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OECD critical of impact investment for focusing on market rate returns

OECD critical of impact investment for focusing on market rate returns

Intergovernmental economic organisation calls for international standards

The Organisation for Economic Co-operation and Development (OECD) has said most impact investment currently goes to areas with relatively easy ‘market rate’ returns, and has proposed defining it as targeting social and environmental areas that help people and countries most in need.

The call comes as major organisations work on a more clearly defined framework for impact investment. The IFC is currently consulting on creating Operating Principles for Impact Management. And the Impact Management Project (IMP) Network, including the likes of the IFC, PRI and OECD, is looking to provide guidance for investors.

In new report, Social Impact Investment: The Impact Imperative for Sustainable Development, the OECD calls for international standards to be applied on collecting data and measuring impact.

It also says most impact investment currently goes to areas with relatively easy returns, such as financial services, energy and housing. It argues for defining social impact investing as targeting core development, social and environmental areas that help people and countries most in need in underserved or developing regions.

Overall, the OECD says the primary focus of impact investment funds should be on delivering measurable impact.

“The challenge lies in defining and measuring impact,” said OECD Development Co-operation Director Jorge Moreira da Silva. “Different countries, public and private organisations are using different yardsticks to measure different elements. To counter the risk of ‘impact washing’, public authorities have a responsibility to set standards and ensure they are adhered to.”

The OECD report says 45 countries have adopted public instruments related to impact investing, with the European Union, United Kingdom, Malaysia and France leading the way.

It says governments should now do more to improve fiscal and regulatory incentives for impact investing and put in place the necessary legal structures for the market to function well.

The Chair of the Global Steering Group for Impact Investment (GSG), Sir Ronald Cohen, who spoke at the report launch in Paris last week, said it was significant that the OECD is taking this lead given its role in informing the 36 governments that are members.

“Because of the authority of its research work, the publication could mark a far reaching change in the way our systems work,” he said.

“Public authorities have a responsibility to set standards and ensure they are adhered to.”

On the report’s concerns that impact investors targeted ‘easy returns”. Sir Ronald said the impact investment market was already evolving to give incentives to deals that reach populations with the toughest social issues. He added that one shouldn’t minimise the importance of dealing with the so-called ‘easy cases’ such as social housing or financial inclusion.

“There are so many social and environmental issues we need to deal with across the whole spectrum,” he said. “And impact investment is beginning to shape instruments to give incentives right across the spectrum”

In related news, the GSG will this week meet with Japan’s government for a high-level dialogue on impact investment as the country takes over the G20 presidency in 2019.

The GSG, with Japan’s National Advisory Board for impact investment and Japan’s Ministry of Foreign Affairs is convening to engage with Japan’s G20 Development Working Group.

Amit Bhatia, GSG CEO, said: “GSG, with its 21 member countries, urges G20 to recognize impact alongside risk and return, as an essential decision criterion in business, investment, policy and consumption decisions.

“Annual reporting should be mandatory, so that the world can truly usher in just and equitable ‘impact economies’, which address people and planet at scale, thus unlocking private capital for public good and the fulfilment of the Sustainable Development Goals (SDGs),” he said.

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