Impact Investment Market Maps

The United Nations’ Global Compact (UN, 2021a) and the United Nations’ Environment Programme Finance Initiative (UNEP FI, 2021) launched in 2005 an initiative to align private investments to social and environmental goals as a strategy to achieve to the Millennium Development Goals (UN, 2021b). From an extensive consultation to leading institutional investors, “The Six Principles for Responsible Investment” initiative was born, offering a menu of possible actions for incorporating environmental, social, and governance (ESG) issues into investment practice and focusing on reducing companies’ and investors’ risks and/or assessing companies’ non-financial performance (PRI, 2021). These voluntary guidelines propose investors to abide to:

• Principle 1: Incorporate ESG issues into investment analysis and decision-making processes.
• Principle 2: Be active owners and incorporate ESG issues into ownership policies and practices.
• Principle 3: Seek appropriate disclosure on ESG issues by the entities in which they invest.
• Principle 4: Promote acceptance and implementation of the Principles within the investment industry.
• Principle 5: Work together to enhance effectiveness in implementing the principles.
• Principle 6: Report on their activities and progress towards implementing the Principles.

 As part of a global trend of putting into practice these principles and trying to go further in terms of sustainability, the financial industry witnessed the emergence of “impact investing”, which is defined as investments made into companies, organisations, and funds with the intention to generate social and/or environmental impact alongside a financial return (RPA, 2021). Impact investment is different from ESG investing, which focuses on reducing companies’ and investors’ risks and/or assessing companies’ non-financial performance. In other words, impact investing is about the process of directing capital to ventures that are expected to yield social and environmental benefits as well as profits (Addy et al, 2019; for some examples, see ACUMEN, an impact investment fund).

As demand started to grow for impact investments, the Principles for Responsible Investments Initiative (PRI) devised a methodology to identify investment opportunities in companies that align to this concept; it came up with the “Impact Investing Market Map”, a framework that aims to facilitate the process of identifying impact investing companies and thematic investments so that investors (such as asset owners and fund managers) can better assess sustainable investment opportunities (PRI, 2018). The Impact Investing Market Map (or better known as the “Market Map”) provides five main benefits to the investment community (PRI, 2018) (Fig. 1):

• A common definition of a thematic investment: (i.e., water, inclusive finance, education) that is aligned with at least one international organisation, global market leader and/or data provider;
• A basic and practical methodology: That can be used by asset owners, asset managers, fund managers, and organisations interested in mapping and identifying companies that generate revenues based on one or more investment themes;
• A framework to structure dialogue: For asset owners interested in discussing how asset managers and fund managers can design and manage their impact investment funds;
• A list of key performance indicators: Helping asset and fund managers to collect, measure, track, and report on basic and common impact investing metrics used by market leaders and international organisations; and
• An alignment mechanism: Where impact investing companies can use the SDG targets and indicators as guiding thematic framework.

Figure 1. Market Map benefits for different stakeholders (Adapted from PRI, 2018).

Based on the three main components of the Market Map, an investor should follow the three next steps to identify a potential impact investment in the water sector:

1. Definition of water impact investments: For the water sector, the market map only focuses on companies operating in water and sanitation for human consumption, that is, “companies that produce or deliver products, projects and services with the scope to provide basic sanitation and safe and fresh water to humans without compromising the quality and sustainability of water resources” (PRI, 2018). This definition covers companies developing the following type of businesses: (1) water management/treatment; (2) water distribution; (3) water desalinisation; and (4) water technology (Fig. 2). Companies that carry out this type of businesses must additionally comply with the following list of criteria and principles (PRI, 2018) (Table 1):