Part II: Harnessing impact potential
There are several steps fintech firms can take to up their impact investment game. Read on to know more:
The global impact investment industry – though rather nascent – already spans several sectors, regions, and asset classes. In 2020, the Global Investment Impact Network (GIIN), the body monitoring the volume of and regulations within the impact investment sphere, published an annual report estimating the size of the market at about $715 billion. US asset management giant Mercer currently estimates a $12 trillion growth opportunity in the sector by 2030.
Impact funds (equity) usually target returns between 15% and 25%, according to the Mint.
That the social impact promises of the fintech industry are aplenty is a fact well discussed in Part I, but as the Harvard Business Review discusses adroitly: “in the current disclosure landscape, it is much more common for firms to treat issues of impact as potential risks as opposed to opportunities, so it is not surprising that mission statements and impact-related disclosures are misaligned.”
Correcting this misalignment provides firms opportunities for improved calibration of the firm’s mission with operations, thereby allowing investors to make more informed impact-related decisions. For fintech firms, for example, as the scarcity of capital becomes more evident further down their life cycle, disclosures on product impact can aid in the differentiation needed for investors in the fast-growing impact investment category.
Improving impact management on myriad material issues is a driver for innovation and profit and the eventual bottom line: growth. This process, reports the HBR, “creates a virtuous cycle: product iteration and innovation to support a more diverse and financially healthier customer base drives business.”
The primary challenge is standardized monitoring.
The good news, however, is that fintech firms and investors can go into advanced impact measurement and management in clear ways and the process can, in fact, be extrapolated beyond the fintech industry seeking to identify and expand impact. Some of the specific aspects to keep in mind here are:
- Parsing specific impact goals against the backdrop of revenue models: There are several fintech firms that identify broad goals such as economic growth instead of identifying specific impact areas aligned with their core services and products. Financial health, for example, maybe more about disruptive products whilst financial inclusion goals are more about affordability and delivery channels. Along similar lines, even fewer companies report outcomes by gender or race, and ethnicity. By not tracking these variables, a major opportunity may be lost both in terms of growth and impact.
- Experimentation with approaches quantifying products’ social impacts: The Harvard Business Review reports:
“Based on the Impact Weighted Accounts project, fintech companies can begin to quantify product impact in ways that are rigorous and comparable. We have identified a preliminary approach for fintech-enabled transactions and compared PayPal and Shopify given sufficient, albeit still limited, public data.
Analysis reveals that product impact can vary meaningfully between fintech companies, with PayPal’s impact driven by the affordability of services and Shopify’s impact driven by access among small and medium-sized businesses, a group traditionally underserved by financial services. Such quantification efforts can help investors make investment and engagement decisions while helping fintech leaders manage toward greater impact.”
- Championing standards for health and financial inclusion: There is not, as of yet, a standardized means of defining and measuring financial inclusion and financial health among most firms. Fintech firms are currently partnering with the International Sustainability Standards Board and other expert intermediaries such as the Financial Health Network developing metrics for actionable and meaningful outcomes.
Embracing interim metrics on the path to outcomes, in this regard, is essential owing to the time lag between identifying compelling metrics and engaging in external assurance processes.
- Establishing flexible systems: The most important aspects and metrics to be considered usually vary amongst stakeholders over time based on how investors and firms develop more nuanced impact theses and their evolving goals and questions.
Fintech firms can deal with this by managing relevant data on a wide range of product impact topics, such as digital stewardship, financial health, and financial inclusion. “Fintech companies can also work to organize disclosures such that metrics follow impact headlines and can be readily bundled and unbundled,” write Zoe Bulger and Ethan Rouen for the HBR.
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