United Nations Secretary-General Antonio Guterres likened the pandemic to an X-ray, “revealing fractures in the fragile skeleton of the societies we have built1 .” The COVID-19 pandemic has not only halted, but in fact reversed decades of progress made regarding global poverty levels, healthcare, and education2 . The unprecedented crisis has derailed a fifteen-year global effort to improve the lives of people through the United Nations’ Sustainable Development Goals (‘SGDs’), most critically that of SDG 1 and SDG 10 focused on eliminating poverty and tackling inequality3 respectively.
At the same time, investors have allocated unprecedented amounts to sustainable investment strategies. The impact investing market alone is estimated at approximately $715 billion4 and expected to continue to grow significantly in the coming years. These impact investment strategies seek double returns; risk adjusted financial returns while also bringing societal returns. These include for example investments in companies that provide critical services to low-income people covering services such as clothing, communications, energy, water, and education5 . In short, these companies provide “basic needs” services.
While sustainable investing has seen remarkable growth over the past 10 years, more is needed than just the allocation of funds to set the world back on course towards achieving the SDGs by 2030. The average direct investment made by impact investment funds is, for example, far less than the deal size of traditional private equity firms. Institutional investors with billions of assets under management could play a broader role if investment opportunities would match their scale, traditional investment criteria and impact requirements. To overcome these challenges a new, collaborative capital approach is needed.
…more is needed than the allocation of [impact] funds to set the world back on course towards achieving the SDGs by 2030.
We already see investors addressing societal challenges, including basic needs. In June 2021, the Swedish International Development Agency (‘SIDA’) guaranteed a social bond that focuses on broad impact across the SDGs and is aimed at institutional investors6. This blended finance approach is particularly attractive for institutional investors as it provides attractive risk-adjusted returns while also making a positive impact. Simultaneously, we also see investors deepening their collaboration and starting to co-invest with like-minded investors. This collaborative capital not only allows resource pooling, but also fosters an environment of knowledge sharing and innovation to amplify impact while meeting traditional investor requirements. Inspiring examples of this can be found around societal themes such as health and education.
Collaborative capital is an approach whereby investors work closely together and collectively collaborate with the problem solvers to develop investment propositions that address societal issues while generating financial returns. It combines the rigor of traditional investing with a robust impact measurement approach. Deep and on-the-ground knowledge of the issue with tailored investment strategies that fit investors’ needs. In short, it is co-creation with the investors in the driving seat.
Transparency on the positive impact is another key element to be improved. For example, it is unclear to many investors how their investment portfolios contribute to addressing basic needs. A wide variety of investee companies might be providing services that address these needs, however inconsistent measurement, if done at all, is prohibiting proper understanding of investor contribution. Transparency and accountability will be key as standards continue to improve and scrutiny around impact products increases.
A wide variety of investee companies might be providing services that address basic needs, however inconsistent measurement, if done at all, is prohibiting proper understanding of investor contribution.
The Cambridge Institute for Sustainability Leadership (CISL) provides a sound approach for measurement based on currently available data which basically measures the total revenue derived from the provision of these goods and services per dollar invested. As such investors can assess their contribution by applying this measurement approach which will provide an initial insight. Going forward, the ideal metric would provide more granularity and specificity in that it measures explicitly the revenue of goods and services that are provided to low-income people.
By understanding the positive impact financing provides, investors will be able to credibly report on how they not only generate financial return but also address the basic needs in our societies. As such, investor actions will help to heal the fractures revealed in our societies. The future is not something that investors step into but is something that must be built, collaboratively.
The Sustainable Impact Framework Navigator (SIFN) is a solution that helps investors measure their portfolio’s contribution towards meeting basic needs, based on currently available data. To learn more about the SIFN or to request a demo, click here.
5 University of Cambridge Institute for Sustainability Leadership; In search of impact - Measuring the full value of capital: Update: The Sustainable Investment Framework