The Impact Investing Ecosystem

The impact investing ecosystem consists of a range of key actors, each of which plays an important role in the operation and evolution of the ecosystem; the flow of capital from investors to impact-focused projects, including identification, planning, and implementation; and impact management, measurement, and reporting.? Key actors in the impact investing ecosystem include[1]:

·?????? Asset and capital owners: Individuals and organizations that hold and provide the capital to be invested directly or through an asset manager.? There are a wide range of asset owners, each with their own investment orientation that will ultimately drive how their capital is allocated along the impact chain, including pension funds, institutional endowments, public sector, sovereign wealth funds, corporate investors, non-profits, insurance companies, retail investors, and private foundations and clients.? Asset managers allocate capital based on agreed investment policies that set risk and return targets and dictate exposure to certain assets classes, geographies, investment theses, and risk weighting.???

·?????? Capital managers (direct and indirect): Individuals and organizations that invest directly or indirectly (e.g., through intermediaries, such as commercial banks, investment banks, and investment funds) into projects, organizations, and real assets including investment/fund managers, pension fund managers, banks, insurance companies, private clients, private equity, venture capital, and development finance institutions (“DFIs”).? Two important categories of intermediaries are “advisors”, who provide advisory services to asset owners on how to deploy their assets in exchange for fees (some advisors also offer their own investment products), and “asset managers”, who develop and sell products on behalf of others to meet the investment goals of asset owners.? Certain capital managers are specifically dedicated to the impact sectors and others, such as private equity and venture capital, may invest both directly into organizations or projects and indirectly through pooled vehicles managed by other capital managers.?

·?????? Recipients of capital:? The projects, organizations, and/or real assets that are being invested into such as public and private enterprises including nonprofits, for-profits and hybrid structures such as benefit corporations.? Recipients should be accountable for deploying the capital in a way that fulfills any promised impact and financial return.? Popular sectors for impact investment have included food and agriculture, energy, climate, healthcare, education, and housing, and decisions regarding deployment are made based on factors such as relative financial returns, risk appetite, and investment philosophy.

·?????? Ultimate beneficiaries of the capital: While the enterprises described above receive and deploy the capital, the impact, both positive and negative, is ultimately experienced by the customers and employees of the enterprise, the communities in which they operate, the employees and communities in their supply chains, and other beneficiaries of the enterprise’s activities including vulnerable groups (e.g., people in poverty, underserved communities, older persons, children and youth etc.) and nature/ecosystems/climate.? Asset owners need to establish their own chains of communications with all these potential beneficiaries through engagement for the owners to incorporate their views into their asset allocation decisions and assess impact on their own, rather than relying solely on reports from the enterprises.

Asset owners must also be mindful of other actors that provide an enabling and supportive environment for activities carried out through the impact capital chain and play a significant role in identifying the needs of beneficiaries, structuring the operations of enterprises, and defining the range of potential investment returns for impact investment projects.? A non-exhaustive list of other actors in the impact investing ecosystem includes governments/regulators from the public sector/policy makers from the nonprofit sector; ratings agencies; stock exchanges; advisors and consultancies including lawyers; trade bodies/associations; NGOs and civil society; data providers; media; and academics.? Each of these actors play a pivotal role all along the lifecycle of an investment (i.e., capital sourcing, deployment, management, exit etc.) in providing infrastructure, influencing capital allocation, managing and measuring impact, and promoting the professionalism and maturation of the sector through contributions to standards development, data provision, consumer protection (e.g., identifying and eradicating “greenwashing”), and education.?

