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August 20, 2013

Impact Economy Produces Analysis of Impact Investing
    by Robert Kropp

The authors identify trends that are likely to encourage an increase in impact investing, but fail to distinguish the definition for it from that of sustainable investing.

SocialFunds.com -- In a recently published paper entitled Making Impact Investible, authors Maximilian Martin and William Burckart of Impact Economy define impact investing as “the practice of investing with the intention to generate measurable social and environmental impact alongside a financial return.” Although it's been several years now since impact investing has been presented as a potential new asset class, I still cannot differentiate between its definition and that of sustainable investing.

One factor differentiating between the two may be that impact investing is largely presented as an alternative to traditional philanthropy, and is directed toward practitioners of the latter such as high net worth individuals and foundations. The authors identify four megatrends which could encourage the growth of impact investing from its current $36 billion to as much as $1 trillion in assets by the end of this decade: “massive pent-up demand at the Bottom of the Pyramid, the need for radical resource efficiency and green growth, the restructuring of the welfare state to drive efficiency, and the rise of Lifestyle of Health and Sustainability (LOHAS) consumers.”

But how do the authors themselves differentiate between impact investing and sustainable investment? The Global Impact Investing Network (GIIN) defines impact investing as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”

“The word 'intention' in this characterization differentiates these investments from socially responsible investments (SRI),” the authors state. “The latter aim to avoid social or environmental harm emanating from an asset that is otherwise managed for a single bottom line: profit.” Such a characterization of SRI or sustainable investing, however, fails to take into account the growing trend in sustainable investment of applying environmental, social, and corporate governance (ESG) criteria to investment decision making. According to last year's Trends Report by US SIF: The Forum for Sustainable and Responsible Investment, an important development in the industry has been the dramatic increase in the number of investment funds incorporating ESG criteria in their investment strategies. The report found that 720 such funds, with $1.01 trillion in assets under management, now do so, a 78% increase over the assets tracked in 2010.

Considering the confusion over definitions that clearly differentiate between the practices, it’s no wonder that Amy Domini wrote in 2011, “Please, 'high impact investors' who are so eager to distance yourselves from us socially responsible investors, don't just presume that you are doing more than we all have for the last 30+ years. If you want to have a high social impact in the world, join us.”

Nevertheless, it’s unlikely that sustainable investors would disagree with the conclusion reached by the authors. “The reputation of mainstream finance has been called into question around the world in the aftermath of the financial crisis,” they write. “Impact investing provides a major opportunity to demonstrate how finance and financial innovation are fundamental to making finance work for the long-term viability of the real economy and society, showing a way forward for the stewardship of society’s assets in the emerging sustainability imperative of the early twenty-first century.”

Labels aside, the opportunities referred to by the authors in their conclusion will surely be welcomed by all investors committed to incorporating ESG factors into long-term investment strategies.

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