The popularity of impact investing is growing, as more investors seek to invest for the greater good. You’ve possibly seen this trend play out among your own clients already – and if you haven’t yet, you’re likely to soon. Either way, know that impact investing is evolving and growing, but there are a few roadblocks that are stifling it at the moment. Fortunately, blockchain technology could change that.
Challenges Facing Impact Investors
The Global Impact Investing Network’s 2018 Impact Investment Survey showed that respondents had invested more than $35 billion during 2017 alone. This shows tremendous growth from years past, but impact investing still needs to overcome several challenges:
- A lack of affordable data on the actual social or environmental results and impact of an investment
- Difficulty with “attribution of impact” (i.e. the allocation of an impact-related claim to an investor, which often risks double-counting)
- Challenges in actually monetizing impact due to illiquid markets, uncertain returns, or high transaction costs
Again, impact investing is growing, but these three roadblocks mean it’s not growing as quickly as it might otherwise. We’ll investigate all three challenges – and how blockchain might solve them – below.
Blockchain-Based Solutions for Impact Investing
Why could blockchain be so transformative in impact investing? Well, blockchain technology is revolutionary – and not just where cryptocurrency is concerned. In fact, it has transformed the way we store, manage, and transfer value between digital identities in multiple sectors of the economy.
Most recently, blockchain is showing multiple use cases in the impact investment community. Investors are taking advantage of all of blockchain’s beneficial features, even seeing the development of a new category of application called “impact tokens.” They represent one of the United Nations’ seventeen Sustainable Development Goals, most often in the form of a quantified measurement metric linked to its origin activity. Impact tokens can be used to do things like track impacts through supply chains or make performance-based payments.
Three Blockchain Features that Mitigate Challenges in Impact Investing
Managing assets on a blockchain are advantageous for several reasons, including security, transparency, efficiency, and reduced cost. In terms of impact investing, blockchain offers particular benefits in three key areas:
Impact investments often take place in the developing world, where there is low institutional capacity and low trust in said institutions. Using blockchain technology lessens the need for trust, though, because of its very nature – there are built-in features that generate trust in the technology itself, thereby reducing risk exposure. Unverifiable impact claims become less of a concern when blockchain technology automates impact verification and measurement, and speeds up an otherwise slow and expensive process, too. With better reliability, the quantifiable impact can be used as one parameter in performance-driven dashboards that manage impact investments.
As mentioned above, attribution of impact remains a challenge. However, impact tokens are a reliable tool to track the impact of an investment through a supply chain (sustainable production, for example). These tokens can be passed to consumers who purchase sustainably made products, thereby helping investors derive financial value from quantifiable impact creation
The process of monetizing impacts can be accelerated using blockchain technology, and it can also have the benefit of removing high transaction costs. Impact tokens, and especially those that can be quantified in units, can be a valuable metric in designing results-based finance strategies. And with the ability to rapidly monetize tokens – even instantly – there are strong behavioral incentives for impact. So, on an implementation level, these instant rewards might significantly influence behavior.
Over the last year or so, a number of impact tokens have entered the market. Though they all differ in design and in purpose, the common denominator is that they each represent a measurable unit of impact related to a UN Sustainable Development Goal. Some have even been made available to the public through ICOs as a way to fund the activity underlying the claimed impact or the team driving the development of the blockchain platform where the token is managed.
A Word of Caution
You and your clients need to practice due diligence when it comes to impact tokens. For all of their advantages, all the hype around these tokens and ICOs has attracted bad actors into the space.
In an upcoming article, we’ll examine a set of criteria you can use to assess the quality of an impact token in order to protect yourself and your clients from fraudulent activity. Suffice it to say, though, it’s critical to scrutinize an impact token to assess both its integrity and its ability to channel your funds to activities that will produce the desired social or environmental impact.
We know blockchain is a game-changing technology and that it could bring real value to impact investing. So, where do we go from here? Impact tokens are still in their early days and there’s likely a lot of trial and error that will happen before the impact investment community can come to a consensus on processes and procedures surrounding them. Still, once that cooperation is achieved, the impact investment community can reap all the rewards of blockchain technology while furthering many of the UN’s Sustainable Development Goals.
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