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The principles for impact management were developed in response to a lack of discipline in managing investments for impact, making it difficult to draw a clear line between impact investing and other forms of responsible investing. The IFC, in consultation with external stakeholders drafted and officially launched the Principles for Impact Management this year in an effort to establish a market consensus surrounding management of investments for impact.

The Impact Principles

FIGURE: The Impact Principles / Source: IFC – World Bank Group

The Principles integrate the management of impact into every phase of the investment lifecycle from strategy to exit with a separate independent verification to publicly disclose alignment and its extent to the Principles. They also help mitigate potential impact-washing whereby funds label themselves as ‘impact investments’ for the sake of obtaining the image of being socially responsible. To date, it’s estimated that the market for impact investing is set at $228 bn as assets under management and scaling [2].

Bringing Impact Through ESG

While corporate social responsibility (CSR) deals mainly with a company’s’ specific actions on having a positive impact with respect to the three P’s(people, profit and planet), the environmental, social and governance (ESG) framework is used to assess corporate behavior and the future financial performance of companies. This means taking into consideration a company’s strategy and operations and the effect it has on society and the environment as a result of its activities.

DIfferent Investor Categories

FIGURE: DIfferent Investor Categories / Source: Bain & Company

 

In Asia, significant strides have been taken to incorporate ESG criteria to their investment practices with around 90% of Asia-Pacific private equity general partners in a Bain survey stated to have significantly increased their efforts to invest more sustainably [1]. However, given the varying types of sustainable investing such as responsible investing and impact investing and different methods of applying ESG criteria to investment strategies, there is considerable confusion as to where the borders lie.

ESG Ratings

FIGURE: ESG Rating / Source: FTSE Russell

Alone, simply incorporating ESG criteria and managing respective risks is only enough for an investment to be classified as responsible, to create impact, businesses that actively seek to generate positive impact and avoid harm are taken into consideration in the investment universe. This immediately removes any company in an industry such as oil, even if it has an additional environmental or social competitive advantage, due to its contribution to climate change.

Fueling SDGs for the Future

The Sustainable Development Goals (SDGs) were set by the United Nations to achieve the goals of ending poverty, protecting the planet, and ensuring peace and prosperity for all people. And although they are a separate set of specific goals, they integrate well into the mission of impact investing, i.e. fueling businesses with a purpose in creating positive changes in society and the environment.

It’s estimated that the global market potential for fulfilling the SDGs are at $12 tn, a mammoth opportunity for businesses looking to create sustainable impact in the future. And given goal of achieving SDGs by 2030, it’s highly likely that many of the partnerships and funding required to realize them will require a rigorous process of selection, a process that the Nine Principles for Impact Management fulfills well.

Mohammed Shehab, Junior Associate at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]

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