identifying as an impact investment should be required to disclose its Impact Plan to prospective investors. We recommend that the Global Impact Investing Network take the lead in determining the precise details of an Impact Plan.
2. Providing an annual “Impact Statement” to investors that discloses the fund or enterprise’s nonfinancial performance
The Impact Statement is an annual report documenting performance against the fund or enterprise’s stated goals in the Impact Plan.
- Funds and enterprises should have the flexibility to track impact using whatever method they deem appropriate. This method will be described and disclosed in the Impact Statement.
- Funds and enterprises should also be free to choose whether or not to have their Impact Statement independently audited. This decision will also be disclosed.
The approach described above enables funds and enterprises to characterize and prioritize impact on their own terms, on the condition they do so transparently. It provides for accountability through the power of markets, led by investors and the choices they make, and a strong and emerging cast of information providers and advisors including dedicated advocacy groups, fund platforms, academic and applied research initiatives, investment consultants, and media outlets.
Investors will likely support those funds and enterprises with Impact Plans most closely aligned with their own impact objectives. Performance benchmarks will quickly emerge as funds and enterprises are recognized for seeking more—or more challenging—impacts, and because of a commitment to especially rigorous nonfinancial performance tracking and reporting.
Some funds and enterprises will undoubtedly try to game the system, claiming the mantle of impact investing while delivering little or no social value. However, we must accept this eventuality and trust that investors see through the most egregious cases.
We recognize clear limitations to our approach, not least because its broad adoption is contingent on a critical mass of funds and enterprises unambiguously self-identifying as impact investments. This is a step some may be reluctant to take if a more nuanced strategy for raising capital has served them well when navigating an eclectic universe of investors. Moreover, the intent to invest and do business with impact resides with dedicated funds and enterprises, but also the large group of institutional asset owners and individuals already investing with the explicit goal of generating social or environmental impacts in more-conventional financial products and markets. These asset owners will likely begin demanding that intermediaries provide Impact Plans and Impact Statements as a condition of investment over time. Until then, their activities will likely remain obscured.
However, a market-based orientation remains the best solution for two undeniable reasons: First, impact means vastly different things to different investors, and second, impact investments are made in a range of different asset classes, financial instruments, market sectors, and recipient types.
For now there can be no single arbiter of what constitutes a sufficient level of real impact. Our top priority must be unleashing market forces to reveal the full scope of activity in impact investing and the different shades of demand. As with other, more-mature markets, a minimum, enforceable standard of performance may emerge in due course.
It is time to take the critical next step of bolstering transparency in impact investing through the requirement that funds and enterprises provide an Impact Plan to investors and report annually through an Impact Statement. Doing so will clear the path for a generation of investors to transform capital markets for good.