The IFC's Operating Principles for Impact Management will help bring greater transparency and discipline to the market, writes Hans Peter Lankes
Asset managers face an increasing-ly challenging task: exploring the social and environmental impact of their investment decisions. That's because a new generation of private investors, especially women and millennials, expect their money to do more than just make more money – they want it to have a positive impact on society.
That shift in the investment focus has profound implications. Imagine if all the financial assets held by institutions and households around the world – roughly $269 trillion – were invested with the goal of having an impact beyond financial returns. Today, much of this money is invested in bonds and other assets, earning low or even negative returns. Some estimates show that about a quarter of all bonds generate negative returns. There's a huge opportunity to do more with the world's savings.
In North America alone, $30 trillion in financial assets will be transferred over the next three decades from baby boomers to Generation X and millennials, according to one estimate. That capital, if invested appropriately, can help finance global issues like poverty eradication, inclusion, education, employment, and health. But there are some challenges that asset managers have to overcome. Private investors need to be persuaded that 'impact' isn't just marketing hype. They want to see how funds are being managed and ensure that the impact is tangible and measurable.
To address this, IFC collaborated with several leading impact investors to recently launch the Operating Principles for Impact Management. The nine principles require that investments be managed with attention to both financial performance and impact at all stages of the investment cycle – from setting an investment strategy and originating projects, through monitoring, evaluation and reporting. (See graphic.)
More than 70 investors, ranging from large investment banks and asset managers to development finance institutions and specialist impact funds, have signed up to the principles. These institutions have committed to follow the principles in all of their impact funds and products. As part of the agreement, they will publicly disclose every year on how they are complying with the principles, while allowing independent verification of their claims.
We expect the Operating Principles will help bring about greater transparency and discipline to the changing investment market.
For the first time, investors will have access to increased public disclosures on how institutions and impact funds are managing their investments. Investors will be able to compare the results, and benchmark them against emerging best practices.
Investors also need to be persuaded on the business case – that there is a commercial benefit that comes with social or environmental impact. At the International Finance Corporation, we know it is possible to achieve impact in a wide range of markets without having to accept lower returns, as evidenced by the long-term performance of our portfolio.
Mainstream investment firms are joining us in this belief: principles signatory KKR &Co., for example, recently exceeded the $1 billion goal for its first Global Impact Fund. The fund, which seeks to address social and environmental issues with private capital, continues to raise money.
By IFC's estimate, the current market for impact investments is small, at less than $1 trillion in assets. We believe there is the potential for tremendous growth. Investor appetite for impact investing could be as high as $26 trillion, if asset managers can offer market returns comparable to other investments.
Realising this potential and moving impact investing into the mainstream means more choices for a new generation of investors who want to see their money mobilised for good. It means more capital for the world's most pressing development challenges.
We invite investors who share our vision of a credible impact investing market to join us by adopting the principles.
