Investors can turn to an increasingly sophisticated array of impact measurement and management tools to help track and maximise the impact of their investment strategies.
Impact investment is now high on the agenda for financial institutions and companies, propelled by the desire to do the right thing, the drive to out-compete rivals on sustainability issues and increased regulatory pressure. Against that backdrop, impact measurement and management (IMM) are fast becoming central to decision making.
Before the COVID pandemic and the increased focus on the climate change agenda of recent years, investors tended to ask what the point of IMM was and whether asset owners were really demanding it, according to Kelly McCarthy, chief impact officer at the Global Impact Investing Network (GIIN).
“Now the conversation has changed. People want to know how they can make sense of their impact data, how they can access standard metrics for a new thematic area, how they can integrate IMM into their portfolio, and how other investors are incentivising impact within their schemes,” she says.
That growing interest is reflected in expanding numbers of users for services provided by IMM specialists. The GIIN’s IRIS+ system has more than 30,000 subscribers, including financial institutions, consultants and companies. New frameworks have been launched in an effort to bring IMM into the mainstream, such as the Impact Management Platform, whose partners include, among others, the United Nations, the International Finance Corporation (IFC), Principles for Responsible Investment (PRI) and B Lab, as well as the GIIN.
The COVID crisis has been instrumental in accelerating interest in IMM, because companies that lost public trust during the pandemic are eager to be seen to be more transparent in their activities and to be working for the general good, McCarthy argues.
The conversation has changed. People want to know how they can make sense of their impact dataKelly McCarthy, GIIN
A tighter regulatory environment hasn’t hurt, of course. It’s a lot harder than it used to be for an investment fund or company to flaunt green credentials without solid data to back up the claim. EU legislation, such as the sustainable finance disclosure regulation (SFDR), has increasingly sharp teeth. In the US, the Securities and Exchange Commission is seeking to introduce regulations relating to disclosures relating to climate change and some social issues.
But a perhaps under-appreciated driver has been the competitive edge that authenticated impact investing, beyond what are now almost routine in-house ESG requirements, can bring to a financial institution.
“When the environmental, social and governance risk floor is established, it will no longer be a differentiating factor in terms of performance or competitive advantage. Then you start to think in terms of managing for impact and positive change in the world to differentiate from others,” McCarthy says.
As interest in IMM has grown so the push to standardise the way impact data is reported across the plethora of platforms that have sprung up to cater to the financial sector.
The GIIN is one of the industry-backed organisations seeking to make sure this happens by making its IRIS+ IMM system and other impact data reporting tools available as widely as possible to financial institutions and companies.
The transfer of the secretariat for the so-called Impact Principles from the International Finance Corporation to the GIIN in October 2022 was symbolic of efforts to work towards a common framework for IMM. The nine principles were agreed on in 2019 by more than 160 leading players in the industry with a view to ensuring that impact considerations were integrated throughout the full lifecycle of an investment by measuring them against targets such as the UN Sustainable Development Goals (SDGs).
Under the GIIN methodology, users of its online services need to carry out four actions: set goals and expectations, define strategies, select metrics and set targets, and finally manage impact performance.
The core metrics sets – lists of key indicators for each strategic goal that can be tailored by each investor or enterprise – provide the backbone of a process that has been honed over recent years.
The challenge now is to hone impact measurement across the many diverse areas covered by the industry.
In October 2022, the GIIN unveiled a new ‘Impact Lab’, a three-year industry research and development initiative to create analytic tools to better direct capital towards impactful investments across the 17 thematic impact categories currently covered by the IRIS+ system. That follows the launch of the GIIN’s first impact performance benchmark and supporting Compass methodology earlier in 2022.
Not all impact is quantifiable
Initiatives such as Impact Lab offer the promise of being able to identify and measure a wider variety of impacts in more detail. But no one thinks it will be easy or that all impact can, or should be quantifiable.
Rosie Rankin, director and positive change specialist at UK-based investment manager Baillie Gifford says that an impact measurement system needs to be flexible to allow for the more qualitative impact that, while highly valuable, is not so easily measured.
“What you wouldn’t want to see is some kind of forced standardisation, where the measurement tail is wagging the whole dog. If you make it so standardised that only a small universe of companies fits those measurement criteria you risk losing out on a lot of impactful opportunities,” she says.
We need to make the link between impact that’s shorter term and company specific to something that’s longer-term and real worldRosie Rankin, Baillie Gifford
In particular, quantifiable impact measurement is harder to apply to aspects of an enterprise’s work that drive long-term change in its sector, given the longer timescales involved and potential lack of immediate impact.
“With a company like Tesla, which is in our portfolio, you can measure the amount of electric vehicles they’ve produced in any given year, and the amount of avoided CO2 emissions that has enabled. But how do you measure Tesla’s impact on the broader world’s transition to electric vehicles? We need to make the link between impact that’s shorter term and company specific to something that’s much longer-term and real world,” says Rankin.
GIIN’s McCarthy cites affordable housing as another area where measuring impact is complex. It’s not enough to build affordable housing, it also has to be in an area where there are adequate amenities and easy, affordable commuter links, for example, so that it is of true value to the communities being targeted.
“Far too little has been done on thinking about the systems level change rather than the narrow vertical approach to impact themes,” she says.
One of the big challenges for the investment industry will be changing a way of thinking often dictated by the time frame of quarterly results and annual reports – and going into investments with an exit strategy already in place. If impact is the true goal, it will need to get more comfortable with returns, both financial and in terms of social and environmental benefits, that may take five or ten years to materialise.
Ensuring that investors have the measurement tools available to make the best decisions on how long to maintain their investments, and time any exit to make sure the investee organisation continues to be impactful, is now the focus for those leading the way on impact management and measurement.
This article is part of the editorial content of the Impact Investor Guide 2023. You can download a digital copy of the guide here.