Lawmakers can create tools that are exclusively within their domain, such as tax incentives, to support impact investment.? At the same time, decisions by elected officials on which projects and communities to favor with their incentives will obviously influence how asset owners are able to deploy their capital. Nonprofits with long-standing and trusted relationships in their communities can assist in asset owners in completing stakeholder analysis during the due diligence process so that asset owners can set appropriate goals and performance metrics with the enterprises that will be receiving the capital.? ?The number of accelerators and incubators operating the impact investment arena has also increased significantly, which will hopefully mitigate risk, expand the range of available investable opportunities and improve capacity and knowledge among prospective enterprise managers.[2]

The surge in interest in impact investing has been supported and driven by the emergence and continuous growth of a comprehensive global network of associations, conferences, research efforts, advisors and consultants.? The GIIN, which has already been mentioned above, calls itself the global champion of impact investing, dedicated to increasing its scale and effectiveness around the world, and proactively engages in efforts to build critical infrastructure and support activities, education and research that help accelerate the development of a coherent impact investing industry.? The GIIN carries out its work through facilitating and supporting development of industry networks, industry events, tools and resources for impact measurement and management, training programs for impact investors and asset managers and industry research, market data and publications.[3] ?Solutions developed by the GIIN include GIIN Benchmarks, which impact investors can use to identify investment opportunities with high impact potential; GIIN IRIS+ (IRIS refers to “Impact Reporting and Investment Standards”), which impact investors can use to help structure data-driven decisions about investment design and understand how they might manage impact performance for a given investment; and the Impact Principles discussed above.[4]? GIIN programs advance the field of impact investing in specific investment themes, asset classes, investor segments or practice areas and, as of June 2024, include Climate Finance, Corporate Impact Investing Initiative, Faith-Based Investors Hub, Impact Lab, IRIS+ Thematic Working Groups, and New Capitalism Project.[5]

Impact Frontiers is a peer learning and market-building collaboration, developed with and for investors, that seeks to create practical tools that support investors in managing impact and integrating impact with financial data, analysis, and processes.[6]? Impact Frontiers also stewards the norms and consensus-building practices pioneered by the Impact Management Project, which operated from 2016 to 2018 and convened a practitioner community of over 3,000 enterprises, investors and experts to build a global consensus, commonly referred to as the “Impact Management Norms”, on how investors measure, improve and disclose their positive and negative impacts (i.e., impact management) in order to provide a common logic to help enterprises and investors understand their impacts on people and the planet.[7]

Social Value International (“SVI”) is the leading global network of practitioners, enterprises, professionals and change makers who are committed to achieving social impact and social value, whilst ensuring the success of their organizations.[8]??SVI has developed the Principles of Social Value, which are intended to be generally accepted social accounting principles drawn from principles underlying social accounting and audit, sustainability reporting, cost benefit analysis, financial accounting, and evaluation practice.? The Principles of Social Value are: involve stakeholders, understand what changes, value the things that matter, only include what is material, do not overclaim, be transparent, verify the result, and be responsive.[9]? SVI believes that these Principles can be distinguished from other approaches by the need to actively involve those stakeholders affected by activities, so their experiences are?respected?and their voices influence decisions and support organizations to optimize their value.?

The Impact Management Platform is a collaboration between the leading providers of international public good standards, frameworks and guidance for managing impact.[10] Together, the Platform partners are working to clarify and build consensus on the meaning and practice of impact management; work towards a complete and coherent system of impact management resources; and have coordinated dialogue with policymakers.? The Platform is currently chaired by the OECD and the UN Development Programme (“UNDP”), and other participants include the International Finance Corporation, the GIIN, SVI, PRI, the UN Global Compact, and the Global Reporting Initiative.? Platform partners are collaborating on four main workstreams: providing further guidance on the actions and landscape of impact management; advancing interoperability between international principles, frameworks and standards to mainstream the practice of impact management and achieve the SDGs; tackling systemic issues (e.g., providing clarity on sustainability nomenclature) through joint research and development; and informing policy and regulatory processes.?

SDG Impact is a UNDP flagship initiative focusing on generating and leveraging private sector capital in delivering the SDGs.[11]? Launched in September 2018, SDG Impact seeks to provide investors, businesses and others with unified standards, tools, and services required to authenticate their contributions to achieving the SDGs and to identify SDG investment opportunities in emerging economies and developing countries.? The UNDP’s partner on SDG Impact is Global Investors for Sustainable Development Alliance, a group of global leaders from the investment and business community committed to developing and implementing solutions for scaling up long-term investment for sustainable development.[12]

