Impact Finance: a (good) definition

The last week has seen a vey important event for the future of Sustainable Finance: a clear definition of Impact Finance has been proposed by Finance For Tomorrow, as a first output of their work on the Impact Finance Marketplace initiative, launched in March 2021.

Definition of Impact Finance

An english version of the french definition has not yet been provided, so here is our (non-official, and litteral) translation:

Impact finance is an investment or financing strategy that aims to accelerate the fair and sustainable transformation of the real economy, providing evidence of its beneficial effects.

Finance For Tomorrow

Three pillars bring important precisions to this definition:

Impact finance relies on the pillars of intentionality, additionality and impact measurement, in order to demonstrate:

1. The joint search, over time, for ecological and social performance, and financial profitability, while controlling the occurrence of negative externalities;

2. The adoption of a clear and transparent methodology describing the causal mechanisms through which the strategy contributes to upstream-defined environmental and social objectives, the relevant period of investment or financing, as well as the measurement methods, according to the so-called theory of change framework;

3. The achievement of these environmental and social objectives part of reference frameworks, and notably the UN Sustainable Development Goals, at the international, national, and local levels.

Finance For Tomorrow

A long-awaited definition

Providing the Sustainable Finance industry with a clear definition of Impact Finance, coming from an official institution should indeed have a positive impact on the development of this investment strategy (no pun intended), for several reasons, and notably:

  1. Impact Finance, a strategy beyond Impact Investing. One of the problem we faced in 2019, when we created IMPACTIN, was to explain that what we meant by impact finance was not the same as (social or environmental) impact investing, that it was a broader perspective. At the time, the term of Impact had indeed been de facto preempted by this domain of sustainable finance, hence with a more narrow acception. The definition now available should really help to educate the market, and thus foster the development of the strategy approach.
  2. Impact Finance, a strategy beyond intention. We have seen too many “intention checking”-approaches in Sustainable Investment. Checking good intentions is not enough, as demonstrated by the study on the ESG perfomance of AMs signatories of the PRI. The definition here provided puts intentionnality at the very core of Impact Finance, but it relies on the measurement of measurable outputs.

Finally, since we created IMPACTIN with the objective to provide Sustainable Finance with an ESG Impact method based on the measurement of ESG objectives part of reference frameworks such as UN SDGs, WTO, GIEC, etc., in order to support the transition toward a more sustainable world, it is with great pleasure that we welcome a long-awaited definition of Impact Finance, which will without doubt be a key for the adoption of this investement strategy, and for the future of Sustainable Finance.

Credit

Photo by Joshua Hoehne on Unsplash

%d bloggers like this: