The current methods for measuring the outcomes of impact investing risk entrenching existing inequalities in access to capital whilst opening the door to “impact washing”, according to a new report.
The report, “No Data, No Deal? Impact Measurement and Capital Flows to Achieve climate-compatible growth”, is released by researchers at the Smith School of Enterprise and the Environment at the University of Oxford, which equips enterprise to achieve net zero emissions and the sustainable development goals, through world-leading research, teaching and partnerships.
Funded by the the Climate Compatible Growth Programme (CCG), and based on interviews conducted with impact investors and intermediary organisations across eight countries alongside a literature review of impact investment over the past 20 years, the report finds that impact investing could entrench inequality rather than address it without improved monitoring.
To counteract this problem, the authors urge governments to act early and set the boundaries of, and principles for, impact standard development; leverage private capital by investing in impact measurement education, including workshops and accelerator programmes; and learn from the lessons of ESG investing.
“Impact investing has become one of the most rapidly growing investment strategies in the global financial system. With the total market worth around US$1.1 trillion in 2022 and forecast to grow at 18.6 per cent per year to 2030, there’s an increasing focus on just how effective it is in terms of delivering the benefits it promises to society,” said co-author George Carew-Jones.
Several high-profile recent studies argue that impact investors frequently overstate the social outcomes their investments actually generate. As the demand for data to prove an investment’s impact grows, smaller businesses looking for investment could be penalised, particularly in developing regions.
“Data which proves that impact investments are making a positive real-world difference is the key to avoiding impact washing. But the burden of collecting this data often falls on the most vulnerable,” said Carew-Jones. “If they can’t collect the data that’s currently asked for by investors, they will lose out on investment.”
Another issue identified in the report is the lack of consistent and agreed measures for the impacts achieved.
“If we are to move towards an impact measurement standard, this must involve safeguards to ensure small entrepreneurs are better supported in measuring project impacts. This could be through standard setting, innovative data collection approaches or technical assistance,” said co-author Dr Alex Money.
The report finds that investees in emerging markets need support in measuring and managing impact. Investors and investees need to work together to ensure that the goals and methods of IMM are co-defined towards optimal outcomes for both parties. The case of Zambia’s Constituency Development Fund is explored as a prototypical example of how impact measurement could unlock investment towards a large group of climate-compatible growth projects and ventures.
“Investments that target specific outcomes are gradually emerging as a distinct asset class. How impact is measured will have a significant bearing on capital allocation. In this paper we argue that alternative frameworks of measurement are urgently needed to support climate compatible growth, and we demonstrate how these frameworks could be applied in practice,” said Dr Money.
The full report can be downloaded here.
