Updated with correction
Impact investing may be poised to go mainstream, thanks to new operating principles aimed at creating a common market standard for investors.
Development of the Operating Principles for Impact Management was led by the International Finance Corp., a member of the World Bank Group, in collaboration with asset managers, asset owners, development banks and other financial institutions involved in impact investing. As the largest global development institution focused on the private sector in emerging markets, IFC delivered more than $23 billion in long-term financing for developing countries in 2018.
The principles' spring debut got a strong boost from 60 early adopters with a collective $350 billion in assets invested for impact, including AXA Investment Managers, BNP Paribas Asset Management, Calvert Impact Capital, Credit Suisse, KKR & Co. Inc., Nuveen and Prudential Financial Inc.
"The principles are a good road map for impact investing. This is something that is needed to move the needle," said Mark B. Grier, vice chairman of Prudential Financial, which by the end of 2018 had more than $1.2 billion in impact investment commitments.
While investor appetite for impact investing is growing, "the field needs some discipline and transparency and rigor," said Mr. Grier, who also serves as board chairman of the Global Impact Investing Network, a nonprofit organization aimed at increasing the scale and effectiveness of impact investing across the globe.
Developers of the principles say investors need assurance that the impact investment market is transparent, credible and disciplined, without the potential for "impact washing" through unsubstantiated claims. To that end, the nine operating principles cover all steps in the investing process, from strategy, origination, structuring and portfolio management to exit and independent verification. The principles stress defining strategic impact investments, monitoring and assessing progress, and improving decisions based on the lessons learned.
The timing is right, said Rekha Unnithan, manager of Nuveen's more than $800 million impact investing portfolio in New York. "We didn't really have until now a framework for what it means to be an impact investor. The need is clear, and it is very important. Every large asset manager and every asset owner is thinking about impact investing. The very critical element of this is scale with integrity," said Ms. Unnithan, who provided feedback during development of the principles.
'Huge step forward'
To alternatives investment manager Rock Creek Group in Washington, one of 16 firms consulting on the principles' development as well as adopting them, it is "a huge step forward for catalyzing flows in impact investing," founder and CEO Afsaneh Beschloss said. Pension funds, endowments and their asset managers "want to invest in companies with long-term returns" from sustainable businesses, she said. "People who are already convinced of that and those less convinced will need a better database. This is the step toward that database.
"It offers investors and companies alike a pragmatic, much-needed balance between a rigorous framework and flexibility to implement for investment management firms globally," Ms. Beschloss said.
Another adopter, KKR Global Impact, KKR's dedicated global impact business launched in 2018 that did not disclose the firm's impact AUM, thinks that having such a market standard for impact investing could encourage "a race to the top" by eliminating confusion over different approaches and definitions, KKR Global Impact co-head Ken Mehlman said at the April 12 signing ceremony in Washington.
For IFC CEO Philippe Le Houerou, the potential to bring impact investing into the mainstream with the principles is good, he said, "because there's no time to lose to deliver on" an impact agenda.
Investor appetite is as much as $26 trillion into impact investing, IFC estimates, with up to $21 trillion in publicly traded stocks and public bonds and another $5 trillion in private markets, including private equity, private debt and venture capital funds.
An April report from the Global Impact Investing Network estimates the current size of the global impact investing market to be $502 billion. In what they say was the first rigorous analysis of the impact investing market, GIIN found that investors include family offices, foundations, banks and pension funds based and investing all over the world, with 800 asset managers accounting for about 50% of industry assets under management and 31 development finance institutions managing just more than 25%.
Up nearly 60%
In 2018, GIIN's annual impact investor survey of 225 institutions including pension funds found that they had invested $35.5 billion in impact investments last year, up nearly 60% from 2016, with plans to increase that by 8% in 2019.
To Jennifer Pryce, president and CEO of Calvert Impact Capital in Bethesda, Md., the last principle — annual public disclosure of alignment with the principles and independent verification of that alignment — may be the most critical. Created by the founders of Calvert Research and Management but now a separate legal entity, Calvert Impact Capital has $485 million in assets under management.
"The requirement for annual impact disclosure and independent verification is unique and can help provide real transparency into the investment firms that have a deep commitment to impact embedded in their systems, processes, (and the) way they do business. This increased clarity around impact measurement and management, along with the creation of more products that have both deep impact integrity and the ability to hold large amounts of investor capital, is what will ultimately enable the industry to achieve the scale required to address the Sustainable Development Goals" developed by the UN and used by many investors to track impact investing performance, Ms. Pryce said.
"It's not just about counting the widgets, it's about using that to improve behavior," said Ms. Unnithan of Nuveen. She expects the final piece, verification, to be rigorous, which should help her firm articulate its impact investing portfolio and engage potential clients.
Signatories have a full year to disclose their alignment with the principles, but at least one is getting an early start. KKR asked an impact strategy advisory firm to review how its impact management system stacks up at the beginning, and plans to share more about that evaluation and ongoing measurements, Mr. Mehlman said.
Patricia Dinneen, Boston-based chairwoman of the Impact Investing Council of EMPEA, the global industry association for private capital in emerging markets, said the need to build a robust evidence-based system for measuring and verifying impact investing outcomes will continue, but she commends the operating principles "for their focus on having a robust management system. We really feel if you are not striving for institutional-quality impact investing, it's not likely to be sustainable," she said.
Reflection of demand
To officials at GIIN, which has a complementary set of core characteristics for impact investing and maintains IRIS, a catalog of generally accepted performance metrics, the IFC operating principles on which they consulted reflect investor demand. "This industry is gaining more and more attention from a lot of different types of capital," including pension funds and foundations, said Sapna Shah, managing director and director of strategy at GIIN. "Now it's a given that an investor needs to measure their impact. It's a much more sophisticated line of questioning.
"IFC's word carries a lot of weight and influence among investors. Now that they've gotten those signatories, we are excited to see where this shows up in practice," Ms. Shah said.
"As the principles become socialized, asset owners and asset managers will start asking for it and using it as a basis" for investment decisions, said Ms. Unnithan of Nuveen. "I think this is going to catch on quite nicely."