The US Sustainable Investment Forum is a non-profit hub for the sustainable, responsible and impact investment sector in the US and provides research, consulting, policies, media, training, national conferences and local events to members with more than $5 trillion in assets under management or advisement.[13]? The US Impact Investing Alliance is committed to raising awareness of impact investing in the US, fostering deployment of impact capital, and working with stakeholders to help build the impact investing ecosystem.[14]? Specifically, the Alliance advances a three-pillar strategy that includes advocating for supportive policies, catalyzing investor action, and building the movement of impact investing broadly, and the Alliance’s long-term vision is to place measurable social, economic and environmental impact alongside financial return and risks at the center of every investment decision.[15]

Other organizations that provide assistance to impact investors include the Rockefeller Philanthropy Advisors, which deploys thought leadership and tailored advisory services to train trustees, philanthropic leaders, teams, and individuals on the possibilities created by impact investing along with a diverse set of approaches[16]; Toniic Institute, a membership-based (high net wealth individuals, family offices, and foundation asset owners) impact investing platform for exchanging knowledge and investment opportunities that has mapped the impact themes of interest to its members to the SDGs and their targets[17]; CREO Syndicate,? a public charity working to invest and catalyze $1 trillion of capital into climate and sustainability solutions towards the decarbonization transition by 2025[18]; Confluence Philanthropy, which has a mission of transforming the practice of investing by aligning capital with its membership network’s values of sustainability, equity, and justice[19]; ImpactAssets, a facilitator of direct impact investing within donor advised funds which also provides customized investment services and innovative philanthropic solutions[20]; and SOCAP Global, a thought leadership platform for the accelerating movement towards a more just and sustainable economy.[21]??

Standardization of measurement of environmental and social impact is obviously a crucial issue and concern and efforts in that area have included the GIIN IRIS+, which has become the generally accepted system for measuring, managing and optimizing impact[22]; the industry-based standards developed by the Sustainability Accounting Standards Board for the recognition and disclosure of material ESG impacts by companies traded on U.S. exchanges[23]; and B Impact Assessment, a free online assessment tool powered by B Lab that allows companies to measure their impact on their workers, communities and customers and on the environment and compare the results to their peers and prepared a customized improvement plan.[24]

Advocacy organizations for impact investing have proliferated as part of a concerted effort to promote impact investing and develop standards responsive to the concerns of the marketplace.? PRI[25] is one of the most notable examples and calls itself the world's leading proponent of responsible investment working to understand the investment implications of ESG?factors and supporting its international network of investor signatories in integrating these factors into their?investment and ownership decisions. ?PRI is a non-profit organization that engages with global policy makers?but is not associated with any government; it is supported by, but not part of,?the UN.? PRI defines “responsible investment” as an approach to investing that aims to incorporate ESG factors into investment decisions, to better manage risk and generate sustainable, long-term returns.? Environmental factors include climate change, greenhouse gas emissions, resource depletion (including water), waste and pollution and deforestation.? Social factors include working conditions, including slavery and child labor; local communities, including indigenous communities; conflict; health and safety; and employee relations and diversity.? Governance factors include executive pay, bribery and corruption, political lobbying and donations, board diversity and structure and tax strategy.?

Signatories—over 5,300 as of early 2024—agree to follow six principles: incorporating ESG issues into investment analysis and decision-making processes; being active owners and incorporating ESG issues into ownership policies and practices; seeking appropriate disclosure on ESG issues by investee entities; promoting acceptance and implementation of the principles within the investment industry; working with others to enhance effectiveness in implementing the principles; and reporting on activities and progress towards implementing the principles.? The principles are accompanied by a menu of possible actions for incorporating ESG issues into investment practice.? Signatories acknowledge that institutional investors have a duty to act in the best long-term interests of their beneficiaries and that ESG issues can affect the performance of investment portfolios to varying degrees across companies, sectors, regions, asset classes and through time.

