Africa: Why Impact Investing Can Help Solve the World's Problems

opinion

A lack of funding is impeding progress on the sustainable development goals, but private banks plug the gap.

Addressing the world's most pressing economic, ecological, and social challenges is a common theme at the World Economic Forum in Davos. This year was no exception, with impact investing widely discussed as a strategy for tackling them.

Impact investing, which seeks to generate measurable positive outcomes for people and planet as well as competitive returns, is a promising tool to support the United Nations' framework for driving real, sustainable change, known as the Sustainable Development Goals (SDGs).

However, there are three major factors holding back these endeavours.

The first is a lack of awareness. A UBS survey published last year discovered regional differences in awareness of terms for investments that aim to contribute to the SDGs - 64 percent of participants were very familiar with the term "impact investing" in China, compared to just 21 percent of US investors polled. A 2016 survey of 24 countries, conducted by Glocalities, found that just 1 percent of citizens knew the SDGs "very well."

Impact investing directly links investment opportunities to particular sustainability topics and SDGs. There needs to be better, more personalised information available that helps investors tackle the social and environmental issues they most care about.

The second obstacle is too much complexity. Investors, givers, and consumers often face a "jargon jungle" when making sustainability decisions. Large amounts of sustainability data, often inconsistent and detached from an individual's affinities for a particular sustainable cause, can confuse rather than clarify where best to deploy capital.

We propose a number of ways to cut this complexity. Global financial industry organisations, such as the Institute of International Finance can lead efforts to develop a clear, simple taxonomy for sustainable investing. If adopted universally, this would push sustainable investment products into the mainstream.

The industry also needs coherent and consistent impact measurement standards, such as the International Finance Corporation's Operating Principles. True impact measurement principles quantify what matters, providing investors with verifiable data on the social and environmental consequences of their investment.

They also minimise the risk of "impact washing," the misleading marketing of investments that claim to deliver impact but fail to prove it, which confuses investors and discredits the impact industry.

The third obstacle is too little financial contribution toward achieving the SDGs. Investors can find it difficult to identify where their capital can make the most positive impact on people and planet.

Environmental, Social and Governance ratings agencies use different methodologies to assess a particular firm's social and environmental performance. We believe this lack of clarity and transparency is one of the main reasons why fewer than half of European foundations prefer a traditional investment strategy for their endowment capital and separate philanthropic activities, rather than embracing sustainable and impact investing.

The current funding gap is a major impediment to achieving the SDGs. However, private investors are willing to make a greater contribution to this effort if the World Economic Forum and other organisations can work towards high quality investment standards and increase the awareness of opportunities to do well while doing good.

Any views expressed in this article are those of the author and not of Thomson Reuters Foundation.

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