Shift to impact investing for real change and returns

IT is becoming a common theme among the region's family offices and institutional investors to include sustainable investing, an investing style which focuses on environmental, social and corporate governance, or ESG for short.

But while noble in its intent, some might argue that investment managers managing funds with an ESG angle do not truly practise the spirit of sustainable investing. In reality, they make their case in investing into an asset solely on the basis for financial gain and thereafter force-fit the investment to be ESG-compliant. This defeats the purpose of the original intent to invest in good causes.

Investment managers behave this way as they are traditionally rewarded by carried interest, where deriving the best financial returns is the sole key performance indicator. Good ESG behaviour becomes an afterthought and is justified in a subjective manner. It is deemed acceptable to tick off the boxes without any clear, measurable positive outcomes.

But is there any way then to nudge investment managers to consider and measure impact returns from their investments as well?

To overcome this issue, a better successor to sustainable investing has emerged: impact investing. The Global Impact Investing Network (GIIN) defines impact investing as "investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return".

This definition arguably makes investment considerations deeper and places a measurable outcome on impact as part of the expected returns that investors want to have. But how do we encourage investment managers to shift their mandate from ESG-selection to including and measuring impact goals? To start expecting investment managers to use impact accounting frameworks (IRIS+ by GIIN is one such example) would be onerous and overwhelming at first sight. There will also be significant compliance and added costs.

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Such costs may be justified if the investment size is significant. But for venture capitalists, such as TRIVE, that deploy capital in smaller quantums, cost is a likely deterrent from adopting such frameworks. Startups, which generally are small and resource-constrained, would prefer to find another investor rather than fill up an extensive framework like IRIS+ in order to receive an investment.

To find a balance, TRIVE went through a journey of discovery to balance the work on impact outcomes. Through our research, we discovered the Impact Management Project (IMP) framework, a simplified framework that eases the evaluation yet is able to measure impact goals.

In this framework, TRIVE drew out relevant questions to guide us to making an evaluation whether a startup is working towards an impact goal. We first identify the intentions and mission of the startup, and the key issue it is trying to solve. The problem statement is then mapped to one of the 17 United Nations Sustainable Development Goals, which are vision goals.

A further set of questions are asked to probe on the contributions that a startup's product or service bring to the beneficiaries. The answer to each question will be ranked respectively on an assessment scale. A final grade will be made to decide whether the startup's product will be measured in an ordinal scale as to whether it avoids harm, benefits people or contributes to solutions.

And though there may not be specific numbers produced, it gave an identity to the impact outcome the startup is trying to achieve. The process is also more manageable for both the investment manager and the startup in question, compared to a full blown impact accounting framework.

Sustainable investing is on the rise, but impact investing is emerging as the better alternative that truly measures real change. By demonstrating that there are viable ways to implement impact evaluation without extensive capital investments, it is hoped that more investors will be encouraged to demand impactful outcomes, beyond financial returns. Only then can we start to see a shift of investment dollars in creating a sustainable world with real change.

Christopher Quek is managing partner of TRIVE, an early-stage venture capitalist that does impact investing in technology startups in South-East Asia.