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October 2020

Key Principles of Impact Investing

Impact Investing
The sharp rise in demand for sustainable investments over the last decade can be explained by the fact that investors increasingly require their investments to meet social and environmental goals, in addition to generating financial returns. They not only want to know where their money is invested, but whether it also creates an impact. Meaningful impact objectives and measurement are therefore becoming paramount.

ESG investing revolves around impact

ESG Investing
Historically, investors have used a number of investment approaches to address global environmental and social issues, including values-aligned investing, ESG integration approaches and impact investing. By applying negative exclusions, Socially Responsible Investment (SRI), values-based investing and various divestment campaigns have targeted companies contributing to environmental and social problems. ESG integration approaches typically aim to manage material risks and harness opportunities arising from environmental, social, and governance factors. In contrast, impact investing approaches aim to generate a positive impact on society or the environment by directing capital toward companies that are providing solutions to social or environmental challenges. Unlike ESG integration, which uses extra-financial information with the ultimate aim of achieving long-term financial objectives, impact investing explicitly targets extra-financial goals alongside financial return.

UN SDGs – a global framework for impact

Impact investing and the UN Sustainable Development Goals (SDG) are closely interconnected. The SDGs provide a definitive framework for sustainable development. They are for all countries, not just the least developed, and were derived from a process that was more inclusive than ever in the history of the UN, with governments, business investors, civil society and citizens involved from the outset to develop a thorough and democratic set of development objectives. Currently the global situation related to Covid-19 and the climate emergency require us to build a new economic system – one that delivers sustainable investment flows, based on both resilient market-based and robust bank-based finance. We need finance for the long-term. To deliver the objectives of the Paris Agreement on climate change and the SDGs it is necessary that finance and financial services be provided in a way that supports, enables, and encourages companies and countries to transition towards those objectives.
The Sustainable Development Goals

Investors are playing an important role

Unprecedented recovery stimulus and bailouts post-Covid-19 will provide both short- and long-term financing facilities to different sectors of the global economy. Investors have an important role in promoting the reorientation of financial markets to support the goals through improved transparency and innovative financing mechanisms. The SDGs provide a timely chance to reshape the trajectory of lives globally and create new market opportunities. And indeed there are tremendous opportunities to provide solutions to global challenges. Financing the SDGs will require a shift in current business models to move towards investing in sustainable solutions. Initiatives that will support the SDGs will create a number of long-term investment opportunities.
Asset of Impact Investors (in USD bn)
Asset of Impact Investors

Measurability is key

One of the key principles of impact investing is measurability – the ability to report on the social and environmental outcomes of investments. While there have been significant advancements in measurement standards by organizations such as the GIIN and International Financial Institutions (IFIs), it remains a challenge to develop comparable measures across projects and companies. For us at J. Safra Sarasin Asset Management, we have developed a framework for the measurement of the impact of companies where the following aspects are embedded:
  • Simplicity: using simple metrics enables communication with a broader audience.
  • Comparability: investors are interested in measuring outcomes at a portfolio level, making it important to use metrics that are comparable across sectors.
  • Relevance: the desire for comparison should not outweigh the specific aspects of each sector and the need to use metrics that are relevant for a particular industry or region.
  • Aggregation: companies tend to report performance metrics at the project level – but for impacts to reach scale, metrics should be consolidated at company and portfolio levels.
Heeding these principles forms the basis to create meaningful and pertinent impact reporting for financial strategies that intentionally target the UN SDGs.

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