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Corruption: an overlooked menace for impact investors?  

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Published: 19 July 2022

Anti-corruption measures are often placed too low on investors’ decision-making agenda. As first movers, impact investors can play a key role in promoting high standards of business integrity in emerging and frontier markets

A new report by Transparency International UK found that anti-corruption measures were placed too low on the decision-making agenda by most impact investors | Photo by Vasil Dimitrov on iStock

In brief

  • ESG due diligence often does not account for wider business integrity concerns

  • Failure to address corruption risk means investments may not realise full potential

  • A new report by Transparency International UK found that anti-corruption measures were placed too low on the decision-making agenda by most impact investors

  • Impact investors have key role in pushing anti-corruption measures up the agenda

Impact investments that make the most difference to lives often aim to nurture businesses in countries with questionable track records in terms of corruption and other risks to business integrity. It’s an inescapable fact that those most in need are frequently to be found in the countries with the weakest institutions. 

Any responsible investor will do due diligence on ESG factors before parting with funds, and to an extent, evaluating the risk of unethical business practices in investee companies is part of that process. But in practice, this may amount to a cursory check on the past history of company leaders, while the main focus remains on corporate governance issues seen as more directly impacting performance and growth, such as transparent accounting and the accountability of business leaders for risk and performance management.  

Impact investments seldom come tied to a plan to further a company’s commitment to anti-corruption measures in the same way as they might be tied to environmental sustainability, gender equality or racial diversity.  

To a degree this is understandable, as the priority for investors and those in investee companies alike is on making a positive impact by reducing poverty, improving health and education outcomes, empowering women and so on.  

Everyone seems to be involved for positive reasons, so why worry about corruption? Besides, a lot of impact investments are directed towards start-up companies run by people with a limited business history, so there is little background to check.  

But that is to overlook the potential for those in investee companies – especially those operating in countries where corruption and bribery may be endemic – to come under pressure to “play the game” in order to secure contracts or relevant permissions.  

What no investor wants to hear, two years down the line, is that the promising company they funded has become embroiled in a bribery scandal. Action may be taken at this stage, but by then the damage is done.

Reducing the risk of getting to that stage requires a much greater emphasis on anti-corruption measures when the framework for investing in a company is established, as well as more joined up thinking across the impact investment sector on anti-corruption measures and training, according to Transparency International UK (TI UK). 

The NGO published a report in mid-July, backed by development finance institution British International Investment, which concludes that anti-corruption measures were placed too low on the decision-making agenda by most impact investors. Business integrity should be viewed as a central tenet of their development mandate, rather than just treated as a compliance issue, it argues. 

Impact investors positioned to take lead 

Ingrida Kerusauskaite-Palmer, head of business integrity at TI UK, said impact investors, as first movers, were in a strong position to actively promote high standards of business integrity in emerging and frontier market, but that not enough were doing so.  

“Backing projects that benefit communities and the environment are vital to sustainable development, but unless corruption is addressed in tandem, the potential of an investment can be dramatically undercut,” she said on launching the report. 

The report provides a multi-faceted roadmap on how impact investors operating in high corruption risk jurisdictions can support investee firms in strengthening their approach to business integrity risk management, given the right resources. TI UK defines business integrity risks as including bribery and corruption, money laundering and terrorist financing, compliance with international sanctions regimes, fraud and tax evasion. 

TI UK said impact investors need to see business integrity as central to their development mandate, adopt a proactive stance to detect and mitigate business integrity risk, improve coordination of their activities on business integrity and ESG, and recognise that high levels of transparency should be the norm in an impact mandate.  

Higher levels of sectoral collaboration were needed to raise standards and disseminate good practices. TI UK said training and best practice advice were currently limited, in part, because corruption was easy to overlook in the context of the UN sustainable development goals (SDGs), which  investors often use as a framework for their impact strategies. 

Anti-corruption measures are covered in the rather nebulous SDG 16 relating to “peace, justice and strong institutions”, but a survey of impact investors for the report showed this is the SDG theme least targeted by impact investors. Investors focus on others, perhaps because it is easier to define objectives and metrics for investments covered by SDGs dealing with climate, water and economic growth. 

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