Impact investing is rapidly evolving. Investors increasingly seek out positive environment, social and governance (ESG) indicators to complement financial returns. The Global Impact Investing Network estimated the total size of the market at $502 billion in 2019. We expect the total addressable market to continue to grow.
How Can You Measure “Impact”?
As the market continues to grow, investors increasingly call for impact analyses that feature the same rigor traditionally applied to financial performance. Market participants have responded with bespoke frameworks addressing specific investor needs in the absence of an industry-wide standard. Proponents of a unitary model cite several benefits:
- Common impact language would provide clarity in an otherwise opaque investment landscape.
- Impact measurement initiatives are resource-heavy and complex; a standardized framework could streamline efforts across the board.
- A standardized framework would allow for comparable reports resulting in easier benchmarking.
- A standardized framework could also lower barriers to entry and incentivize higher participation.
The challenge is that “impact” is hard to define and each ESG factor might feature distinct milestones and priorities from the applicable operator and investor perspectives. For instance, the social pain points addressed by a renewable power project would naturally be different from those addressed by a minority-owned trade school. A further concern is that a standard framework could constrain impact investing by incentivizing the meeting of quotas rather than actually promoting more ambitious social objectives. As a result, many companies and their investors favor tailored approaches that track and measure only the impact indicators most relevant to their business, layering material impact objectives on top of financial goals.
Is this a positive development? Yes, insofar as bespoke measurement frameworks are responsive to investor priorities. However, critiques include a lack of transparency as well as the risk of “greenwashing” (overstating ESG results that lack meaningful impact beyond positive public relations).
Where Do We Go from Here?
The UN Sustainable Development Goals (SDGs) have emerged as one commonly referenced overarching framework, providing market participants with a broadly understood set of priorities. Industry groups have since coalesced around more quantifiable disclosure and accounting metrics (see for instance the Sustainability Accounting Standards Board Metrics). Regulatory initiatives complement these efforts: by way of example in the U.S., some state-level initiatives prioritize sustainable investing (see Illinois’ Sustainable Investing Act) and diversity (see California’s gender diversity legislation), while bills on the Congressional agenda endeavor to facilitate SEC ESG rulemaking (see the ESG 2019 Disclosure Simplification Act).
Looking ahead, we expect to see refinement in the space as it matures and investment theses prove out.
The Paul Hastings Impact & Sustainability practice brings together lawyers with experience across all vectors of the impact and sustainability space. To learn more about how we help clients navigate business issues unique to this emerging area of the economy, please visit our website or contact any member of our Impact & Sustainability team.
Paul Hastings and Impact Capital Forum explored these topics with the investment community at our Measuring Impact & Sustainability: Pain Points & Best Practices panel, held in New York in late 2019. We would like to thank our panelists for their significant contributions to our thinking:
- Jed Lynch, Head of Americas, Sustainable & Impact Banking, Barclays
- Elizabeth Seeger, Sustainable Investing Director, KKR
- Syd del Cid, ESG Analyst, Bloomberg
- Lily Trager, Executive Director and Director of Investing with Impact, Morgan Stanley Wealth Management
- Tess Virmani, Associate General Counsel & Senior Vice President-Public Policy, LSTA