How does impact investing actually make a difference? In the face of a global pandemic, widening inequality, racial justice, and the climate crisis, impact investors and corporate social responsibility teams have been leveraging their capital to tackle some of our biggest problems. From supporting early-stage investments in vaccine developers to providing finance to sustain struggling businesses, to seeding companies that are decarbonizing our economy, impact investors can point to an impressive list in the ways they have contributed to meaningful change.
And yet, it’s easy to talk about the positive outcomes of investments without taking a hard look at the unintended consequences – or negative impacts – the same investments cause.
For example, investing in electric vehicles has helped reduce greenhouse gas emissions and combat climate change. It has also contributed to troubling labor practices in the extraction of minerals, including instances of the use of child labor in cobalt mines in the Democratic Republic of Congo, where children are exposed to toxic chemicals and have been injured or killed. Investing in hydroelectric projects also helps tackle climate change, contributes to electrification in isolated areas, and creates good jobs. It can also destroy ecosystems, create issues with water quality, and cause wildlife and human displacement.
Managing impacts comprehensively is further muddied by the lack of a more explicit and universal definition for “negative impact” in the impact investing industry. What impacts investors deem material, or relevant to them, depends on their investment strategy: the time-horizons, geographies, sectors and asset classes they invest in. However, by ignoring the negative, impact investors may inadvertently contribute to the challenges that the industry seeks to solve.
If CSR officers and impact investors are serious about avoiding green- and impact-washing and showing up for racial and economic justice, it’s critical they identify and manage the negative along with the positive outcomes of their investments to understand their real impact.
Our new report summarizes the most promising practices and resources that can help companies and investors integrate negative impact management into their impact measurement and management (IMM) approach, and identifies opportunities to further develop this practice.