PRI has developed and distributes an extensive collection of tools and resources for investors including a range of starter guides for those new to responsible investment covering several relevant topics such as policy, structure, and process; selecting, appointing and monitoring investment managers; stewardship; screening; asset classes (i.e., listed equity, fixed income, private markets, hedge funds); and ESG issues such as climate change and metrics; human rights; and corporate governance.[26]? PRI also engages with others to conduct and publish research and analysis on policies relating to sustainability such as steps that jurisdictions can take to establish a legal framework to support investors wishing to invest for sustainability impact.[27]

Consistent with the development of voluntary standards and instruments relating to other sustainability-related topics, sector-specific organizations and initiatives have been launched to promote impact investing, measurement and reporting in specific industries.? Impact investors can require investees to adhere to relevant sector-specific standards through certification and verification and use such standards to develop impact performance metrics for the investees in their portfolios.? Sectoral initiatives have been described as aiming to address widespread challenges in a specific sector (within a country, regionally or internationally) and provide a common approach in direct operations or in dealing with supply chain management.[28]? Sectoral frameworks usually include targets for compliance with minimum social standards and fundamental environmental protection measures considering sector-specific criteria and requirements as decisions are being made.[29]? Sectoral initiatives may be led by businesses or developed through a multi-stakeholder process and the goal is to establish uniformity across an industry by setting a single standard that all companies can follow and apply to the operations of their suppliers (many of which have relationships with multiple purchasers in the industry).? There are hundreds of sectoral initiatives, and examples include Electronic Industry Code of Conduct, ICC International Codes of Marketing and Advertising Practice, Responsible Care (chemical industry), International Mining and Metals Council Principles for Sustainable Development Performance, International Council of Toy Industries CARE Initiative, Forest Stewardship Council Principles and Criteria, Marine Stewardship Council Environmental Standard, Better Cotton Initiative, and Fairtrade Standards established by Fairtrade International.[30]

Finally, while many argue that impact investment has emerged due to the inability of governments to adequately address environmental and social problems due to a lack of resources and political will, governments play an important role in the impact investment revolution and evolution through the development of new regulatory frameworks and policies to encourage private impact investing and the formation of impactful business enterprises.? Examples of such actions highlighted in the GIIN’s 2019 Annual Impact Survey included the French Impact Initiative launched by the French Government in January 2019 to unite and diversify social entrepreneurs and create a national social innovation accelerator to mobilize EUR 1 billion of public and private funding in five years for venture- and growth-stage businesses and provide them with capacity-building support to scale; the creation of a Fund for Social Innovation by the Portuguese government to provide equity and debt financing for enterprises recognized as innovation and social entrepreneurship initiatives; the designation of “opportunity zones” by the US federal government to encourage and facilitate investments in economically distressed areas; and the announcement by the Office of Social Impact Investment of the state government of New South Wales in Australia of an initiative to finance innovate strategies to prevent homelessness among people exiting government services such as public housing or juvenile justice.? The Development Working Group, a subgroup of the G20, issued the “G20 Call on Financing for Inclusive Businesses”, a declaration that called on governments to provide friendly regulatory environments for inclusive businesses to promote sustainable development.[31]

Case studies and other illustrations and explanations of the application of the principles and guidelines included in this publication are available from a variety of sources prepared and published by organizations with substantial experience relating to impact investing including Rockefeller Philanthropy Advisors and the GIIN.? Among the topics covered in these case studies are articulating mission and values and defining impact, implementation tools and tactics, developing an impact investment policy, building the pipeline and generating deal flow, analyzing deals, evaluating impact, impact investing governance, organizing for impact and investment advisory committees.[32]? The Annual Impact Investor Surveys published by the GIIN also provide insights into developments in the impact investment market, such as growing interest in gender lens investing, investing in refugee issues, human resources, diversity and inclusion and the role of governments and policy.

To learn more, see my new book on Investing for Impact: A Guide for Impact Investors and Sustainable Entrepreneurs.

Notes

[1] Descriptions are adapted from Estimating and Describing the UK Impact Investing Market (Impact Investing Institute, March 2022), 12-15 and S. Godeke and P. Briaud, Impact Investing Handbook: An Implementation Guide for Practitioners (Rockefeller Philanthropy Advisors, 2020), 46-50 (describing the “impact capital chain”).

[2] S. Godeke and P. Briaud, Impact Investing Handbook: An Implementation Guide for Practitioners (Rockefeller Philanthropy Advisors, 2020), 50.

[3] Information on GIIN membership is available here.

[4] Information on GIIN solutions is available here.

