Guidelines Towards Implementation Strategies of an Impact Investing Portfolio

With more than 10 % of the population still living in extreme poverty, 2 billion people exposed to the risk of reduced access to freshwater resources, and roughly half the world’s population still living with about USD 2 a day, many initiatives for change have been undertaken around the globe. The financial sector is not different. An increasing number of investors engage in a more sustainable approach as regards to their investments’ strategies. Emerging from Socially Responsible Investments (SRI), a new strategy, ‘Impact Investing’, has been developing to better meet the increasing demand for social positive impacts from investments. Nevertheless, Impact Investing suffers from the lack of agreements on key performance indicators that could be standardized across investments within a specific sector – or even across all sectors – to measure intentional social changes and positive impacts resulting from an organization’s activities. Investing firms and investors are not properly harnessed in terms of strategies and methodologies to meet the expectations of all stakeholders concerning impact, risk, and financial return. Consequently, this thesis offers a starting point to thoroughly understand the evolution of Impact Investing and its concepts that need to be considered to align objectives and maximize both financial and social return at a given level of risk when building an Impact Investing portfolio. The thesis first describes the contextualization of Impact Investing and its evolution over time, and then explore funds available in the Belgian and international markets as well as the different types of investors. Currently, Impact Investing only accounts for USD 444.26 billion worth of assets, less than 1 % of total investments in Socially Responsible Investments at a worldwide level. However, its growth has been significant over the past few years, and this trend is expected to continue further. Impact investors’ decision to inject capital into an organization is based on a three-dimensional spectrum composed of social impact, risk, and financial return. What matters the most is social impact to some investors but financial return to others. The second part of the thesis aims at better understanding the different methodologies that could be used to measure the social impact resulting from a specific organization’s activities as investors and stakeholders genuinely want to know the difference they make by investing in social projects. Each social-oriented firm is expected to provide clear information about its social impact based on the theory of change. Therefore, it must implement a methodology to collect data on outputs and outcomes resulting from its activities. To do so, there are numerous measurement frameworks (SROI, SDGs, Most Significant Change, Social Enterprises Balanced Scorecards to name just a few) allowing firms to assess and report the most relevant indicators of their social activities; yet, there is no consensus on a method suited for all types of organizations assessing the same indicators. Some methodologies consider WHAT to measure, and others HOW to measure impact. Understanding and selecting the right one for your institution is crucial. This tool will allow you to effectively communicate with all stakeholders about your effectiveness and the positive changes generated by the changes in the company’s social value chain without wasting resources on incompatible and unfitted methodologies. In addition, as traditional investments, impact investing funds are also exposed to risks. However, beyond the traditional risks, an additional spectrum leading to greater risk is to be considered. The performance of the portfolio will therefore highly depend on the risk tolerance, on the financial expectations, as well as on the level of impact expected by investors. This is explained based on the Markowitz model with the addition of the impact axis. The last part presents an exploratory research on three Belgian impact investing firms supporting social projects in Belgium and abroad: Belgian Investment Company for Developing Countries (BIO); Incofin; and SI ² Fund. Even though they share the same overall objectives to create social changes towards a fairer and more sustainable world, these companies were selected because of the nature of their investments; the differences in investments’ sizes; the market they target; differences in investors’ expectations; and, their corporate structure. Strategies are dissimilar, and all organizations have implemented multiple impact measurement methodologies to collect data about their deals and assess them to report to stakeholders. The exploratory analysis through internal documents, official publications or third-party database, among others, shows that building an impact investing portfolio is complex and multidimensional. It requires a full understanding of key theoretical concepts. It also highlights the challenges faced, the lack of common methodology for all social businesses and social investors and raise questions for further analysis.