top of page

WHAT IS IMPACT INVESTMENT?

Impact investment is when capital is deliberately invested in places where it can generate positive environmental or social returns as well as financial returns. These impact returns are greater than would be possible if capital markets were left to their own devices without an impact intentionality.

​

As such, there is always a degree of concessionality involved in impact investing. This could be subsidy by public or philanthropic funds or acceptance on behalf of investors of lower returns or longer timelines. For asset managers it might mean higher risk investments, better terms for investees, or higher levels of non-financial support.

WHAT'S WRONG WITH IMPACT INVESTMENT?

Impact investment still largely operates in the same way as traditional investment, with additional requirements on reporting and measurement. Funds might be established with some more restrictive parameters which are aligned with impact such as operating in emerging markets or excluding certain sectors, but within these parameters, they are most commonly profit maximising. Consequently, the concessional resources are not achieving the impact sought in return for this concessionality in several respects:

 

​

​​

​

​​

 
​Missed opportunities for transformation 

 

Development challenges exist in economies and system and not in firms. Investment in firms has the potential to address development challenges if it addresses the causes of these development challenges. Appropriately targeted and managed capital can be catalytic and its impact many times greater than just addressing firm level challenges.

 
Financial additionality​

 

Asset managers claim the impact of a portfolio company - accounts opened, consumers of products, jobs created - as their own. In reality, the impact of the finance (the subsidy from the 'concession') is what matters and that is often a fraction of that impact. Other investors in the capital stack are claiming that same impact. Impacts on financial markets can be negative as private domestic and commercial capital are unable to compete, meaning competitors do not have access to growth capital.

 
Impact additionality​

 

Portfolio companies are growing at the expense of competitors without concessional capital. Firms are growing anyway and the impact claimed is not as a result of the capital.

 
Output level changes not addressing development challenges​

Most impact investment reports on consumers of products and access to services. It fails to capture the effects on people's lives.

WHAT IS SYSTEMIC IMPACT?

Systemic impact is when individual investments contribute to improving the efficiency and productivity of the broader sector and create opportunities for continued growth and development impact, in aggregate, for the actors involved. ​

​

Systemic impact is inherently catalytic and transformative. It starts with acknowledging that portfolio companies do not operate in isolation. Therefore, it involves asking ‘what’ is not working, ‘how’, and ‘why’, to assess whether and which financial and non-financial investments can address those issues. Ultimately, systemic impact delivers results by addressing firm-level constraints (for the portfolio company) and system-level (beyond the portfolio company) constraints so that the sector functions better. ​

SYSTEMIC IMPACT IN PRACICE

An asset manager in Southern Africa has a mandate to reduce poverty. It has a fund with a debt finance instrument. The sourcing manager uses traditional methods and identifies a prospect as an underperforming agricultural processing factory  seeking investment.

​

The asset manager identifies that this is an area in which they can add value beyond their debt finance instrument. They know agriculture in this system well. The problems that this factory is having - access to sufficient quality and quantity of inputs as well as access to export markets - are common across the industry. Bringing on this firm as a portfolio company could potentially address issues across the industry and up and down the value chain.

sourcing

WHY DO WE NEED A STANDARD?

To achieve excellence in impact, asset owners with limited time or expertise and generic processes need an easy way to differentiate between asset managers or funds whose objectives, processes, and ultimately results are aligned with systemic impact.

As demand for this type of impact has grown, the need for the standard has become clear. Thus, the standard serves this  purpose as an independently audited way for asset managers to differentiate themselves in this regard. This is important as, unlike all of the other norms, principles, and guidance it is not for everyone and needs robust, credible, independent verification to justify the and validate different ways of working for asset managers.

VALUE OF THE APPROACH & SIIS

Asset owners

  • Greater impact return on investment

  • Greater sustainability of impact outcomes

  • Greater reliability of impact data

  • SIIS allows easy assessment of investments likely to deliver systemic impact

blended finance or catalytic capital

  • Better deployment of concessional capital and resources to leverage private investment.

  • More easily direct concessional capital to asset managers and funds aligned with systemic impact objectives.​​

asset managers

  • Better alignment of impact and financial returns

  • Greater additionality of investments

  • More robust impact data

  • SIIS improves ability to attract capital from asset owners interested in systemic impact

PORTFOLIO COMPANIES

  •  Focus on their own corporate objectives.

  • TA and other value-added activities of investors are directed towards improving impactful core business and not compliance.

  • Gives their investors clarity on roles and responsibilities.

HOW IS SIIS DIFFERENT?

SIIS is different from other norms and standards and from other discussion of 'systems' in investing in several respects:​

​

​

​

Systemic not simplistic

SIIS draws a link between the broader system and development outcome while the existing impact frameworks and standards are focused on impact at the portfolio company level.

Incentives not idealism

SIIS is not altruistic or idealistic. It realises the political economy of impact investing and works with it to ensure all parties achieve their objectives.

Pragmatism not panacea

SIIS is not proposing large-scale investments which are not economically rationalised or imagining a portfolio company can change everything. It is about pragmatic actions to maximise the potential impact and minimise risk.

Auditable not agreeable

SIIS is not a generalised agreement in principle. Instead, it is accredited so that it may be used to differentiate between funds.

HOW DOES SIIS WORK?

SIIS has three components reflecting the full investment lifecycle - sourcing management and measurement. For each component asset managers can demonstrate progress through each towards achieving accreditation moving from demonstrated intent (PURPOSE), through having established mechanisms in place to achieve systemic impact (PROCESS), and ultimately demonstrating that these processes have been implemented and resulted in different decisions made in each of these components of the investment lifecycle (PROOF).​​​

PURPOSE: Has started to add these considerations into how they decide where to invest and develop investment pipelines in fund level strategy documents

sourcing

PROCESS: Have clear strategies, guidelines, review processes for integration in sourcing and selection, reflected in impact theory of change, sourcing guidelines, screening criteria, DD documents and team capacity.

PROOF: Have invested in businesses according to this process, evident from pipeline and investment decisions.

image_edited.png
image_edited.png
image.png

Figure 2: Full accreditation and achievement of systemic impact investing standard

Figure 1: Partial accreditation as funds progress through stages

bottom of page