First report on impact investing in the Nordics
83% of Nordic impact investors expect their impact portfolio to deliver at or above market rate of return. It is a myth that an investor has to compromise his financial return when investing in solutions that improve the world, according to a new report: ‘Impact Report Nordic Investors.’
In September 2015, 193 countries signed and adopted the 2030 United Nations Agenda for Sustainable Development and its 17 Sustainable Development Goals (SDGs).
UN estimates that the global gap to implement the goals ranges from US $3 trillion to US $5 trillion annually. Looking at it from another angle ’The Better Business Better World’-report shows that solutions for the SDGs represent a US $12 trillion market in commercial opportunities and a potential of 380 million jobs to be created by achieving the SDGs.
As a matter of fact, there is US $200 trillion in private capital on global financial markets that increasingly could be invested in the SDGs.
The question then becomes how we can accelerate investments in sustainable solutions? One of the most recent answers in the finical world is: “Engage in impact investing!”.
A global phenomenon with a political approach
Any investor can rightly, and in good faith, claim that he or she contributes to the financing of a better world, in the sense that generally economic growth generates prosperity that in turn creates better living conditions for people.
While investments generally have furthered the development of society, impact investing is a new phenomenon that has concrete and pronounced political and sustainable objectives.
There is global scientific consensus on the reality of climate change and the fact that it presents a significant challenge for the world’s future, and many believe there is an ethical imperative to not sit idly by and leave these problems to future generations.
Combating climate change and addressing other social challenges covered by the UN’s 17 SDGs are a strong driving force behind the trend towards impact investing.
According to the Global Impact Investing Network over 1,340 organizations currently manage USD 502 Billion in impact investing assets worldwide.
Over the past decade, impact investing has gained significant momentum as both an investment strategy and an approach to addressing pressing social and environmental challenges.
Impact Investing in the Nordics
Impact investing is also growing in the Nordics. According to a new report, launched in this week, ‘Impact Report Nordic Investors’, 92% of Nordic investors, both private and institutional, perceive impact investing as a good way to solve shared societal challenges.
However, as an investor you do not have to compromise your financial return when seeking a positive impact on the world.
“It is a myth that you as an investor has to compromise your financial return when investing in solutions that improve the world. Our brand-new report shows that 83% of Nordic impact investors expect their impact portfolio to deliver at or above market rate of return,” emphasizes Richard Georg Engström, founder of IMPACT X, advisors in impact business and investing and the company behind the report.
The report also points out that some investment opportunities are more attractive to investors than others. Nordic investors focus their capital mostly in their local market, and on sustainable development in areas of renewable energy, healthcare, education, industry innovation and smart cities.
Despite SDGs being widely implemented in the Nordic society and business environment, few investors seriously use them to develop their impact investment strategy.
“Since this is a new field of financing and an immature market there are still challenges and obstacles to overcome before we see impact investment go mainstream. 67% of Nordic investors ask for more data on past performance of impact portfolios. However, 70% are not yet measuring or reporting on the impact of their own portfolio,” Richard says.
Professionalization of impact investment strategy
The definition of impact investment and what it entails is quite broad, as there are no official standards and rules. Investment strategies that seek both financial return and to measurably contribute to sustainable advancement are a relatively new phenomenon in the financial sector.
The Global Impact Investing Network (GIIN), one of the world’s largest impact investor networks, defines impact investing as:
“Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”
The International Finance Corporation (IFC), working under the World Bank, defines impact investments in roughly the same way:
“Investments into companies or organizations with the intent to contribute to measurable positive social or environmental impact, alongside financial returns.”
Both organizations thus involve the investor’s or the fund manager’s intention to generate more than just financial return. Thus, according to GIIN and IFC, it is sufficient to call oneself an impact investor, if one intends that investments should also contribute to non-financial goals.
The intention to generate a non-financial return can be ascribed a structure in order to professionalize the approach to impact investing. Professionalization of impact investing strategy can ensure more data and evidence-based structural approaches to investments.
This will provide the opportunity to invest on the basis of more than just wishes and good intentions, as well as increase the chances of both financial and non-financial returns and reduced risks.
A way to look at different intentions among investor, whether they value the impact first or prioritize financial return before impact, is to see the spectra from traditional investing on one side and traditional philanthropy on the other side.
“We can see that also Nordic impact investors have different intentions in their approach to investments impact companies. In the analysis we did based on the survey for our report, we can see that a third of Nordic impact investors are impact driven. 33% invest for impact first, then a financial return,” Richard Georg Engström finalizes.
Download a copy of ‘Impact Report Nordic Investors’ here: www.oneinitiative.org/investorreport/
The IFC set out nine principles for impact investments. The principles intend to identify a common frame of reference and a possible practical approach to impact investment strategies. IFC principles are not truth statements, but rather offer a guide for investors or managers to consider all phases – from initial investment to exit.
PRINCIPLE 1: Define strategic impact objective (s), consistent with the investment strategy. The Manager shall define strategic impact objectives for the portfolio or fund to achieve positive and measurable social or environmental effects, which are aligned with the Sustainable Development Goals (SDGs), or other widely accepted goals.
PRINCIPLE 2: Manage strategic impact on a portfolio basis. The Manager will have a process to manage impact achievement on a portfolio basis. The objective of the process is to establish and monitor impact performance for the entire portfolio, while recognizing that impact may vary across individual investments in the portfolio.
PRINCIPLE 3: Establish the Manager’s contribution to the achievement of impact. The Manager shall apply to establish and document a credible narrative on its contribution to the achievement of impact for each investment. Contributions can be made through one or more financial and / or non-financial channels. The narrative should be stated in clear terms and supported, as much as possible, by evidence.
PRINCIPLE 4: Assess the expected impact of each investment, based on a systematic approach. For each investment the Manager shall assess, in advance and, where possible, the concrete, positive impact potential deriving from the investment. The assessment should use a suitable results measurement framework that aims to answer these fundamental questions: (1) What is the intended impact? (2) Who experiences the intended impact? (3) How significant is the intended impact?
PRINCIPLE 5: Assessment, address, monitor, and potential negative impacts of each investment. For each investment the Manager shall seek, as part of a systematic and documented process, to identify and avoid, and if avoidance is not possible, mitigate and manage Environmental, Social and Governance (ESG) risks. Where appropriate, the manager shall engage with the investee to seek its commitment to take action potential address gaps in current investee systems, processes, and standards, using an approach aligned with good international industry practice.
PRINCIPLE 6: Monitor the progress of each investment in achieving impact against expectations and respond appropriately. The Manager shall use the results framework (referenced in Principle 4) to monitor progress towards the achievement of positive impacts in comparison to the expected impact for each investment. Progress shall be monitored using a predefined process for sharing performance data with the investee.
PRINCIPLE 7: Conduct exits considering the effect on sustained impact. When conducting an exit, the Manager shall, in good faith and consistent with its fiduciary concerns, consider the effect which the timing, structure, and process of its exit will have on the sustainability of the impact.
PRINCIPLE 8: Review, document, and improve decisions and processes based on the achievement of impact and lessons learned. The Manager shall review and document the impact of each investment, including expected and actual impact, and other positive and negative impacts, and use these findings to improve operational and strategic investment decisions, as well as management processes.
PRINCIPLE 9: Publicly disclose alignment with the Principles and provide regular independent verification of the alignment. The Manager shall publicly disclose, on an annual basis, the alignment of its impact management systems with the Principles and, at regular intervals, arranged for independent verification of this alignment. The conclusion us of this verification report shall also be publicly disclosed. These disclosures are subject to fiduciary and regulatory concerns.