Impact Investing in SMEs that add ESG value
Triple I believes that a strong SME sector contributes to sustainable economic development. The impact investment sector is booming and the number of investors that are labeled as “impact investor” is growing. Today around 36 billion USD (GIIN, 2016) is invested in SMEs labeled as “impact investments”. However, of this collection of investors, not all investments are in SMEs that add value socially or environmentally alongside their financial returns.
Since its modest roots in 2000, impact investing has grown significantly and is no longer a niche activity. In the past two years, the world’s biggest financial institutions have become active in this field. For example: BlackRock launched a new division called “Impact”; Goldman Sachs acquired an impact-investment firm, Imprint Capital; and two American private-equity firms, Bain Capital and TPG, launched impact funds (Economist).
What is impact, really?
The sector struggles with defining impact and focusing on actual impact. Different definitions of “impact” from different investors have confused the market. Some investors focus on social performance in its business processes as impact.
More devoted investors use the term “impact investment” only for investments that deliver both market-level returns and strict measurements of the non-financial impact. Others refer to impact investments when financial returns are sacrificed for greater social or environmental benefits. This stresses that investors have problems with identifying and measuring their impact.
In reality, impact as a standard is often degraded and evaluated based on the outcomes, and sometimes even the output levels. Negative ESG impact mitigation becomes therefore the actual norm in many cases.
By showing concrete impact in addition to the financial return on investment, the (proven) ESG value can be included in the performance ratios of individual SME’s as well as impact portfolios. Triple I is convinced that knowing and understanding the achieved impact of SMEs and its investors, is essential to further attracting capital to the asset class.