Impact investing can encompass a broad range of investments depending on an organization’s desire and ability to engage in the space. Strategies that hold companies based on positive Environmental, Social, and Governance (ESG) characteristics may serve as an alternate approach for organizations. These strategies seek to make a positive impact by allocating capital to companies on the basis of ESG-based criteria rather than through direct investments.
Proper due diligence of strategies is critical. In spite of the recent growth of the impact investment market, strategies continue to proliferate to meet growing demand. It is therefore important to discern institutional quality mandates from retail-based and start-up offerings. Strategies should be sound from both an investment and social perspective and align with an organization’s values. Investment costs also should receive attention as impact-oriented strategies can at times have unfavorable cost structures that could erode return potential.
A process for ongoing monitoring and evaluation should be agreed upon prior to implementation. The ability to measure the social impact is a core feature of successful impact investing. Third party standards exist to measure a variety of social, environmental, and financial metrics and aid in data-driven evaluation. While these standards lend credibility to the impact movement, effective measurement remains a challenge. Among public companies, lack of disclosure and inconsistent standards for ESG metrics also remain a persistent issue. With continued investor pressure and leadership from larger companies, disclosure is expected to improve with time.
While impact investments nobly aim to achieve both a positive social impact and a profitable return, it is important to keep in mind that just like any other investment, there are risks involved and a less than optimal financial result could be achieved even as worthwhile mission-based goals are being met. Concord urges organizations to seek out advice if they are thinking about impact investing as the endeavor can be complex and time consuming as much as it is rewarding.
2 “Global Impact Invest Investing Network: Sizing the Impact Investment Market” https://thegiin.org/research/publication/impinv-market-size
Concord offers a full range of investment consulting services including the evaluation and implementation of impact investing strategies as part of a comprehensive investment program.
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