[5] Programs in place as of June 2024 are listed in the text and current information on GIIN programs (including previous programs such as the Gender Lens Investing Initiative, is available here.

[6] Impact Frontiers (Our Mission, History, and Vision).

[7] Impact Management Norms (Impact Frontiers).

[8] Social Value International.

[9] Principles of Social Value.

[10] Impact Management Platform.

[11] SDG Impact.

[12] Global Investors for Sustainable Development Alliance.

[13] The Sustainable Investment Forum.? The US Sustainable Investment Forum is a member of the Global Sustainable Investment Alliance, a collaboration of regional sustainable investment organizations including the Japan Sustainable Investment Forum, the Responsible Investment Association Canada, the Responsible Investment Association Australasia, and the European Fund and Asset Management Association. ?

[14] U.S. Impact Investing Alliance.

[15] The Alliance published a comprehensive report in 2020 that included 12 specific policy recommendations and ideas with the potential to catalyze more impact investments to help address urgent social, economic and environmental challenges.

[16] Impact Investing - Rockefeller Philanthropy Advisors.

[17] Toniic.? See Sustainable Development Goals: Impact Theme Network (Toniic).

[18] CREO.

[19] Confluence Philanthropy.? As of June 2024, Confluence Philanthropy’s membership network consisted of over 250 private, public and community foundations; family offices; individual donors; and their values-aligned investment advisors representing more than $75 billion in philanthropic assets under management, and over $3.5 trillion in combined managed capital.

[20] ImpactAssets.

[21] SOCAP Global.

[22] IRIS+ System.

[23] For further discussion of sustainability reporting standards, see A. Gutterman, Sustainability Reporting Frameworks, Standards, Instruments, and Regulations (Oakland CA: Sustainable Entrepreneurship Project, 2024).

[24] B Impact Assessment (bcorporation.net).

[25] Principles for Responsible Investment.

[26] An Introduction to Responsible Investment.? The resources also include technical guides, practice guides, questionnaires, and case studies.

[27] A Legal Framework for Impact.? For further discussion of PRI, see A. Gutterman, Sustainability Standards, and Instruments (Oakland CA: Sustainable Entrepreneurship Project, 2024).

[28] “Overview of Selected Initiatives and Instruments Relevant to Corporate Social Responsibility” in Annual Report on the OECD Guidelines for Multinational Enterprises 2008 (Paris: Organisation for Economic Co-operation and Development, 2009), 239.

[29] Handbook on Corporate Social Responsibility (CSR) for Employers’ Organizations (European Union CSR for All Project, January 2016), 30.? ??

[30] “Overview of Selected Initiatives and Instruments Relevant to Corporate Social Responsibility” in Annual Report on the OECD Guidelines for Multinational Enterprises 2008 (Paris: Organisation for Economic Co-operation and Development, 2009), 247.? See also Annex 6.A6 to the OECD Report, which sets out categories of instruments and initiatives relevant to CSR by sectors covered and illustrative examples of government sponsored or supported, industry sponsored, partnership sponsored and labor or NGO sponsored initiatives in the following sectors: advertising, agriculture, apparel, chemicals, energy, extractives, investment, electrical, forestry, fisheries, oil and gas and toys.? For further discussion of some of the sector initiatives mentioned in the text, see A. Gutterman, Sectoral and Multi-Stakeholder Initiatives (Oakland CA: Sustainable Entrepreneurship Project, 2020) and A. Gutterman, Sustainability Standards, and Instruments (Oakland CA: Sustainable Entrepreneurship Project, 2024).

[31] Annual Impact Investor Survey 2019 (Global Impact Investment Network, 2019), 41.

[32] See, e.g., S. Godeke and D. Bauer, Mission-Related Investing: A Policy and Implementation Guide for Foundation Trustees (Rockefeller Philanthropy Advisors, 2008); S. Godeke and R. Pomares, Solutions for Impact Investors: From Strategy to Implementation (Rockefeller Philanthropy Advisors, August 2010); and S. Godeke and P. Briaud, Impact Investing Handbook: An Implementation Guide for Practitioners (Rockefeller Philanthropy Advisors, 2020).