One of the defining trends in impact investing in the past year has been the mushrooming interest in impact management, the essential practice of integrating impact at each stage of the investment process.
This is thanks to field-building efforts led by the likes of the Impact Management Project and Global Impact Investing Network (GIIN), along with the attention marquee entrants have attracted from a much larger investor base. When Bain, TPG, Partners Group, and others arrive on the scene, investors want to know: Is it for real?
The scrutiny is welcome and appropriate. Many of the fundamental challenges in impact investing—confusion, inefficiency, and misalignment—can be traced back to the difficulty of differentiating and articulating the impacts in impact investing, which is part of what impact management sets out to do.
While the field still lacks a commonly accepted way to easily distinguish between approaches to impact, that has not stopped investors from making tremendous progress in putting impact management into practice.
This progress—and the growing understanding impact investors and their stakeholders have of the effects of their investments as a result—is creating the sorts of robust, actionable examples and tools the field needs to demonstrate the veracity of impact investing strategies to an ever-growing and diverse audience of investors.
Tideline has supported both the owners and managers of impact capital in developing systems and tools for impact management. Through this work, we have crafted a set of guideposts we call the “IMPACT Principles”—integration, materiality, pragmatism, authenticity, commitment, and transparency—that we believe can help investors achieve robust impact management.
Integration: Impact management involves intentionally weighing both impact and financial considerations at each step of the investment process, including during sourcing, due diligence, execution, support for investees, monitoring, reporting, and exit. Many managers are seeking new partners to help integrate these processes seamlessly and efficiently using tools like custom screening criteria, due diligence questionnaires, performance dashboards, and purpose-built impact governance structures.
The benefits of integration are manifold. For example:
- There are more opportunities for investors to be “additional” by delivering positive outcomes that would not occur but for their involvement.
- Monitoring and managing environmental, social, governance, and impact performance over the life of an investment can help mitigate impact risks.
- Better understanding an enterprise's impact on the environment, society, and its workers can help inform business strategy.
Materiality: Materiality is a core concept in financial accounting (and now, sustainability reporting) that encourages companies to manage toward and report on aspects of their business that potentially have significant effects. The Global Reporting Initiative’s definition prioritizes aspects of an enterprise with potential to significantly (positively or negatively) affect society, rather than only those with significant potential effects on the financial condition of the enterprise, as materiality is traditionally defined.
The principle of materiality suggests that an impact investing manager’s investment theory of change, or impact thesis, should be grounded in specific activities and outputs that academic and other evidence suggests will have material positive social and environmental outcomes.
In developing the strategy for its $1 billion endowment commitment to impact investing, the Ford Foundation decided to focus on impact sectors that both have sufficient investible opportunities for a large institutional investor and contribute to the foundation’s strategy to combat inequality.
Ford’s choice to focus on affordable housing and financial inclusion (with attention toward diversity and inclusion in the management of its investments) was founded in the foundation’s pioneering work over decades to support research into evidentiary links between high-level activities and the actual impacts on beneficiaries that can result.
The GIIN’s Navigating Impact project is a new resource designed to help all impact investors develop their practices by providing straightforward guidance on connecting common impact strategies to a supporting evidence base and a starter set of core metrics, regardless of where they are on the impact management journey.
Pragmatism: Investors should design their impact management practices so that they are pragmatic and appropriate for the needs of their stakeholders. To do so, they should balance rigor in impact evaluation with efficiency and cost-effectiveness.
Even though the highest standards of evidence are rarely feasible for impact investors, there are many other methods of gaining greater confidence in impact outcomes that combine the essential, ongoing work of process evaluations (assessing how investors and enterprises conduct activities and who they reach) with reliance, where possible, on partnerships or proxies and third-party evidence for outcome and impact evaluations (assessing the effects on target populations or the planet).
Fortunately for the field, there are a growing number of resources to help investors develop or improve on appropriate impact management practices, no matter where they are on a spectrum of confidence in impact outcomes.
For example, the Impact Risk Classification developed by New Philanthropy Capital and KL Felicitas Foundation (building on their Impact Assurance Classification and the Impact Management Project) is one tool for evaluating and comparing manager and enterprise impact assessment practices across sectors and investment strategies. The tool not only helps indicate what the impact assessment expectations might be for a given sector or strategy, but also what improvement can look like.
Authenticity: To build and maintain credibility, investors should be clear about the roles they are playing—and the roles they are not playing—in generating impact. We strongly believe that many types of impact are valuable and necessary, as do almost all investors we interact with. But mistaking a highly targeted strategy for one that is seeking to align more broadly and less precisely with impact (and vice versa) can result in wasted time, misaligned financial or impact expectations, and even disenchantment with impact investing overall.
PGGM, investment manager of one of the largest pension funds in the Netherlands, worked with the Impact Management Project earlier this year on mapping its portfolio to effects on people and the planet. PGGM indicates the bulk of its portfolio (81 percent) is focused on “avoiding harm” and acknowledges that, given gaps in data availability, it can only assume that the various instruments it uses to minimize negative impact (exclusions, engagement, ESG integration) actually do have their intended effects.
PGGM also recognizes that providing flexible capital by making concessions to risk-adjusted returns would conflict with fiduciary duty, but it directs a portion of its portfolio (about 2.5 percent) to an Investments in Solutions (BiO) program to target significant positive contributions in the themes of climate change and pollution, food security, health care, and water scarcity.
Recognizing different impact goals for different parts of a portfolio helps an investor speak authentically about their contributions and customize targets and processes for each different impact strategy.
Commitment: Discerning investors recognize when managers have “impact DNA,” meaning they are truly committed to the social and environmental outcomes they seek, they know what it means to manage for impact, and their messaging is consistent across the organization. Internal education and socialization, as well as continued learning and refinement, are essential to success.
Acumen reflects in its 2017 Energy Impact Report that “[p]rior to 2012, most of our impact reporting focused on breadth of impact, with spotty or anecdotal data around poverty focus and depth of impact.” The work Acumen has done since then to understand its impact—by iterating on its approach to impact measurement and developing and socializing its Lean Data method among investees, other investors, and the broader field—speaks to the organization’s deep commitment to meaningful impact assessment and continued improvement.
While Acumen sits at one end of the spectrum—using an approach to impact management that may be more or less suitable to others—its commitment to improvement and inquiry embodied in the 2017 report ought to be universal.
Transparency: We define transparency to mean clear and accurate disclosure not just of impact performance, but also of an investor’s whole impact management process. The best impact investors can compellingly articulate the big-picture narrative of complex chains of accountability to both their multiple stakeholders and the broader market. Supporting and participating in sector- and field-wide efforts to create common standards can help facilitate the process of communication and understanding.
HCAP Partners has distinguished and telegraphed its efforts to drive employment growth in underserved communities by creating and naming a “Gainful Jobs Approach”. HCAP’s impact report clearly lays out strategic roadmaps for its investee enterprises, detailing plans for year-over-year progress, and setting a baseline for measurement and accountability. HCAP’s approach is rigorous, but also readily intelligible to the uninitiated.
These IMPACT Principles are intended to provide guidance, but they will fall short for some and seem too onerous for others. While impact management can be complex and idiosyncratic, recent advances have the potential to result in unifying best practices, which will be an important step toward greater accountability in impact investing, and a better understanding of actual effects on people and the planet.