Impact Investments: A Call for (Re)orientation

How do you recognise an impactful investment strategy?

Sustainable investment practices are now everywhere, but finance professionals still struggle to define properly what can be considered an impactful strategy regarding ESG issues.

Timo Busch and his co-authors classify sustainable investment strategies into 4 categories depending on their potential impact in their article « Impact investments: a call for (re)orientation ».

They call for dropping intentionality and additionality as criteria for impact investments due to difficulties in implementation and documentation, and focusing on real-world changes in solving social challenges and/or mitigating ecological degradation.

• ESG-screened and ESG-managed investments are backward-looking strategies that do not proactively change companies' behaviours.
• They do not demonstrate a real effort to achieve real-world change through investment.
• Impact-aligned investments focus on fledgling companies that are transforming or disrupting an existing industry.
• They address ESG challenges and goals through detailed descriptions of how an investment has achieved a better social and/or environmental performance in the past.
• Impact-generating investments focus on creating entirely new markets and industries through innovative technologies.
• Their objective is to contribute to solutions to ESG challenges and lead to the required transformation of the economy to address them.

It is essential to differentiate between these categories to fully leverage the sustainability potential of financial markets, with only impact-generating investments showing a causal effect attributable to the investment.

If they are to make a difference, the authors argue investors should focus on impact-generating strategies by encouraging changes in the companies they own, use their voices as shareholders and cooperate through collaborative initiatives.

From a practitioners point of view, demonstrating causal effects of investments may be challenging and resource-intensive, and dropping intentionality and additionality criteria could be seen as weakening the concept of impact investing.