Impact

Over the past few months I have noticed that the terms 'impact' and 'impact investor' leave plenty of scope for interpretation. And that is far from helpful when you are trying to create a distinct profile for yourself by using these terms. So what is the issue here?

Whenever impact investing is discussed and whenever the term is used, the key notion is that when undertaking investments we should focus not just on financial returns, but also on social returns; on the degree to which an investment contributes to solving social problems. One of the insights you quickly encounter in practice and in literature is that the two can coexist: it is possible to invest in a way that yields financial returns as well as social returns. And if you explain the social returns and report transparently on them, then for many people that is enough: you can now call yourself an impact investor. In my opinion that is a touch too easy, and a touch too quick. Let me give a few reasons why I think this way.

First of all, there is virtually always a social return. Consequently, if impact investing is nothing more than being able to demonstrate the social returns you have generated, then it is neither as exceptional nor as ground-breaking as is often claimed. It would be more challenging to uphold the principle that the essence of impact investing should be to ensure that financial returns become less important than social returns. Admittedly, that makes it difficult - but it also makes it interesting.A second criticism of the increasing prevalence of the term 'impact investing' is the claim by investors that they 'also' do impact investing. In other words, they are doing what they always did, but are additionally undertaking investments that generate social returns. This I also find a touch too easy. Does it mean that financial returns continue to have priority in the rest of their portfolio? And could this mean that while you consciously invest in social impact in one part of your portfolio, in the other part of the portfolio you invest in activities that are incompatible with this aim? This seems to me to be wrong. Real impact investors apply the concept across their entire portfolio.Finally, a third criticism concerns attempts to freeride on this fine concept. Take large commercial investors in pharmaceutical research, for example, who eventually sell their company to big pharma, which then goes on to market a drug at socially unacceptable prices. These investors now also refer to themselves as impact investors, arguing that they are promoting health - and if that's not impact, then what is? In a way they are right, but as long as financial returns have priority then as far as I'm concerned this has nothing to do with impact investing.

What lessons are there for Invest-NL from all of this? What should be our response? As follows:

• We maximise impact with an assurance of sufficient financial return. That is very different from maximising our financial returns, with some added impact.
• We focus on investments where we can make a significant contribution to solving social problems. The transition to a carbon-neutral and circular economy is an example of this focal interest.
• We develop impact analyses which are fully integrated in our investment process, in the same manner as risk and return. This is not something we drag into the equation if the decision has long since been made. And once the investment is in place, we keep track of whether the predicted impact actually materialises.
• We talk with business partners, the funds we work with and the companies we invest in about their policy in relation to impact. And we try to make it a part of our business relationship that they too prioritise impact.
• We report transparently about our approach to impact, what we succeed in doing and what we have not (yet) managed to do. These are promises we can be held to.Invest-NL and impact investing: while it may take some understanding, and it by no means is simply riding the wave of a popular trend, it is an interesting concept and a tremendous challenge.

Invest-NL and impact investing: while it may take some understanding, and it by no means is simply riding the wave of a popular trend, it is an interesting concept and a tremendous challenge.

If you would like to learn more about impact investing, we invite you to register for the "Co-financing our Future" event to be held on December 1the premier peer-to-peer event for all impact and conventional financiers in the Netherlands.

Wouter Bos
CEO Invest-NL