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Business Commentary Canadian firms must adopt a common standard for impact investing

Philippe Le Houérou is chief executive officer of the International Finance Corp. (IFC). Paul Lamontagne is managing director of Development Finance Institute Canada (FinDev Canada)

Across the world, the appetite for impact investing is growing. The prospect of investing in funds that deliver solid financial returns while doing good can be appealing, especially for young investors who are showing an increasing desire to put their money in investments that address global or local issues such as poverty, inclusion, education, employment, health, gender and climate change.

But how can investors trust that their investments are delivering impacts as intended, and that asset managers are not simply exaggerating the social and environmental benefits of their products – a practice known as “impact washing?"

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The key is common standards – from how investments are managed to achieve impact to how impacts across projects and even asset managers are assessed. Unlike financial return, impact assessment has not reached the point where common approaches and metrics have become widely accepted.

In response, a group of 60 global investors with about US$325-billion in impact assets under management came together last April on the sidelines of the World Bank Group/International Monetary Fund spring meetings to endorse a groundbreaking new set of standards for impact investing.

Called the Operating Principles for Impact Management, the principles seek to build investor trust by requiring signatories to assess and monitor not only their financial returns, but also the progress of their investments in achieving impact. Critically, this impact will be independently verified at regular intervals.

Investors crave this kind of discipline and transparency. The green bond market is an excellent example of how common standards can improve investor confidence and unlock investments.

Before the introduction of the Green Bond Principles in 2014, investors had no way of knowing whether green bonds truly financed climate-friendly projects. These principles, however, with their focus on promoting integrity in the green bond market through guidelines that recommend disclosure and reporting, increased investor confidence that green is green, and not “green washing.” This led to rapid growth in the asset class – to US$170-billion last year from US$10-billion in 2013.

We hope that the Operating Principles for Impact Management will have a similar effect in building the impact investment market.

A recent report by International Finance Corp. found that the current level of self-defined impact investments globally stands at an estimated US$1-trillion, but that the potential market could be as high as US$26-trillion.

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Imagine what we could do if impact investments were mobilized at that scale. We could confront the world’s greatest challenges – from poverty to climate change to fragility. We could make serious progress on the United Nations’ sustainable development goals, which are estimated to need trillions of dollars a year.

To date, 63 global investors have signed the principles and we are in discussions with 50 more. To ensure the implementation and evolution of the principles, an advisory board from among the signatories was created. The board serves as a conduit for the views of other signatories, potential signatories and the impact investment community. Its 14 members come from impact investment firms, multilateral banks, and development finance institutions, including FinDev Canada.

We call on many more Canadian investment firms to sign the principles. Now there are just three – FinDev Canada, Cordiant Capital and Sarona Asset Management – but there is the potential for many more to adopt them.

We believe that with common standards, impact investing can harness the forces of the market economy in powerful ways to help fight poverty and help save the planet. As French President Emmanuel Macron said at the Paris climate summit in 2017, “There is no Plan B, because there is no Planet B.”

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