For nearly ten years now, impact investing is practised by philanthropists and investors as a measure to generate social and environmental benefits while achieving financial returns. Being incorporated into the product portfolios of the many financial services companies, it has attracted more than $77 billion in assets under management.
However, with the growth of the investment practice, the industry finds it increasingly hard to invest, claims McKinsey: Privately held businesses are increasingly hard to find and to evaluate with various standards being used to measure social and environmental impacts. Moreover, investors are being confused by the wide range of products, some of them achieving just market returns and some of them even underachieving.
Strengthening the impact investing industry should, however, not just be a major goal for fund managers but also for society to generate funds to improve human welfare worldwide. In the article “How impact investing can reach the mainstream,” McKinsey analyses the current impact investing market and how asset managers, investors, governments and entrepreneurs can turn impact investing in a large-scale practice for financing social and environmental improvements.
According to the report, a fully developed impact investing market will have proven and self-sustaining economics that allow investors to achieve market-rate financial returns without any form of government help. Furthermore, just as other financial products, the service quality needs to be consistent. While “impact investing” is used differently in today’s world, the industry needs to define the term more clearly and use it more consistently to develop a range of well-defined, specialised offerings.
Speaking with impact investors, asset managers, governments, and entrepreneurs, McKinsey identified four critical themes that are to be addressed: First, impact measurement standards need to be clarified to ease comparison of firms for fund managers and for investors when comparing funds. Second, the practice of impact investing needs to be professionalised, e.g. by giving fund managers access to knowledge on proven operational practices and helping them to implement them. Third, social enterprises and impact-oriented businesses need more support from governments and large corporations, especially when to scale their operations. Finally, product development and marketing practices need to be adapted. Currently, investors have problems comparing different products. Therefore, impact fund managers need to develop and communicate their overall strategies, objectives and risks.