Q&A: Ready for impact?
In the first of a series of articles exploring how investors and business can contribute to the Sustainable Development Goals, IIED’s Laura Kelly puts questions to Chris West from Sumerian Partners on the lessons and challenges from impact investing.
The last 18 months have seen a wave of business and investors seeking to redefine their raison d'être – where their purpose goes beyond simply making money for their shareholders and extends to delivering social and environmental benefits.
It feels as though this wave is now reaching tidal proportions. In September, for example, the Business Roundtable – a group of nearly 200 CEOs representing the largest US companies – issued a statement (PDF) setting out their commitment to do what’s right – for people and planet – while also delivering for their stakeholders. Pledges include protecting the environment by embracing sustainable practices, investing in employees and dealing with suppliers ethically.
This high-profile announcement, with signatories including the likes of Amazon, Apple, JP Morgan and Pepsi, ramps up expectation: the world wants to see corporate leaders using their immense power to drive real, positive change.
And people are scrutinising businesses now more than ever. Unless they start to see companies making a difference by operating with genuine renewed purpose, the companies will rightly be accused of ‘purposewash’ (the new greenwash).
The Sustainable Development Goals (SDGs) have the potential to support this renewed purpose, showing businesses how they can play their part in solving the world’s biggest sustainable development challenges.
In this new blog series, IIED will explore how business and investors can contribute to achieving the SDGs and examine the challenges and opportunities in delivering social and economic impacts as well as economic returns.
Impact investing has been grappling with these issues for some time, making it a good place to look for lessons on assessing SDG impacts. Laura Kelly (LK), director of IIED's Shaping Sustainable Markets research group, picked up this conversation with Chris West (CW), of Sumerian Partners. He has a long and distinguished track record in investing in business-based solutions that can deliver lasting social and/or environmental impact at scale.
LK: Chris, first what’s your take on the current impact investing landscape?
CW: Impact Investing has grown hugely since the term was first coined around 2007. It now attracts investors with a wide range of objectives from supporting social businesses to reducing CO2 emissions. So I’ve come to distinguish between ’investing with impact’ – where the primary focus is on achieving a net positive financial rate of return alongside social impact, and ’investing for ’impact’ – where the primary focus is on achieving a social impact: any associated financial returns are secondary to that objective.
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By far, the largest concentration of funding lies with those 'investing with impact' as this reflects their appetite for comparatively low risk/high return investments.
LK: That’s a helpful distinction. In your opinion, which businesses are best geared up to making real social and environmental change?
CW: Using market-based solutions to tackle some of the most complex social and environmental problems is really hard! Unsurprisingly, many of the really innovative business models I come across – in both emerging economies and developed countries – follow a ‘low and slow’ growth path due to having high costs, low margins and frequent points where the business model needs to be altered to reflect customer needs.
Without support from those 'investing for impact', I fear many of these will never achieve their potential. These social businesses, or innovations within companies, also require non-financial support (such as business skills mentoring, financial management, corporate governance, and linkage to markets).
LK: Yes, IIED has quite a lot of experience in working with these types of business: small and often informal but with huge potential – if they can get the right mix of support and investment.
CW: I would also highlight that larger corporates are supporting these kinds of business as part of market-building and the development of more transparent supply chains. For example, many leading brands and retailers (including C&A and Primark) are supporting a social enterprise – CottonConnect – to meet their sustainability criteria. Big companies such as Unilever and Danone are also outlining how their operations contribute to the SDGs.
LK: And what are some immediate challenges around businesses assessing SDG impacts?
CW: There is a growing number of tools and indices for measuring social and environmental impacts as well as financial returns – potentially confusing to investors, business and the public. I think we’ll start to see regulations introduced that define 'impact' in investing products.
LK: I agree. Tools for business to report their sustainability and SDG impact is a crowded area and one we’ve been thinking about at IIED. Where else do you think IIED could add value?
CW: Research and learning seem obvious areas for you. Gathering and sharing more market-based evidence that can inform new structures for investing with impact and investing for impact. Creating better forums for learning about the different financial instruments, skills support, impact management and so on.
Collaboration and dialogue are also important for bringing together business, grant funders and investors with and for impact, to understand the different needs and perspectives. I know IIED has a track record in dialogues that convene diverse actors – often with different agendas.
LK: Good suggestions Chris and very much in keeping with our new five-year strategy that emphasises dialogues for transformational change, engaging practitioners and policymakers, providing evidence and empowering the excluded.
That rounds up this discussion, but I hope it’s the start of many conversations with you and others on how we ensure the interest and activity on business and the SDGs really delivers. More on this in a few weeks.