Impact investing: A multitrillion-dollar market in the making

///Impact investing: A multitrillion-dollar market in the making

Impact investing: A multitrillion-dollar market in the making

Impact investing has been gaining traction over the last decade, as investors, consumers, and—to an extent—policymakers come to recognise that new ideas are needed in order to address some of the largest societal and environmental challenges facing humankind.

However, as is often the case with new ideas, impact investing continues to face big challenges and misconceptions. How to actually define this type of investing is one of those challenges, while the biggest obstacle perhaps remains the general belief that doing good with investments will almost always result in lower-than-market-rate returns.

One person who is determined to not only debunk some of the misconceptions, but also prove that impact investing in its own right can develop into a multitrillion-dollar market, is Sir Ronald Cohen (pictured).

The renowned investor co-founded global investment giant Apax Partners while only in his mid-twenties. Since retiring at the age of 60 in 2005, Cohen has spent a large part of his time trying to ignite an impact investing revolution, and currently holds the role of chairman for the Global Steering Group for Impact Investment (GSG).

“The first misconception is that impact can’t be measured, and the second is that any sort of business or decision making that is based on impact rules will ultimately lead to lower returns,” Cohen told PitchBook in a recent interview. “In fact, I believe that measuring impact is a lot easier than measuring risk, and have seen that impact-related investment can not only match traditional returns, but in many cases it can by far exceed them.”

While this narrative is gaining traction and a considerable amount of column space, it is by no means undisputed. Recent research from Renaissance Capital cited in the media, for instance, suggests that the relationship between environmental, social and governance (ESG) scores and financial performance is poor at best and, at worst, does not exist.

Another argument suggests that the heightened interest just masks the fact that impact investments perform like every other investment, with some achieving their targeted returns, some missing the mark and others exceeding expectations.

But according to Cohen, at least, the scepticism is due to a somewhat dogmatic approach by traditional practitioners. “Many people have the notion that optimising risk and return is sacrosanct, and therefore refuse to even contemplate any alteration to the system which might affect their two dimensions of the decision-making process.

“The reason I am putting weight behind this is that if we can apply the usual tools of financial analysis—such as price-earning ratios and return on equity—on an impact-weighted basis, then we will have the most versatile set of tools to be able to make comparisons between companies. This is a huge, but totally achievable goal.”

Defining impact investing

Another aspect that will help address some of the existing misconceptions is agreeing a clearly defined playbook as to what actually constitutes impact investing. Consensus that it is investing under the umbrella of the UN Sustainable Development Goals has been gaining traction, and this currently appears to be the most commonly agreed-upon definition.

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