Article by Dr Christoph Kind, Chief Investment Officer at Marcard, Stein & Co
Impact investments are considered the highest level of sustainable investing. Investors use them to try to achieve a direct effect ("impact") in the fight against grievances. The interest in impact investing is also due to the increasing frustration with ESG sustainability investments. Despite an immense regulatory effort, it has not yet been possible to banish the dangers of "greenwashing" and measure the positive effects in a meaningful way. "The recognisable weakness of the ESG movement is driving supporters to impact investors," the news magazine "Der Spiegel" stated.
In recent years, a consensus has emerged on what constitutes an ethically sound investment. The United Nations' Social Development Goals (SDGs) define 17 goals, the first 15 of which are fundamentally investable. These goals go far beyond decarbonisation. Ecological goals such as "Clean water and sanitation" (Goal 6) or "Affordable and clean energy" (Goal 7) are only followed by "Climate action" in 13th place. In principle, the achievement of the ecological goals can be measured by the amount of renewable energy produced (in megawatt hours) or the reduction of greenhouse gas emissions (in CO2 equivalents).
Measuring the impact of social goals, on the other hand, is more difficult. The first development goal of the United Nations is "No poverty". A goal that most people can probably identify with. But how many people are actually poor? The German Parity Welfare Association (DPW) speaks of poverty when someone has less than 60 percent of the average income. This definition does not make sense, because what would happen if everyone earned twice as much at once? Poverty would not change at all. If, on the other hand, the state taxed all incomes at 100 per cent, there would be no poverty at all according to the DPW definition, as no one would earn less than the average income. Strictly speaking, the DPW definition is not a definition of poverty at all, but an assessment of income distribution. The DPW defines poverty in such a way that it is not the level of individual income that is decisive, but the question of how far it deviates downwards from the average.
One could argue that a more balanced distribution is certainly a goal worth striving for. After all, the tenth development goal of the United Nations is "less inequality". However, this is not about radical egalitarianism, but about eliminating extreme imbalances. The decisive factor for the poor is not what others earn, but what they can afford from their income.
Both definitions of poverty and inequality are equally useless for impact investing. Impact can only be measured if the pre-defined goals can be achieved by an individual company. However, a single company cannot change the income distribution of an entire economy. A more practicable target for poverty reduction, on the other hand, would be the proportion of income from products for low-income groups. The impact of microcredit providers can be measured by the number of people who gain access to financial services. If the goal of reducing inequalities is to be achieved, this can be measured, for example, by the number of jobs created in low-income areas or among disadvantaged groups. The number of local suppliers in the supply chains can also serve as a criterion.
Impact investing is always about making a positive change to the status quo. There are therefore two fundamentally different ways to create impact. Investors can promote the growth of companies that are already pursuing a good cause or accelerate the transformation of companies that want to move away from problematic business models ("turning brown into green"). By contrast, investments in companies that are already pursuing a good cause but are not increasing their impact in this area perform poorly. An example of this would be Gilead Sciences, one of the largest pharmaceutical companies in the world. Gilead develops and produces drugs against serious diseases such as HIV. The company is therefore doing good in terms of the third development goal of "health and well-being". However, investors who want to make an impact should ask themselves whether more patients are being treated by buying Gilead shares. Although Gilead produces the drugs, it does not determine how many people in need are supplied with them. To achieve impact, investors would have to put pressure on the company to keep the prices of drugs as low as possible and thus enable more people to receive treatment.
This example makes it clear that in many cases, impact cannot be achieved through investments alone, but only through the additional active influence of investors. The Centre for Sustainable Finance & Private Wealth has identified four variants of impact investing. The first two involve investments in companies that (want to) achieve a positive impact but lack access to suitable sources of financing. In the third case, the influence of investors is used to further support companies with a positive impact through active influence or to put companies on the right track that have not yet generated any or negative impact. The fourth case involves the active integration of sustainability goals into the business model.
Impact investing means working together for a good cause.
There is great interest in impact investments, but many questions remain unanswered. How can an impact be attributed to the cause? The difficult question of how development would have proceeded without impact investments must be answered. Whether investments really have an impact also depends on how high the impact is in the first place. Investors must ensure that they invest their money primarily where the greatest progress can be made.
It takes more than financial investments or charitable donations to achieve impact in the fight against injustice. Impact investing means working together for a good cause. A challenging task that more and more investors are taking on.
Note from the editors:
The Bundesinitiative Impact Investing (Federal Initiative for Impact Investing) is the leading authority on the topic of impact investing in Germany and provides extensive information for you on its website.
