On the back of the Government’s recent International Investment Summit, the UK Chief Secretary to the Treasury hosted an investor roundtable involving some of the largest asset managers with impact funds. As the global impact investing market grows and matures, the entry of larger asset managers indicates a mainstreaming of this asset class, on which hope is increasingly pinned to tackle complex social challenges, including in the UK. The UK impact market alone “has grown to £76.8 billion in assets under management (AUM) as of end-2023.”

Risk and returns: the case for business integrity

Impact investors tend to prioritise disadvantaged markets where there’s higher potential for positive social and environmental impact. The promise of impact investing for achieving the Sustainable Development Goals (SDGs) focusses on emerging and frontier markets in particular where investment is urgently needed to finance climate mitigation and adaptation initiatives and social impact projects.

While developed economies are not immune from corruption, emerging and frontier markets pose higher risk. They are more likely to be dogged by weak governance, political instability and higher levels of corruption to the extent that conducting critical business activities, such as securing licences, tenders and land acquisitions, risks fuelling a climate of corruption to the detriment of business, wider society and social and environmental goals.

But while there’s an elevated risk, as Transparency International UK’s Investing with Integrity research shows, there’s also a real opportunity for impact investors to be a part of the solution. Specifically, investors can play a key role in breaking the vicious circle of corruption by requiring portfolio companies to maintain good corporate governance and robust integrity measures, which can have a ripple effect in the societies in which they operate. Several impact investors we consulted with also saw a ‘business integrity premium’ where high integrity standards translated into improved financial performance and return on investment.

Comprehensive pre-investment due diligence

Unfortunately, our research found that impact investors are often paying inadequate attention to business integrity pre-and post- investment. Rigorous pre-investment due diligence is critical for identifying integrity risk factors which, if not properly mitigated, could derail the project and intended positive impact. Where project land is acquired through bribery and political connections to accelerate the process, for example, the resulting project exacerbates the risk of human rights abuses including involuntary displacement and loss of livelihood.

Our recent practical guidance (published March 2024) aims to help investors conduct a comprehensive assessment of risk by coordinating business integrity and environmental & social due diligence processes so as to better identify and address corruption related drivers of environmental and human rights challenges.

Leveraging influence post-investment to build business integrity capabilities

Post-investment the work continues. To achieve success on exit, investors will need to use their influence constructively throughout the investment life cycle to shape portfolio companies’ direction and development. This is most evident in the ways impact investors support their investees such as by working to improve their business integrity capabilities and proactive portfolio monitoring. This engagement is critical not only from a compliance perspective, but also to help build resilient businesses which are better able to realise positive economic, environmental and social outcomes.

Collecting portfolio data for effective risk management and to protect impact

With greater attention on the value of integrity in impact investing, there’s an opportunity to improve understanding of exactly how integrity measures link to social and environmental impact.

Transparency International UK’s new research aims to unearth these linkages. We are working with researchers from UCL’s Centre for Sustainable Business and IBLF Global, with funding from British International Investment (BII), to identify trends between business integrity measures and impact outcomes and, therefore, the information impact investors should collect from portfolio companies to manage business integrity risks effectively and protect impact goals.

"Integrity and robust governance are essential not just for reducing corruption risks but for driving real, measurable impact on the ground. This new research will provide practical guidance to investors on mitigating integrity risks while maximising impact outcomes. By strengthening integrity measures, investors can both safeguard their investments and support meaningful change in the communities they engage”.

Professor Paolo Taticchi, Co-Director UCL Centre for Sustainable Business

“To meet their sustainable development goals in emerging and developing markets, impact investors need to address the daunting governance and integrity challenges faced by their investee companies and their supply chains. In order to achieve this, investors need credible measures of integrity and other indicators allowing investors to make informed decisions. This is precisely what our project intends to produce.”

Dr Jan Dauman, Co-founder and Trustee, IBLF Global

This latest research is an opportunity to demonstrate the tangible contribution of anti-corruption and integrity to social and environmental impact performance and why investing in this critical area of business conduct provides the bedrock for success.