Since its inception in 2007, Impact Investing as an asset class has grown rapidly; it is expected to represent over $500 billion in invested capital by 2020 1. Despite this explosive growth, there are still issues surrounding the precise definition of an impact investment. The four core characteristics of impact investing include: intentionality, investment with return expectations, range of return expectations and asset classes, and impact measurement 2. One of these characteristics in particular, intentionality of the investment, is one giant grey area.
The lack of quantitative thresholds in impact investing is a product of a lack of standardization and a perceived inability to quantify externalities (the non-market, spill-over, benefits and costs of the project). For example, the choice between investing in a new transit project (producing large social, environmental, and economic benefits), a business creating carbon sequestration technology, or another business removing pollutants from water is relatively arbitrary; how can the investor know where their dollars would produce the greatest amount of impact? This is where new tools in the infrastructure space come into the picture.
Emerging exchanges, such as the West Coast Infrastructure Exchange (WCX), are requiring the use of economic valuation tools to monetize externalities before infrastructure projects can be listed. This is increasing transparency for impact investors and allowing them to see how their dollars are creating social and environmental impact in dollar values. This is a huge step forward, but it still means that projects cannot be directly compared. This is due to the fact that the methods for quantifying and attaching dollar values to non-market costs and benefits may be different from one tool to another. This is being addressed by other exchanges, such as the Canadian Impact Infrastructure Exchange (or CiiX, currently in development), which is looking to use one economic valuation tool so that investors can make an apples to apples comparison of all projects on the exchange. This requires standardized methodologies.
A team at Impact Infrastructure is on the path towards standardizing methodologies used to monetize the externalities of infrastructure projects. These methodologies are being embedded in a business case analysis tool called AutoCASE™, which has a direct link into CAD software including Autodesk’s Civil 3D and soon their Infraworks software suite. This enables infrastructure design information to be extracted directly from the design itself, so the externalities quantified are as precise and up to date as possible. Using a standardized approach to quantifying costs and benefits in risk-adjusted dollar values means that when projects are listed on exchanges, such as the CiiX, impact investors have access to a range of metrics that they can use to measure the impact of their investment. The power that this kind of exchange offers is immense. Investors can go on an exchange and say, “we require a minimum direct financial ROI of x%, with an environmental and social benefit equal to $y.” This enables impact investors to increase the transparency to their shareholders, so they can clearly communicate how much social or environmental value is being created for each dollar they invest.
The creation of standardized economic tools that can be used in the context of infrastructure exchanges may enable a new era of impact investing. Investors can use new standardized metrics to shape the definitions of new asset classes, including green bonds and impact investments in general. In turn, this can create a positive feedback loop as more infrastructure projects are listed and financed on exchanges such as the WCX and CiiX, accelerating the rate of impact investing. AutoCASE and these new exchanges can provide impact investors with the ability to increase transparency for shareholders, more clearly define impact investing, and leverage a largely untapped asset class that inherently produces social benefits while also meeting minimum return requirements and hedging against volatility in the global markets.
Ryan Meyers is the Product Manager for Impact Infrastructure LLC. He is the lead developer of the AutoCASE™ software for infrastructure business cases.