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As impact investing gains traction, investors, regulators and end clients are placing greater scrutiny on impact measurement and management (IMM). While the quest for robust IMM practices and standards may be shared by the impact community, the journey is less than straightforward. Impact investors need to balance myriad nuances with an objective, transparent and evidence-based approach to impact assessment and measurement.
Wellington’s Impact Platform has a robust framework to assess impact according to materiality, additionality and measurability. While these requirements provide a sound starting point for identifying impact companies and issuers, clarifying the impact thesis for some investments can be more challenging, requiring granular analysis. Impact measurement is even trickier. Developing a standard set of impact key performance indicators (KPIs) or leveraging IMM frameworks might bolster the authenticity and transparency of impact, but every company, issuer and issue is different. A blanket approach could lead to the exclusion of worthy candidates from the impact opportunity set. Here, we offer a few examples of common issues where a fundamental, issuer-specific approach can help.
Many companies offer products that enable their customers’ positive impact activities but do not have direct positive impact themselves. Take, for example, a train leasing company that does not own or build trains but has a high rate of electrification in its fleet relative to peers, thus facilitating more public transport at a lower carbon footprint. Should this company be considered an impact investment?
Potential approach: Establish clear evidence of additionality and check in and continue to evaluate impact over time. Without this company’s lease agreements, a reasonable counterfactual would hold that fewer electric trains would run in a given year. How much better is this company than the next best alternative? Because the answer to this question can change, investors should verify that this company’s electrification rates lead its peers year after year. Be transparent about attribution, as this company is part of a broader value chain for cleaner transport systems. The impact theory of change and KPI should focus on the degree to which the company enables — rather than directly causes — the subsequent environmental benefit through lower emissions.
All companies and issuers can have negative potential impacts — externalities from their business activities with adverse social or environmental effects. Companies that build affordable homes may disrupt or harm part of the local environment during the construction process, for example. Telecommunications companies that help bridge the digital divide in emerging markets may pose privacy or security risks to end users. The solar industry helps decarbonise our energy supply, but the risk of modern slavery in the supply chain from some materials providers persists.
Potential approach: Engage with the board or management to make negative externalities a key part of the impact conversation. Establish a plan of action to mitigate negative impact. Fully analyse risks using a framework such as the Impact Management Project’s Five Dimensions, avoiding impact investments for which the negative risks may outweigh the positive outcomes, and considering insights from regional or industry specialists.
Finally, some companies may either not yet have — nor be able to collect — data that demonstrates their wider social or economic impact. In the first situation, many companies are typically accustomed to reporting ESG metrics that show the effects of their operations (how they function) rather than the impact of their products and services (what they produce). In the second situation, some companies’ ultimate impact is difficult to measure; for example, positive community health outcomes or reduced societal inequality.
Potential approach: Work with information that a company may already track to ensure a reliable, repeatable data series, and engage to improve impact data collection and availability. Our company engagements typically include open dialogue about best practices for impact reporting. Emphasize an impact logic chain that establishes a tangible link between a company’s activities and outputs to actual impact. Find a credible evidence base that links an available KPI to the ultimate societal or environmental impact. For example, a generic-drug manufacturer enables access to lower-cost drugs, the ultimate impact of which is broader access to health care. This is very difficult to measure, especially across a company’s entire product portfolio. Focusing on the company’s output — the volume of generic drugs and their prices, relative to brand-name versions — is more practical. From here, an investor can derive a KPI that tracks anticipated cost savings for customers and use this as a proxy for increased access to treatment.
Final thoughts: Overall, the impact community will need to find ways to balance subjectivity and nuance with objectivity in assessing and measuring impact. We should establish a strong evidence base when including companies or issuers in an opportunity set. We will need solve for indirect impact, and work to minimise and track the reduction of negative impact. Finally, impact practitioners should establish intentional and productive courses of action when available data fails to adequately demonstrate impact, bearing in mind that the point of IMM is not only to improve measurement, but also to maximise real-world positive social and environmental outcomes.
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