Impact Investment:What are the main risks and challenges?
Pros -Impact investing challenges the long-held view that market investments should focus exclusively on achieving financial returns.
-Impact investment can catalyse additional capital flows into developing economies, and stimulate private sector development where
this is otherwise absent.
-The impact investment market offers diverse and viable opportunities for investors to advance social and environmental agendas
through investments that also produce financial returns.
-Impact investments can compete with, and at times even outperform, traditional asset class strategies.
-By combining various forms of capital with different return requirements, social challenges can be addressed in more scalable ways
than is achievable by the government alone.
-Impact investors provide new ways to allocate public and private capital more efficiently and effectively. It can facilitate cooperation
between public and private sector actors.
-Impact investment can strengthen social sector organisations and enterprises, by giving them access to the full range of financing
options available to regular businesses.
-Impact investment can stimulate the creation and growth of innovative enterprises, and hence also expand the whole economy.
Cons -Impact investment can generate higher transaction costs compared with similar private equity or venture capital investments.
-The basic definition of impact investment is still debated. While some organizations are producing impact certification schemes with
independent third party verification and such regimes exist in some sectors (e.g. organic food or fair trade), there is still no
accepted standard or definition.
-The lack of reliable research and evidence on financial performance. Credible data on risk and return can help both existing and
future impact investors better identify strategies that best suit their desired social, environmental, and financial criteria.
Risks - The lack of intermediation services can raise the transaction costs due to fragmentation, the complexity of deals, and a lack of
understanding of risks.
- The lack of an enabling infrastructure can inflate impact investment’s costs. Networks are underdeveloped, and the lack of widely
accepted and reliable social metrics makes the trade-off between financial and social returns difficult to assess.
-Lack of absorptive capacity for large investments. Investment readiness (availability of good projects) remains a key issue in
developing countries, beyond impact investment.
-Limited options for co-financing.
-Hyping market solutions to “do good” can create a bubble – especially if there is a gap between expectations about financial and
social returns and actual performance – thus diverting capital away from philanthropy and decreasing the grants allocated to social
and environmental challenges.
-Greenwashing can damage the appeal of the impact investment market and ultimately the trust of investors. For example,
unscrupulous asset managers could fraudulently label and sell traditional investment products as impact investment.
-Financial and operational risks common to traditional investment apply (e.g. liquidity, currency, political risks, etc.). Additional risks
are related to the understanding of impact investment by stakeholders (e.g. confusion between grants and impact investment). The
latter encompass working with different cultures, including for example taking into account different understanding of the financial
risks and intended impact between a global investment committee and a local community.
Source:
http://www.undp.org/content/sdfinance/en/home/solutions/impact-investment.html
