Today, there is a growing recognition that this does not have to be a binary choice: in fact, these are just two ends of a spectrum, with a range of investment opportunities in between.
The Spectrum of Capital (first published in 2014 as part of the G8 Social Investment Taskforce) was developed to illustrate this range. Between traditional investment and philanthropy, it also identifies three other investment strategies: Responsible, Sustainable and Impact-driven.
The more recent version of the Spectrum shown below also reflects the work of the Impact Management Project, a collaborative global initiative to agree a set of standard norms for measuring and managing impact (see below). The IMP consensus was that all three of these strategies fall within the broad ‘impact economy’, since all three can have a significant positive impact on society. In fact, they correspond to three ‘impact goals’: ‘Avoid harm’, ‘Benefit all stakeholders’ and ‘Contribute to solutions’, which reflect the particular intentions of the investor.
Source: Bridges Fund Management and The Impact Management Project 2017
Responsible investment seeks to Avoid harm and mitigate risks through the consideration of Environmental, Social and Governance (ESG) factors.
Sustainable investment (which the BVCA treats as a sub-set of ‘Responsible investment’) involves using these ESG factors to seek out value creation opportunities that Benefit all stakeholders.
Impact-driven investments go one step further, in that they deliberately seek to Contribute to solutions to societal challenges – and this intentionality to generate impact is central to the model of the investee enterprise.
All of these investment strategies can be executed across a variety of asset classes, including debt, private equity, venture capital, infrastructure and real estate.
The financial goals across this spectrum range from normal ‘market-rate’ returns to potentially accepting lower financial returns in exchange for greater depth or breadth or certainty of impact. However, as shown in the graph (to the right), adopting an impact investment approach does not necessarily involve a trade-off between financial and social or environmental objectives.
At the United Nations Summit in 2015, 193 countries agreed to adopt the Sustainable Development Goals (SDGs): 17 ambitious global goals for the year 2030, covering key societal challenges like poverty, hunger, health, education, clean water, affordable energy, global warming and social justice.
The SDGs have contributed significantly to the growth of the impact economy. As well as helping to raise awareness of these pressing issues, they provide a helpful framework for investors to think about how they can avoid harm, benefit stakeholders and contribute to solutions (ABC) – and therefore align their investment strategies with their impact goals.
Measuring and managing impact
How did the overall financial performance of your impact investments compare to:
Source: 'Investing for Global Impact' report, Financial Times 2018
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