Standard Life Investments

Impact investing for a better future

01 October 2017

Impact investing for a better future

The world faces numerous challenges, from climate change and poverty, to inequality and pollution. As asset managers, we believe we can play a vital role in helping to address these issues. One way to do so is through ‘mainstream’ equity impact investing.

This involves channelling capital into listed entities that are attractive from a financial position, but that also have a strategy that seeks to deliver measurable social and environmental returns. From these, an asset manager can then create an impact fund. This can have specific goals, such as concentrating on job creation, or can be more broad-based, focusing on a range of social and environmental issues.

While this is an exciting area of the market, there are challenges. Chief among them is how to ascertain whether a company is having a genuine impact or if it is just piggy-backing on a burgeoning investment trend.

A measure of success

In our view, therefore, impact investing must have two characteristics: first, the company or other entity being invested in must have the strategic intention to deliver impact (i.e. its operating model must be designed to achieve a specific positive societal and/or environmental impact); and second, this impact must be measurable.

However, while measuring financial returns is fairly straightforward, the science of quantifying positive environmental or social impact is more difficult.

A framework for helping to identify the world’s challenges, and then measure a corporate’s intention to provide solutions to these challenges, is the UN’s Sustainable Development Goals (SDG).

United in impact

These are a universal set of 17 goals aimed at tackling climate change, rising inequalities, and unsustainable production and consumption. The UN has identified 232 indicators to measure progress against the goals, and against which companies could potentially be assessed. For example, a business's commitment to sustainable energy can be gauged against factors such as the proportion of its customers with access to clean energy or the amount it invests into developing clean energy.

On top of this, it is important that companies report accurately on their activities. This helps demonstrate transparency and accountability, and will build investor confidence in impact investing.

A bright outlook

The outlook for mainstream equity impact investing is bright, as investors increasingly look for financially attractive investment solutions that make a difference to the world. As time progresses, impact investing will build a track record, which should demonstrate its benefits and cement its place in the values-based investing market.