STELLENBOSCH UNIVERSITY STUDY
Nebulous definition of impact investment a possible bar to wider adoption
A methodology for measuring the effects of the investments will provide more certainty
What good is impact investing? This question, raised in the Harvard Business Review in 2014, highlights increasing international interest in this booming responsible investment strategy. In SA, President Cyril Ramaphosa’s special economic envoy on investment has also recently been paying particular attention to the opportunities impact investment provides. A national task force for impact investment was launched in October to direct capital towards underfinanced impact projects.
Impact investing has been defined by some as an investment approach that intentionally seeks to create both a financial return and a positive impact that is actively measured. These dual goals can be achieved by investing in entities offering products and services ranging from microloans to affordable housing, renewable energy and sustainably grown crops.
Given its scope, impact investing can be used to tackle a wide range of social and environmental challenges. However, some scholars claim definitional ambiguity is a barrier to impact measurement that reduces the attractiveness of this responsible investment strategy. To complicate matters further, there is no universally agreed set of metrics to actively measure and compare impact.
The lack of a standardised definition has been at the centre of much academic debate since the term was coined at the 2007 Rockefeller Foundation convention. Nonetheless, role players in the impact investment market do agree on four elements of the definition of impact investing: it should be an active and intentional deployment of capital; the impact created by the investment should be measurable; there should be a positive correlation between the intended impact and an investment’s expected return; and it should have a net positive effect on society and the natural environment.
Though there are four common elements in the process of impact investing and an understanding of the dual motives of impact investors, much of the uncertainty lies in defining impact. A review of the literature reveals that impact identification and measurement are two of the most complex elements of impact investing and could represent a barrier to the wider adoption of this strategy.
Though impact investing has become more recognised and researched globally, limited academic research has been undertaken in emerging markets where more than two-thirds of impact investment transactions occur. Given its sociopolitical history and status as an emerging market, SA presents a unique setting in which to investigate the phenomenon. The country also has the fastest-growing impact investment market in sub-Saharan Africa.
We set out to investigate local role players’ views of the definition of impact investing, their motives for adopting this strategy and their understanding of what social and environmental impact actually constitutes. We interviewed 13 experts along the impact investment value chain. In line with previous scholars, they agreed that impact investments should be intentional, measurable and have a positive impact alongside financial return.
Some of these impact investors prioritise market-related, risk-adjusted financial returns over social and environmental impact while others are of the opposite opinion. They also deliberated the importance of adopting a standardised definition of impact investing. The majority did not consider it to be a barrier to growing the local impact investment market.
The lack of clarity about what actually constitutes social and environmental impact was not deemed to be a debilitating barrier either. Instead, we found the real barrier was an unclear method to establish and balance clear and detailed impact objectives regarding financial objectives. Many investors (in this study and further afield) have broad impact objectives that make the measurement of impact difficult and unreliable.
The measurement of impact is vital to build track records for asset managers. Investors know how to report financial returns as there is a standardised format for doing this. However, we found there might be a dearth of knowledge on how to report social and environmental impact, as there is no uniform format for doing this. Therefore, the disclosure of social and environmental impact would be inconsistent and not comparable across investment time horizons. As such, a standardised format of reporting should be researched and developed, not in terms of social and environmental impact metrics but in terms of consistent measurement categories within the reports across multiple years.
In addition, research could be conducted on the methodologies of successful impact investors that managed to establish and achieve impact alongside their financial return objectives.
Though the debate on what constitutes impact investing is likely to continue, it seems as if the role players actively pursuing this responsible investment approach have a genuine desire to drive social and environmental change. This change will likely only be revealed incrementally over time. Therefore, it is crucial that the impact investment community be open to documenting and sharing their success stories and methods of impact measurement and reporting.
• McCallum and Viviers are academics in the department of business management at Stellenbosch University.