Impact investing risks entrenching inequality without robust oversight, Oxford study warns

In recent years, impact investing has rapidly emerged as a key strategy in the global financial system, promoting itself to align financial returns with positive social and environmental outcomes. The market, valued at approximately $1.1 trillion in 2022, is forecasted to grow by 18.6% annually through 2030. However, a new report from the Smith School of Enterprise and the Environment at the University of Oxford raises significant concerns about the effectiveness of this approach. According to the study, existing methodologies for measuring impact investing outcomes may unintentionally reinforce existing inequalities in access to capital and foster “impact washing,” where investments are falsely marketed as impactful. 

The pitfalls of current impact measurement practices 

The Oxford report, authored by researchers George Carew-Jones and Dr. Alex Money, argues that the lack of standardized and transparent impact measurement practices poses a considerable risk to the integrity of the impact investing sector. The report warns that without robust oversight, the rapid growth of the impact investment market could lead to unintended negative consequences. These include the entrenchment of existing inequalities and the proliferation of misleading claims about the social and environmental benefits of investments. 

George Carew-Jones, one of the report’s co-authors, explains the urgency of addressing these issues: “Impact investing has become one of the most rapidly growing investment strategies in the global financial system. However, several high-profile studies have argued that impact investors frequently overstate the social outcomes their investments generate. This lack of accountability and transparency could undermine the very goals that impact investing seeks to achieve.” 

The report identifies several key challenges facing the impact investing sector. Among them is the inconsistency in how different investors measure and report the impacts of their investments. This lack of uniformity makes it difficult to compare results across investments and evaluate the true effectiveness of impact investing as a tool for social and environmental change. 

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The consequences for small businesses and emerging markets 

The study highlights that smaller businesses and entrepreneur, particularly those in developing regions, are often at a disadvantage under the current impact measurement frameworks. These businesses may lack the resources or capacity to meet the stringent data requirements demanded by investors, which can prevent them from accessing much-needed capital. Carew-Jones notes, “Data that proves impact investments are making a positive real-world difference is key to avoiding impact washing. But the burden of collecting this data often falls on the most vulnerable. If they can’t collect the data that’s currently asked for by investors, they will lose out on investment.” 

This disparity is especially pronounced in emerging markets, where access to capital is already limited. The report argues that the current focus on rigorous impact measurement could inadvertently exclude smaller players who are unable to meet the high costs and technical demands of data collection. This, in turn, risks reinforcing existing inequalities and limiting the potential of impact investing to drive meaningful change in regions that could benefit the most. 

The study’s findings are particularly relevant for policymakers and investors looking to foster inclusive economic growth in developing regions. Dr. Alex Money, co-author of the report, emphasizes the need for more support for investees in emerging markets to help them measure and manage impact. “If we are to move towards an impact measurement standard, this must involve safeguards to ensure small entrepreneurs are better supported in measuring project impacts. This could be through standard setting, innovative data collection approaches, or technical assistance.” 

The need for standardized impact measurement 

One of the report’s key recommendations is the development of standardized impact measurement practices. Currently, there is little cross-industry consistency in how impact is defined and measured, leading to a wide range of practices and methodologies. This lack of standardization not only complicates efforts to assess the effectiveness of impact investments but also creates opportunities for “impact washing,” where investments are marketed as impactful without providing verifiable evidence of their social or environmental benefits. 

The authors argue that establishing clear standards and guidelines for impact measurement is crucial for the future of the impact investing industry. Such standards would provide a common framework for assessing the social and environmental outcomes of investments, making it easier for investors, policymakers, and the public to evaluate the true impact of their investments. 

To this end, the report suggests that governments should play a proactive role in setting the boundaries of impact standard development. This includes defining principles for impact measurement that prioritize transparency, accountability, and inclusivity. By setting clear expectations for how impact should be measured and reported, governments can help ensure that impact investing delivers on its promises and does not become another tool for perpetuating inequality. 

Learning from the ESG investing experience 

The report also draws parallels between the challenges facing the impact investing sector and those encountered in the field of environmental, social, and governance (ESG) investing. ESG investing, which focuses on incorporating non-financial factors into investment decisions, has faced similar issues around standardization, transparency, and the risk of “greenwashing.” 

Dr. Money points out that the impact investing sector can learn valuable lessons from the ESG experience. “Investments that target specific outcomes are gradually emerging as a distinct asset class. How impact is measured will have a significant bearing on capital allocation. In this paper, we argue that alternative frameworks of measurement are urgently needed to support climate-compatible growth, and we demonstrate how these frameworks could be applied in practice.” 

The report urges impact investors to adopt more rigorous and transparent impact measurement practices, drawing on the lessons learned from ESG investing. This includes developing clear criteria for what constitutes impact, establishing robust processes for data collection and reporting, and ensuring that impact claims are independently verified. 

The role of public policy in promoting effective impact measurement 

The authors of the Oxford report believe that public policy has a critical role to play in promoting effective impact measurement and preventing impact washing. They recommend several policy interventions that could help improve the integrity and effectiveness of the impact investing market. 

Firstly, governments should invest in impact measurement education, including workshops and accelerator programs, to build capacity among smaller businesses and entrepreneurs. This would help ensure that all participants in the impact investing ecosystem have the skills and knowledge needed to measure and report on impact effectively. 

Secondly, the report suggests that public policymakers should leverage private capital by creating incentives for investors to adopt best practices in impact measurement. This could include offering tax breaks or other financial incentives for investments that meet high standards of impact measurement and reporting. 

Lastly, the report calls on governments to establish regulatory frameworks that require impact investors to disclose their impact measurement methodologies and results. This would help increase transparency and accountability in the sector and reduce the risk of impact washing. 

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Case study: Zambia’s Constituency Development Fund 

To illustrate the potential of effective impact measurement, the report examines the case of Zambia’s Constituency Development Fund (CDF). The CDF is a publicly funded program that supports community-led development projects across Zambia, with a focus on promoting climate-compatible growth. 

The report finds that the CDF has great potential to act as an “aggregator” of impactful, community-led growth projects. By aggregating small projects and providing a platform for them to access impact capital, the CDF could help overcome some of the barriers to investment in emerging markets. 

However, the report also notes that the CDF currently lacks a robust monitoring and evaluation system to measure the impact of its projects. Without this data, it is difficult to demonstrate the effectiveness of the CDF and attract private investment. 

Dr. Money emphasizes the importance of building robust impact measurement frameworks in programs like the CDF. “Investments that target specific outcomes are gradually emerging as a distinct asset class. How impact is measured will have a significant bearing on capital allocation. In this paper, we argue that alternative frameworks of measurement are urgently needed to support climate-compatible growth, and we demonstrate how these frameworks could be applied in practice.” 

Moving forward: A call to action for the impact investing sector 

The Oxford report concludes with a call to action for the impact investing sector to prioritize transparency, accountability, and inclusivity in its practices. By adopting standardized impact measurement frameworks and supporting investees in emerging markets, the sector can ensure that it delivers on its promise of creating positive social and environmental outcomes. 

As the impact investing market continues to grow, the report warns that failing to address these issues could undermine the credibility of the sector and limit its potential to drive meaningful change. “A delicate balance exists in the current practice of impact measurement and management,” the report states. “Whilst it is clearly needed in order to increase the credibility and transparency of the industry, this cannot come at the expense of investees who lack the current capacity to measure impact.” 

Ultimately, the report argues that the future of impact investing depends on the industry’s ability to evolve and adapt. By learning from the lessons of ESG investing, embracing transparency and accountability, and supporting inclusive growth, the sector can ensure that it fulfills its potential to create a more equitable and sustainable world.