We can create an alternative to our current two-tier society
The impact investing market reached US$2.3 trillion in 2020 but only US$636 billion of assets – or less than a third – were identified as measuring impact . Astonishingly low given impact measurement is supposedly a defining feature of impact investing.
Meanwhile in sustainable finance, over US$30 trillion of finance is now labeled as “sustainable” finance – but “it is unclear how much of it actually promotes sustainable development and how much is actually “SDG-washing”….because there is no universal yardstick for sustainable finance”. After all, if US$30 trillion of finance was really contributing towards sustainable development outcomes, then arguably the SDG financing gap would be contracting rather than expanding to US$4.2 trillion annually – up from US$2.5 trillion pre COVID-19.
“Doing good” with 1% of investment capital is never going to be enough if the other 99% of investment capital continues to create negative outcomes for people, and planet-seeding the need for future interventions and solutions. It’s akin to trying to empty the ocean with a teaspoon.
And of course, sustainable finance and impact investing account for but a tiny fraction of the total assets under management globally, so what about the impact the other 99% of investment capital is having? “Doing good” with 1% of investment capital is never going to be enough if the other 99% of investment capital continues to create negative outcomes for people, and planet-seeding the need for future interventions and solutions. It’s akin to trying to empty the ocean with a teaspoon.
Then there’s responsible investing. The most prevalent so-called responsible investment approach in use by global investors today – ESG integration – is really an investment risk mitigation / profit maximization strategy, not a sustainability or impact strategy at all. So long as investors are rewarded adequately for the perceived risks, or if investors don’t believe the impacts will materially impact the financial value of the investments, investments that cause harm can still be made. (We’ll leave for another day the argument that focusing only on “financially material” ESG risks systematically under-estimates future financial risks anyway….)
The proliferation of so-called responsible, sustainable, ESG, and impact investment products in recent years makes it challenging for end investors to unpack and differentiate these products and make informed decisions. Many make the not unreasonable assumption based on what these investment products are called that they avoid harm to people and planet and even contribute positively to the SDGs. But even where there are some positive benefits, this is not systematically achieved and there’s no way of knowing whether the most important impacts are being managed; whether negative impacts are being created in pursuit of positive, intended outcomes; whether anything changed or the change is happening at a fast enough rate to achieve the SDGs; or whether the trade-offs between different economic, social and/or environmental outcomes or between or within stakeholder groups are acceptable.
But there is a solution. Across all investments, we should focus on one thing – how investors and the organizations and projects they invest in integrate impact management into their decision making across purpose and strategy, management approach, transparency, and governance practices. Each plays an important role in fully integrating sustainability and contributing positively to the SDGs into organizational systems and decision making, and highlight gaps in current practice – especially around strategy and governance:
Embedding sustainability and contributing positively to the SDGs in purpose and strategy is important because it drives attention, focus and resources to what matters most and where the organization can have the most significant impact on important outcomes – including by reducing negative ones. It recognizes that investment returns and organizations’ prospects for future prosperity increasingly depend on the health of the planet and the wellbeing of humanity.
Integrating responsible business practices and impact management into organizational systems and management decision-making is about setting the right conditions to maximize chances of achieving the organization’s goals of contributing positively to the SDGs and increasing the probability of success over time. It helps organizations generate options and make more informed choices between those options to optimize their contribution towards sustainable development and the SDGs.
Being transparent is an important element of being accountable to Stakeholders – including those affected or potentially affected in future by the organization’s decisions and activities. It also helps Stakeholders make more informed decisions, for instance about whether they want to work with or for the organization, invest in or lend to the organization, or buy or use the organization’s products and services. To be effective, transparency needs to be useful and accessible to all Stakeholders.
Governance is an essential element of embedding responsible business and impact management practices into organizational decision-making. The organization’s informal and formal governance mechanisms define expectations of behavior, how decisions are made and how the organization holds itself and others accountable for their decisions and actions in accordance with its values, principles, and policies.
Sustainable development is complex, and we need to build assurance capacity and analytical capability – not a color by numbers approach.
Standardizing impact management practices
Standardizing impact management practices would help investors and organizations create a shared language and approach to make more informed, strategic capital allocation decisions to move from SDG alignment to SDG action, from measuring impact to managing impact, and from thinking about the SDGs and impact as an add-on to what business gets done to how all business gets done. It would also help to connect different actors across the ecosystem creating the enabling environment for greater cross-sector collaboration and innovation in SDG financing solutions.
Independent assurance of impact management practices
Just as we expect financial management systems and statements to be audited, independent and transparent assurance of impact management practices also needs to be considered. Assurance of impact management practices matters because, done well, it will underpin trust, credibility, and confidence; improve impact integrity and reduce impact-washing; reduce risk of management bias or blind-spots; improve quality and reliability of information; draw attention to shortcomings, and create impetus to improve. Sustainable development is complex, and we need to build assurance capacity and analytical capability – not a color by numbers approach.
If investors are serious about investing responsibly and sustainably and optimizing their contribution towards the SDGs, it’s time to also get serious about impact management.
 IFC, Investing for Impact: The Global Impact Investing Market 2020
 OECD. Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet
Regina "Gina" Kline
Founder & Managing Partner, Enable Ventures
October 27 - 12:00 PM EST
Founder & CEO, Acumen
November 3 - 12:00 PM EST
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