If the focus of double bottom line investing gets placed exclusively on financial metrics, then the conclusion could be drawn that good intentions equate to impact.
A recent joint publication from Cambridge Associates and the Global Impact Investing Network (GIIN) sought to introduce the first ever “Impact Investing Benchmark”. GIIN defines impact investing as investments “made into companies, organizations, and funds with the intention to generate a measurable, beneficial, social or environmental impact alongside a financial return”. At first glance, the benchmark results are extremely impressive, showing (as they do) that some impact investing fund categories have, in fact, financially out-performed a selection of comparable ‘normal’ funds while overall returns are close to market rates. The obvious conclusion is that investing for impact does not necessarily lead to lower financial returns — as headlines by various news outlets suggest.
These headlines will certainly help raise the profile and popularity of impact investing. The question remains, however: at what cost? Developing guiding principles and benchmarks for the impact investing sector is in itself a great idea. It was never going to be easy, but it could perhaps be taken as the first step in an iterative process — as noted by the authors. But the first step, in particular, should be in the right direction. There are some fundamental concerns as to whether the report provides a “benchmark” for impact investing. These concerns are not so much about methodological or technical details as it is about the message communicated by the overall approach.
The most glaring problem is that social impact takes such a back seat. According to GIIN, impact investing is about generating social benefit alongside financial returns. Now, imagine the reaction of the impact investing community in the following scenario: 50 impact investing funds get selected with the intention of generating financial returns and creating a so-called "Impact Investing Benchmark" based only on their impact performance. The “benchmark” provides no information about financial returns but describes in detail different dimensions and measures of impact performance. The new benchmark does not even try to assess if the financial target returns of the funds were met. What do you think the crowd will say? “That's impressive! But how did they perform financially?” The same logic must be followed the other way around.
Impact assessment and measurement is a complex task and it would be unreasonable to expect that such a novel benchmark provides a fully comprehensive aggregate for the impact generated by all the funds involved. On the other hand, the report uses a self-reported "intention to generate social impact" as the only impact-related inclusion criteria and this falls short vis-à-vis the overall spirit of impact investing. The message coming from the benchmark, as it is currently stands, is that good intentions are enough, while good returns are great.
The flip-side of not including an explicit measure of social impact is that the focus of the benchmark gets placed exclusively on financial metrics. There’s no doubt that financial metrics are important, but what exactly is the point of impact investing? In exclusively highlighting the financial performance of impact investing funds vis-à-vis their ‘traditional’ counterparts, it could attract purely financially-motivated investors who would normally steer clear of the sector. This danger is exacerbated by including only impact investing funds in the benchmark, which target market-rate returns or above only.
We should not underestimate the effects of a broadly accepted benchmark on the entire sector, or industry, especially when finance professionals are involved. A benchmark represents the level that others should strive for. Sooner or later the whole crowd might start following it with investment managers incentivized to outperform or at least to meet the standard. This powerful and guiding instrument should represent the leading indicators of the market. But impact investing is defined as double bottom line investing.
One of the core characteristics of impact investing, and “a hallmark” as defined by the GIIN, is “the commitment of the investor to measure and report on social and environmental performance and the progress of underlying investments.” In completely excluding any indicator of social impact and focusing on the most financially-oriented impact funds, the new “Impact Investing Benchmark” appears to be limited in its applicability for the impact investing sector. Framing the discussion around impact investing purely in financial terms detracts from the amazing work and impact achieved by so many pioneers in this area. Blazing new trails is necessary, but you also need to think hard about what impression you are going to make.
There is clearly a need for further research in this direction, and just recently, Wharton's Social Impact Initiative released another publication, which offers more or less similar results to the above, although they too placed the focus squarely on financial returns. At least, Wharton stopped short of using the term “benchmark” for its performance data.
The discussion around the “Impact Investing Benchmark” and other efforts in this direction provide a great basis for reflection and priority-setting in the impact investing industry. It will be well worth creating a case study for our advisory, and education practice in impact investing and social finance, and will certainly help to get people engaged in the double bottom line discussion.
Bjoern Struewer is founder and CEO of Roots of Impact, a specialized consultancy creating solutions for more effective impact investing and development finance. Rory Tews is advisor for social entrepreneurship and social impact assessment at Roots of Impact.
