Impact investing has the power to create social change, but we need to measure it
As our world faces a myriad of environmental, social and geo-political challenges, there can be little doubt that radical changes must be made to ensure a sustainable and equitable future for generations to come.
The UN’s latest report on climate change sends a stark warning: we have passed the point of no return. We must move quickly to find alternative sources of energy and new forms of technology.
The terrible situation in Ukraine has further highlighted this need, not only for humanitarian reasons, but also to break the reliance so many nations have on Russia for oil and gas.
Later today, I will tell an audience at Gresham College how the private sector, and in particular impact investment, can play a leading role in resolving these issues, making the world a fairer and safer place.
The term “impact investment” covers all investments which – intentionally or not – have economic, environmental, and social impact.
It represents an opportunity to reset our economy and re-evaluate how we want our planet, society, and future to look.
As we build on the economic recovery from Covid-19, firms need to put their money where their mouth is. Shifting more investment from areas which simply avoid harm to those which provide real solutions will unlock the power of finance to accelerate the Just Transition Declaration of COP26 and the government’s levelling up agenda. Crucially, it can also finance the Sustainable Development Goals set by the UN.
Until now, ESG investment measurements have heavily focused on environmental impact.
However, both the levelling up and just transition agendas need an equal focus on social impact, because companies which might score highly on environmental problems may also have serious social and human rights issues in their supply chains.
The International Finance Corporation estimates that impact investing in private markets could be as large as $2.1t in assets under management. Right now, however, only $505bn is clearly measured for its social and financial impact.
This could be boosted through global convergence and strengthening of existing impact data and measurement structures.
That is to say, companies need a framework in place for measuring and demonstrating how they are making the world a better place. Words alone are not enough.
We need a more accurate measurement of impact investment to free up the power of finance and consign concerns about “impact washing” to the history books.
We must ensure savers and investors wanting to prioritise ESG factors can have full confidence in the authenticity of the products that are offered to them.
This will encourage genuine and effective investor engagement and ensure better impact as that capital is deployed.
Work is already underway. Financial institutions will be expected to publish estimates of the carbon emissions linked to their loans and investments, under draft international standards published by the International Sustainability Standards Board.
The UK and Canada are pioneers in impact investing and, with knowledge gained over two decades of practice, are perfectly placed to drive this critical change.
There are real opportunities for investors to secure financial returns while addressing inequality and supporting more inclusive and sustainable development.
With measurable social impact this model can succeed. After all, investing in the future of society is simple business sense.