COVID-19: The Gateway for Impact Investing

"Crises and deadlocks when they occur have at least this advantage, that they force us to think." Jawaharlal Nehru

Over the past several months we have all heard the phrase, “a virus does not discriminate.” While COVID-19 spreads indiscriminately, its decimation of the global economy has deepened socio-economic divides as low-income workers in essential services face the disease head-on. In addition to the economic consequences of the global shutdown, we also witnessed a brief recovery of the earth as a result of a drastic reduction in human activity previously considered impossible. As every nation looks at how to resume activities and take on the impending recession, funding has already emerged from both conventional and modern sources of revenue, ranging from stimulus packages to contributions from tech’s elite. While market volatility and economic uncertainty tend to dissuade traditional investors from pursuing new ventures, this pandemic could provide an opportunity for impact investors to take the lead in redefining how we use capital to address freshly exposed issues.

Coined in 2007 by the Rockefeller Foundation, the term “impact investing” describes investments with both a financial return and environmental/social impact. This encompasses solutions to the 2030 UN Sustainable Development Goals (SDGs), ranging from quality education to responsible consumption and production.  In 2020, the Global Impact Investing Network estimated that the overall impact investing industry stands at $502 billion, double last year’s figures. Impact investment is no longer just a trend – with over 70% of wealthy Millennials and Gen-Xers having made at least one impact investment, this idea has the potential to drastically alter the future of finance.

Steve Petterson, Executive Director of the National Social Value Fund, leads a network of community-focused student impact investment teams throughout Canada’s major cities. In an interview about impact investing’s role in economic recovery, Steve categorizes the global response to the pandemic into a 3-horizon focus: immediate emergency response, strategic recovery, and systemic change. He asserts, “I believe impact investing is best suited to support these last two phases… (it) is well suited to play a pivotal role by aligning financing mechanisms with the social and environmental recovery goals of organizations… financing new ideas for how we can introduce systemic change that is clearly needed in different facets of our world.” But what role does impact play in the current financial landscape and how must this develop in order for investments to effectively advance recovery and ultimately incite such systemic change?

Several challenges arise when attempting to integrate impact into the capital market. The conventional goal of optimizing financial return fails to account for both the positive and the negative effects of investments. Not always measurable through traditional metrics, investors often ignore these effects when making decisions, creating a gap in available funding for impact-first enterprises from traditional venture capital funds. Filling the gap, as described in a recent G8 report, “… requires a paradigm shift in capital market thinking, from two dimensions to three. By bringing a third dimension, impact, to the 20th century capital market dimensions of risk and return, impact investing has the potential to transform our ability to build a better society for all.” Defining how to measure this third dimension poses the number one challenge in the emerging impact investing sphere. If funds can quantify impact, they can incorporate this measurement into the due diligence stage, design an optimized investment, and evaluate the total effect to analyze the success of the venture to prove value. 

Projects to facilitate these measurements include the Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Rating System (GIIRs), which provide tools to analyze impact but are limited for use within the impact investment sphere. Methods used by impact investors in the broader world of investment include third party certifications, customized quasi-experimental methods, and the “Logic Method,” a general model to evaluate the effectiveness of programs. Although firms find innovative and rigorous ways to measure impact, the process remains decentralized, facing different challenges when quantifying social versus environmental impact.

In environmental management, there exists a range of metrics such as waste generation, CO₂ emission, and water quality. These quantifiable effects make measuring environmental impact significantly easier than social impact. Organizations such as the Dutch Partnership Carbon Accounting Financials (PCAF) work to standardize the accounting for these metrics.

Although quantifying the results is more difficult, many players in the social impact realm are working to establish a similar system. Acumen, a non-profit fund with $145.8 million in assets, invests in “early-stage companies whose products and services enable the poor to transform their lives.” Acumen helped create IRIS and launched Lean Data, an approach that uses inexpensive technology to gather data directly from the consumer and analyzes the collection to demonstrate tangible benefits to the targeted population.

Defining a common measurement system will help integrate impact investing into the traditional investment landscape, empowering more entrepreneurs to not only pursue missions centered on a social or environmental cause, but to also create self-sustainable, profitable business models. 

The COVID-19 crisis has the potential to catalyse the paradigm shift in capital market thinking needed to mainstream impact investing and to create this common impact measurement system. Described in a McKinsey report as “the biggest shock to our livelihoods in nearly a century,” this pandemic has exposed a wide range of systemic failures from the structure of the American health system as the unemployed lost health insurance, to the extreme global wealth divide as the elite received testing while the 99% struggled without access, to the fragility of the centralized meat industry as unsanitary working conditions created virus hotspots and disrupted production. With no shortage of impact enterprises that provide local and global solutions to such issues and mounting consumer pressure for corporations to act responsibly and sustainably, impact investing can propel these social enterprises forward while enabling companies to strategically fulfill their philanthropic promises.

Social bonds illustrate the growing sustainability and impact consciousness of today’s consumer. Typically used to finance projects with a social impact, the repayment of these investments to the shareholder depends entirely on whether the initiative succeeds in its impact mission. Nordea, the largest financial services group in northern Europe, reported a global increase of 20% in the total social, green, and sustainable bonds issued recently – an impressive statistic considering the risky nature of the investment.

The pandemic has incited companies to look at expanding their impact investment initiatives or to open new funds, while providing the opportunity for existing impact investment funds to extend their reach in a COVID-19 targeted response. Desjardins announced its $150 million GoodSpark Fund, a project dedicated to investing in social and environmental community initiatives working to accelerate COVID-19 recovery. The Visa Foundation committed $210 million to support micro-businesses, focusing on women’s economic advancement. As global financial institutions such as Visa and Desjardins enter or increase their presence in the impact investing sphere, incentive rises to create a common impact measurement system that will ultimately aid in incorporating impact investing into the conventional finance sector.

 This crisis gives us the opportunity to create a future where all investment theses include a mission for impact, a future where the capital market incites the creation of self-sustainable solutions that we can use to build a better post-pandemic world.