Building the market: The rules of the road for impact investing

2019 is the year when the rules of the road for impact finance are set out on a global scale – the International Finance Corporation (IFC) has proposed “principles”, the Global Impact Investing Network (GIIN) has “characteristics”. From the point of view of UK social investment, what would we want to see in the rules of the road? What are the principles that give impact real integrity and the opportunity to achieve for both our mission and our sustainability and growth?

Impact investing is experiencing a period of explosive growth, with the market now estimated to be worth over $500 billion. While these are exciting times for the sector they also bring the risk of loss of integrity and impact washing – meaning that lots of investors use the term without doing anything specific to achieve impact. 

Cliff Prior of Big Society Capital and Jess Daggers of Nesta hosted a session on ‘The Rules of the Road for Impact Investing’, which considered these dangers and the steps the UK sector is taking to tackle them amidst several international initiatives. 

The session began with Prior drawing an analogy between impact investment and driving on UK roads: while the number of ‘car miles’ driven per year in the UK more than trebled between 1960 and 2010, the number of people killed on the road dropped by 75%. This was because more effective rules for road safety were developed and observed. 

For Prior, the challenge was to achieve the same with impact investment – to grow the market while developing clear and effective rules for understanding what it is and whether it is working. 

The session leaders provided an overview of some of the initiatives currently being developed to ensure that impact investing can be effective and meaningful. In particular the sets of standards developed by IFC and the GIIN. 

The IFC’s Operating Principles for Impact Management, officially launched in April 2019, aim to “establish a common discipline and market consensus around the management of investments for impact and help shape and develop this nascent market”. 

The GIIN’s ‘Characteristics of Impact Investors’ outlines a series of actions that impact investors can pledge to take, based on: intention to contribute to positive impact, informed decision making, managing impact and contributing to shared approaches. 

In the discussions that followed, attendees explored the pros and cons of the specific sets of standards on offer and of the standardisation process in a general sense. Attendees also discussed the suggestion by the IFC that independent verification of compliance with their principles should become the norm. 

Challenges included “shoehorning everything we invest in into that impact structure” and the reflection that “definition is good but the [specific] definitions may not be what you want”. One attendee raised the point that “the GIIN rules don’t say anything about additionality”. 

A key recurring theme from the group discussions was the need for standards to recognise the voice of service users and other end beneficiaries of investments. The session leaders felt that the IFC and GIIN standards were significant in that they took this into account while some other available standards systems did not. 

Key actions:

For the UK sector to consider its attitude to these standards: ‘Should we sign up to them or challenge them or develop our own?’

For attendees to keep discussing the issue through regular meetings and/or email discussion. 

Since the Gathering several intermediaries and sector organisations have flagged up the crucial gaps in the principles which have been published – and the UNDP is setting out SDG impact standards which insist on full stakeholder engagement.