Impact Investing for a Sustainable Future

By Frank-Jürgen Richter

February 22, 2023

Nowadays, there is a lot of buzz around impact investing – an outcome of rising demand to go green and sustainable. In layman terms, impact investing is done with the intention to achieve positive, measurable social and environmental outcomes alongside profits.

So, impact investing is not only beneficial for societies and the environment, but it also fosters economic growth. When an impact investment is done, socioeconomic and environmental targets are determined, in view of the overall good.

Impact investors have their own set of motivations and below are some diverse examples of impact investments and their objectives.

  • Acumen Fund is a non-profit impact investment fund that raises donations to make equity investments in early-stage companies that provide a product or service to the poor. Acumen has recently launched an initiative to fund early-stage companies that provide renewable energy-powered appliances to microentrepreneurs and smallholder farmers in India and East and West Africa. “To tackle poverty and climate change in this decade, we need to reimagine how low-income communities access and use power. Productive use appliance companies have the potential to transform livelihoods, but lack access to investment capital to support their growth. Alongside our partners, we will continue to invest high-risk, early-stage capital in this next generation of innovations at the intersection of energy access, livelihoods, and climate resilience,” said Sarah Bieber, Head of Energy Partnerships at Acumen.
  • Medical Credit Fund is another example of how impact investment fund is beneficial for the overall good of the society. The Fund provides loans to private health clinics and pharmacies across sub-Saharan Africa along with the support of local financial institutions. A perfect example is Ghana’s exceptional progress in achieving universal health coverage. The Fund provided technical assistance to the National Health Insurance Authority of Ghana to drive increased uptake of the national health insurance scheme. In 2021, the enrollees increased from 10 million to 17 million, covering over 50% of the country’s population.

These clearly depict how vital is impact investing for a sustainable future. But are goals of impact investors always clear? 

Not Always Clear

While impact investors generally seek to achieve a social or environmental impact alongside financial returns, their specific goals can vary widely based on factors such as their investment philosophy, target impact area, and desired financial return. As such, the goals of impact investors may not always be clear or aligned with one another. However, many impact investors aim to promote sustainable and inclusive economic growth, reduce poverty, and address pressing social and environmental challenges.

When creating an impact fund, investors will need to be wary about clarity around basic principles, implementing good practices and avoiding biasness towards large companies. Impact investing can help if properly harnessed. Few recurring problems include not having proper clarity around rates of return, leading to cost overruns and in-fighting among investors.

Ensure Transparency

To ensure transparency for all stakeholders as they join impact investors, portfolio managers can take several steps:

  • Clearly define their impact goals and communicate them to stakeholders: This includes identifying the social or environmental impact they seek to achieve, the target beneficiaries, and the metrics they will use to measure progress.
  • Establish transparent reporting and monitoring mechanisms: Portfolio managers can provide regular reports on the impact of their investments, including any challenges and progress made towards meeting their impact goals. This can help stakeholders understand the impact of their investments and make informed decisions.
  • Engage in dialogue with stakeholders: Portfolio managers can engage with stakeholders, including investors, investees, and other stakeholders, to understand their needs, expectations, and concerns. This can help build trust and ensure that the impact investments align with the interests of all stakeholders.
  • Use third-party verification and certification: Portfolio managers can use independent third-party organizations to verify and certify the social and environmental impact of their investments. This can enhance transparency and credibility, and provide assurance to stakeholders that impact claims are accurate.

Overall, ensuring transparency requires an ongoing commitment to communicate openly and honestly, and a willingness to engage with stakeholders and adapt based on feedback.

Role of Financial Regulators

Financial regulators also play an important role in ensuring transparency in impact investments. Regulators can help establish clear standards and guidelines for impact investments, including disclosure requirements and reporting standards.

Regulators can also monitor compliance with impact investing standards and guidelines, and take enforcement actions against investors or fund managers that fail to meet the requirements.

Furthermore, regulators can collect and disseminate data on the social and environmental impact of impact investments, helping investors make informed decisions.

Lastly, regulators can collaborate with other stakeholders, including investors, fund managers, and third-party verification organizations, to promote transparency and ensure that impact investments meet their intended goals.

Photo Caption: Wind turbines on agricultural lands.