Delio roundtable: How can you measure the impact of investing for good?Sam Roberts
The pace at which impact investing has gathered momentum over recent years cannot be denied. As one of the hottest investment trends, the allocation of capital to organisations and projects that promise to make the world a better place is hugely appealing. When coupled with the increasing media focus on social issues, climate change and civilisation’s moral responsibilities, it is also fairly obvious that the interest in impact investing won’t be subsiding any time soon.
In our latest impact investing roundtable, we brought together members of the Delio network that specialise in impact or ESG investments to gather their views on one of the biggest challenges facing the sector; how do you tangibly measure the impact that these investments actually have?
Why do we need to measure the impact that investments have?
In order to contextualise the issue of impact measurement, several of the participants began by sharing their views on why this even needs to be considered in the first place. One member of the group voiced their concerns over how the lack of a ‘true definition’ of impact investing means that the term is often ‘overused as a sales tactic’. In his view, this meant that defining the positive difference that investments actually make became even more important.
Another contributor said that being able to measure the impact of their investments via a tangible and validated framework of measures was very important to investors who are allocating capital to these assets. They added that any data that was collected as part of these frameworks also needed to be managed appropriately so that they could be independently audited if necessary. This view was broadly supported by the group, with one member adding that measurements also need to be realistic if they are to offer any real value.
The sentiment of the group was perhaps best summed up by the view of one member who argued that “you can only define yourself as an impact investor if you have some form of measurement to support your decisions.”
How is the measurement of impact investments currently being managed?
The group’s experiences of impact measurement revealed a wide range of approaches and results. One participant said that they often come across funds that look and feel like they will deliver excellent results but have very little in the way of tangible metrics or performance indicators that can demonstrate positive outputs. They went on to say that this hadn’t necessarily been a barrier to achieving funding as long as they could demonstrate how investment would be supporting a project or initiative that was under-funded or had a defined objective; for example, technology that removes plastic from the ocean.
One member said that they were aware of several projects where good quality data was now being collected in order to demonstrate its effectiveness. However, they went on to point out that there were often so many data points in circulation that it became difficult to collate in a cohesive and easily digestible way. This challenge was seen to be exacerbated by the lack of a truly overarching framework of measurement that enables investors to transparently compare outputs against standardised criteria.
The view from the group was that while most investors would undoubtedly like to see detailed analysis of how their capital was directly contributing to positive change, there was a general acceptance that this was not always possible given the relevant infancy of many impact projects. One participant offered the example of projects involving ‘deep decarbonisation’; she said that given there were very few counter-arguments to the importance of action in this space, investors were relatively content to allocate capital based on the knowledge that they were contributing to positive change, even if it was not particularly clear how much would be achieved.
However, it was also agreed that this was not a sustainable long-term perspective and a time would come when investors would expect to see measurable outputs as part of their investment due diligence. The group also agreed that investors were increasingly assessing opportunities based on what level of impact they were going to have, rather than simply allocating capital to anything with impact or ESG in the title.
What frameworks or measures are impact investors using?
A recurring theme that emerged throughout the roundtable was that of measurement frameworks. There is no shortage of systems available to measure the impact of investments, but the lack of a common overarching structure means that drawing direct comparisons between projects is often difficult, if not impossible to do with any confidence.
The group agreed that this was one of the most significant factors affecting the impact investing space. Several participants argued that as the pace of investment in impact and ESG projects accelerates, this will only become a bigger problem in the future. One participant said that while more nimble investors, such as multi-family offices, were currently satisfied by a high level understanding that they were investing in opportunities that would deliver a benefit of some kinds, institutional investors were already beginning to expect more tangible measures.
In terms of what measurement frameworks were being used by the group, the broad range of responses perhaps best illustrates the challenge around commonality of reporting. Sustainable Development Goals (SDGs) were the most commonly mentioned measure being utilised across the group, but it was also agreed that these were more akin to thematic measures rather than specific goals that could be applied to specific projects. As such, they were often left open to interpretation by different parties which one member said needed to be looked at given that ‘institutional investors want clear alignment against sustainable goals’.
Other methods that were mentioned included life cycle assessments, which take a more scientific approach that helps to tell the story of how certain technologies can offer better outcomes than existing solutions. On a similar note, the ‘theory of change’ was highlighted as one of the more versatile measurement models that could be used. This framework is based on logic and continuous feedback loops to establish baselines in performance, apply actions for change, and then measure their impact before repeating this process. It was argued that this approach often adds helpful context when demonstrating impact that data alone cannot provide.
To conclude, one group member said that as important as overarching frameworks were, a potentially bigger issue was the independent verification of any claims that organisations are making regards to the true impact of projects. As she put it, ‘firms are currently marking their own homework’, and she highlighted that independent validation of any impact scoring was going to be needed in the future to maintain credibility.
To register your interest in becoming part of the next Delio roundtable on impact investing, contact us and we’ll add you to the discussion.
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