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About Ethical Fund Investing
‘Ethical’ fund investing, the sector that Marmanie, Development Ratings and Artha focus on, is often termed ‘impact investing’ and differs from traditional investing in its core aim to solve environmental or social (and moral) challenges while generating financial profit. By tapping the global capital markets, ethical fund investing has the potential to unlock financial resources to address the planet’s challenges at a scale that government and philanthropic actors would find hard to match. What binds those who drive the ethical fund investment space is the shared confidence that innovative capital structures can play a huge part in solving global social and environmental questions. In recent years, a rapidly growing amount of investment capital has gone into these structures, in portfolios across very different geographies, sectors, asset classes and with a wide range of return expectations. I would like to make one brief follow up point about the measurement of social and environmental impact.
Unlike mainstream investing, ethical fund/impact investing is for the most part, not yet supported by established regulatory institutions or service providers. Although this sector infrastructure is rapidly growing, ethical/impact investors must for now ‘self-regulate’ and ensure they remain transparent and credible. A key and differentiating feature in the development of blended value (financial, social/environmental) investments as an asset class is the demonstration and measurement of impact, and the stories around the positive use of capital that compel these investments. Thus ethical fund investing calls for more than reporting financial performance, and must also concentrate on monitoring and determining the social/environmental impact generated by investment dollars. In many ways, this is no different from traditional investments, but measuring social/environmental impact is not quite so straightforward. Every ‘social’ investment has a different impact, and the way it is measured differs from investment to investment and also by organisation. Evidently this results in somewhat confusing results on an aggregate level, as every organisation measures and reports impact differently, even though it is often the funds that have a proprietary method of measuring impact that are successful in attracting socially and environmentally mindful investors. Earth Capital Partners, Root Capital and Acumen for instance, use their in-house proprietary methodologies to measure their impact and thus make it easier for an ethical fund investor to track performance.
Fortunately, there is increasing convergence of minds on the metrics and monitoring issue given the rapid growth of the sector, and impact investing experts are calling for assessment or rating of impact in addition to measurement and reporting, The need for standardised frameworks to enable benchmarking of funds around their impact is essential so that investors can more easily compare them. The Rockefeller Foundation is leading an effort to create a common impact reporting framework, IRIS (Impact Reporting and Investment Standards) to begin using a ‘common language’ that will allow comparison, benchmarking and communication across the breadth of organisations that have impact as a primary driver. This initiative is an important step towards lowering transaction costs around measuring impact and improving the ability to understand ethical fund investing. Taking a long term view we can see how the drive towards standardisation in monitoring paves the way to impact investing/ethical fund investing being included in regulatory schemes. Of course, not everything will fit tidily into these matrices but as a sector it is important to increase transparency and reduce risk through reporting.
Responsibly investing in ethical funds requires investors to pay close attention to Monitoring and Evaluation systems and the assessment of environmental and social impact. In this interim period while standardisation measures are created, analysing the robustness of proprietary M+E systems has become a key role for prospective investors.
December 2009