Impact investing in the time of COVID-19
By Philippe Le Houérou
This article was originally published on Responsible-Investor on May 6th, 2020.
IFC CEO Philippe Le Houérou explains why impact investing is more vital than ever, and how efforts to strengthen measurement and reporting are developing
With the world now in the throes of a deep recession, one thing is clear: helping countries recover from COVID-19 will require billions of dollars to revive jobs and value chains, tackle systemic inequalities and promote a greener reconstruction. This will present significant opportunities for investors to innovate and finance projects that contribute to sustainable and inclusive long-term growth.
Many investors are interested in doing just that, as evidenced by the movement that is taking root around us. A year ago, a coalition of 60 asset managers and institutional investors adopted the Operating Principles for Impact Management: a set of clear market standards for how to manage investments aiming to achieve positive impact alongside financial returns. One year later, that number has grown to 94. That includes 16 organisations that signed on since January, when the COVID-19 outbreak began to hit the global economy.
By summer, we expect to reach consensus on how to measure and report on key impact themes including climate change, gender equality and job creation
In the process, we have gained unparalleled insights into the impact investing world. Importantly, what used to be the terrain of smaller, specialised impact investors now attracts larger and more diverse private equity funds: we estimate that a total of over $300bn in impact assets are managed collectively by our signatories in alignment with the principles.
Significantly, some of the world’s largest asset managers have chosen to adopt the Principles when launching impact funds on a scale we haven’t seen before. These include the recent closing by KKR of a new Global Impact Fund and the launch of Blackrock’s Global SDG Impact Fund. But that also applies to long-standing impact fund managers, including LeapFrog Investments which raised record-breaking amounts for investments in Africa and South Asia.
Development Finance Institutions (DFIs) continue to be the largest impact investors. Among the signatories, we count eight multilateral and 17 bilateral DFIs. IFC manages the largest pool of impact investments, with $83bn in impact assets under management.
We also see a broadening base of impact funds across the world, with signatories coming from 26 different countries across five continents. While most signatories are headquartered in North America (33%) and Western Europe (56%), we see growing interest from other regions. The Japan International Cooperation Agency signed the principles, reflecting growing interest in Japan in impact investing. Emerging markets comprise eight signatories managing about $6bn in total. I strongly believe that the movement will continue to diversify as it forges ahead.
Significantly, impact funds have a greater focus on investing in emerging markets than other funds: We estimate that 30% of the volume of impact funds was raised for projects in emerging markets, as compared with 20% of the volume of conventional funds.
We have held extensive consultations with JP Morgan on how to design an impact management system for their development finance activities
Further, the industry is entering a new era of transparency and credibility. 18 signatories have already posted their first annual public disclosure statements explaining how they implement the Principles, and another 40 or more plan to do so by this July. These disclosures are accompanied by statements from independent verifiers, giving investors assurance that what they read in the disclosures is being consistently implemented.
But the bare facts and disclosures don’t capture the spirit of collaboration among the signatories. Supported by the secretariat, which oversees and supports the continued promotion and adoption of the Principles, 31 have shared case studies providing more granular explanations of how they implement different aspects of the framework. We plan to publish these soon, to deepen industry understanding of emerging good practices.
And the signatories are driving forward efforts to align impact measurement systems into a common core of impact metrics that will further improve the ability of investors to compare impact performance across funds and institutions. Work over the past six months has already aligned more than 90% of the indicators in the leading measurement frameworks. By summer, we expect to reach consensus on how to measure and report on key impact themes including climate change, gender equality and job creation. This will create clear value for investors and serve as a strategic and operational tool to drive investment where it matters the most.
Our impact management work is now generating interest outside of our community of signatories. For instance, we have held extensive consultations with JP Morgan on how to design an impact management system for their development finance activities, leading the bank to adapt IFC’s Anticipated Impact Measurement and Monitoring system for their own impact management purposes.
As an impact investor for over 60 years, IFC has proven the case for staying the course through emerging market crises and booms alike. Our equity and debt portfolios have matched long-run market returns, while contributing to reducing extreme poverty and promoting inclusive growth in low- and middle-income countries. The structural drivers of investors’ interest in impact investing — from millennials managing their money differently from their parents, to the imperative of addressing climate change and inequality — have not gone away.
The Operating Principles provide a distinct line between impact investing and other forms of sustainable and responsible investing. As investors regroup from the market turmoil created by the coronavirus pandemic, the principles provide a clear choice for investors seeking to invest in a better, more resilient, and more sustainable world.
Philippe Le Houérou is CEO of the International Finance Corporation