Impact investing

Objectifs de développement durable
Street garden party in Washington DC, ©Ted Eytan

Impact investing is on the rise in the asset management world. This article aims to describe precisely what this strategy consists of, with the aim of highlighting the objective criteria that allow a fund to claim to be part of this movement. Indeed, "impact washing" is growing, just as "green washing" has developed in parallel with green finance. We will attempt here to summarise as clearly and comprehensively as possible several frameworks and reports on impact investing, which are referenced at the end of the article.


Impact investment is completely in line with sustainable finance, which it tries to take one step further. In short, impact investing explicitly and simultaneously seeks economic profitability and a positive and measurable social and environmental impact.

SRI (Socially Responsible Investment) seeks above all to limit negative externalities (for example by excluding coal) in a sustainable development approach, but does not exclude any activity a priori. Impact investing goes further by aiming to generate positive externalities.

NB: by “externality”, we mean “the fact that the production or consumption activity of one agent affects the well-being of another without either of them receiving or paying compensation for that effect” (definition of Encyclopædia Universalis). An externality can be negative, such as pollution, but it can also be positive, such as an innovation in the field of waste recycling.

In principle, impact investing can be applied to all asset classes. However, it is easier to implement an impact approach in the unlisted sector. In this context, the investor is free to select companies with a strong impact, generally in niche markets, and to support them over time by being close to the management team. However, we are beginning to see impact approaches develop in the listed or credit markets.

Impact investing is estimated to have 715 billion dollars in assets under management in 2020 (source: GIIN Global Impact Investing Network), which makes it still a niche segment in the world of asset management, with a large number of small players. However, the approach is spreading in the SRI world, with many investors using the United Nations' Sustainable Development Goals (SDGs) to assess the positive impact of their funds.

Objectifs de développement durable
The 17 UN Sustainable Development Goals


In the definition given above, all words are important. For an investment to be considered as having a positive impact it must meet three criteria: intentionality, additionality and measurability.

Intentionality describes the explicit and announced ex ante intention to contribute to a specific and measurable social or environmental objective. This objective guides all investment decisions of the fund. It primarily concerns the investor, not necessarily the target business.

Additionality refers to the specific action or contribution of the investor to increase the net positive impact generated by the invested company.  Additionality can be financial when it consists in financing assets that are not well covered by the market. It can be extra-financial when it consists of actively supporting the company in its development.

Measurability consists of defining impact measurement indicators, monitoring them throughout the life of the investment and communicating regularly on these indicators. The indicator can measure the increase in a positive externality, or the decrease in a negative externality over a given period of time. It can be quantitative preferably, or qualitative otherwise. It mainly covers the impact of the company's products, but can also describe the impact of its production processes. Last but not least, the indicator is used in all investment decisions and is reported in the fund's communication.

Regarding measurability, the notion of net impact deserves to be clarified. While seeking to increase a positive externality, the investor must obviously also seek to limit negative externalities. This is the "do no significant harm" principle of the European taxonomy. From this perspective, the net impact measures the increase in positive externalities, less any negative externalities. In practice, this calculation involves numerous methodological difficulties.


In practice, impact investing will guide all of the fund's activity throughout the investment process.

Intentionally contributing to an environmental or social objective

Initially, this involves identifying a social or environmental need that has been highlighted by science, the investor's experience, or demanded by the public. In relation to this objective, the investor will define transparent impact objectives aligned with known frameworks, for example the UN Sustainable Development Goals (SDGs).

This analysis leads to the formulation of an "impact thesis" (similar to the "investment theme" of a traditional fund) that includes these objectives, which will guide the strategy put in place to achieve these objectives.

Actively manage impact performance throughout the investment lifecycle

Define a framework for evaluating and managing the positive impact at the portfolio level

The investor will seek and use the best possible data sources to measure the indicators defined in relation to the expressed objective. Going into more detail on the description of these indicators, they must meet a number of criteria:

  • They allow to inform investment decisions, to monitor portfolio companies, and to report on the impact.
  • They answer several questions:
    • What? What is the concrete result over the period?
    • Who? Who benefited from this result?
    • How much? : What is the measure of this result in relation to a baseline scenario, taking into account possible negative externalities?
    • Effective contribution: could this outcome have been achieved in another way?
    • Risk: What is the probability of achieving the objective? What is the risk that the outcome will not be achieved?
  • They have certain quality criteria:
    • They are based on existing frameworks and standards.
    • The calculation methodology is transparent.
    • They are preferably quantitative, qualitative if necessary.
    • They can be aggregated to compute an indicator of overall impact at the portfolio level.

Once the indicators have been selected, they will guide investment strategies to address the need, while controlling potential negative impacts.

Impact investing is part of a process of constant improvement, whether in the search for data sources or the rigour of the methods used to select and evaluate investments. This implies the implementation of a governance system adapted to the impact strategy, which involves all the fund's stakeholders, via an "impact committee" for example. In particular, this governance must ensure that financial interests (including the manager's remuneration) are aligned with the achievement of impact objectives.

Systematically measure and manage each investment within the defined framework

Whenever possible, the investor seeks to incorporate feedback loops throughout the lifetime of each investment. In concrete terms, this means:

  • Conducting a policy of engagement with investee companies: monitoring the progress of each investment against targets, identifying potential negative impacts of each investment and implementing mitigation measures;
  • Manage the exit of each investment in line with the overall impact objective;
  • Use the results and lessons learned from past investments to improve methods, metrics and processes.

Disclose impact performance to investors and investees in as comparable a manner as possible

Impact reporting should be robust, honest and transparent. It describes the entire investment process. The indicators published are accompanied by an analysis of their quality and reliability (data availability, limitations, relevance, etc.).

Finally, the fund manager actively submits to an independent verification process by an external actor.

In this respect, the investor also strives to actively contribute to the growth of impact investing. It communicates transparently about its level of involvement in the investment. It uses approved standards and practices. It shares with the investment community all non-confidential information and lessons gathered in the course of its practice.


The basic framework for impact investing is the UN's Sustainable Development Goals (SDGs). These 17 goals "address the global challenges we face, including poverty, inequality, climate change, environmental degradation, peace and justice". They are indeed broad enough (no poverty, no hunger, access to health services to name the first three) that any impact investment can automatically be linked to at least one of them.

In the same vein, still emanating from the UN, we can cite the six Principles for Responsible Investment (PRI).

There are also several methodological frameworks defining the main principles and methods of impact investment itself. These frameworks have been used extensively in the preparation of this article. Let us mention the following:


  1. ex ante : beforehand