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The impact investment universe continues to rapidly evolve, mobilising more than US$1.1 trillion in assets under management1 to address some of the world’s most pressing challenges. But amid the industry’s significant growth, it grapples with a multitude of complexities.
These challenges include one of the four core characteristics of impact investing: the need to ensure accurate measurement and interpretation of impact data.2 The absence of standardisation, coupled with a lack of consistent and comparable data, poses the question: How do we continuously deliver credible impact measurement and management that supports real-world positive outcomes?
In this paper, we offer insights gleaned from our engagement with public and private impact companies, our collaboration with key stakeholders in the impact investing industry, and our latest research into impact reporting best practices. We believe that mutual understanding and honest communication are critical to the industry’s progress.
For investors, this means being aware of the capabilities and resources of portfolio companies to set realistic expectations. For portfolio companies, it means understanding investors' expectations to better meet them. In our effort to advance impact measurement and management (IMM), we share three recommendations each for impact investors and companies.
1. Clearly communicate the impact data you plan to measure and why it matters for business outcomes.
For portfolio companies, the request for impact metrics can sometimes be burdensome or seem detached from company priorities. Industry research shows that today’s IMM conversations are dominated by the information that investors need.3 Companies can become hamstrung by the questions asked by multiple investors, rendering them unable to focus on the issues they feel are most relevant to their businesses. As an investor, it’s crucial to be mindful of the impact data you request and to explain why certain metrics are important and how they can enhance the portfolio company’s business value. Making sure the request for impact data is reasonable (given the resources available to the business) and relevant to its strategic goals is key to achieving alignment of interests between impact investors and portfolio companies.
Illustration: In recent engagements with publicly listed higher education providers, we underscored the importance of post-graduation outcomes, such as average starting salaries relative to peer institutions. This guidance was well received because we illustrated that the data 1) is a key component of our impact thesis, showing the long-term value that a university provides to students and 2) can serve as a powerful recruiting tool for the university, attracting potential students by demonstrating the value of investment in higher education.
2. Meet companies where they are on their impact measurement journeys.
Navigating the industry’s evolving impact measurement best practices can be challenging, especially for a young company with limited financial and human resources. It’s essential to reassure companies that they don’t need to have the perfect impact metrics right away. Instead, they should have space to evolve with your support along that journey. This partnership not only builds trust but can also accelerate a company's ability to best measure impact.
Illustration: Our private-market climate investors often consider investments in enablers — companies that facilitate positive climate outcomes but aren’t solely responsible for them. Measuring impact in these cases is often difficult and at times we are only able to reliably get data on activity-based metrics (such as number of customers). In one case, however, we were able to work with a company to conduct a customer survey containing specific questions related to environmental impact. A better understanding of how customers use the product can potentially give us more evidence linking customer numbers to environmental benefit. It can also yield insights for the business to aid with customer engagement and product development. This example demonstrates the trusted partnership we develop with portfolio companies, our willingness to progress at a pace comfortable for each company, and the potential dual benefits of impact-focused research.
3. Emphasise that the IMM journey is nonlinear. Just because a company doesn’t experience steady impact progress doesn’t mean you don’t believe in its potential.
Companies aiming for environmental or social impact often grapple with the pressure to consistently deliver positive impact results, fearing that any shortfall may disappoint investors. Investors who proactively acknowledge the volatility of impact can foster an environment of transparency and collaboration. This reassures portfolio companies that we are partners in this journey, understanding and accepting the ebbs and flows inherent in the pursuit of impactful solutions.
Illustration: We believe that maintaining regular dialogue with companies that report declining impact over time is crucial, emphasising that a temporary shortfall doesn’t necessarily diminish our confidence in a company’s impact. Whether or not it can remain in an impact portfolio in this case depends on the reason behind the decline. Following disappointing impact results, we use engagement to assess if there has been any change in the underlying business model that may run contrary to our impact thesis. This approach creates a climate of trust, enabling the company to more readily share important information with us so we can engage early and support the business if needed.
1. Be transparent about your impact data.
Investors place a high value on understanding your impact data and its underlying assumptions as it feeds into their own impact reporting. Investors consider the greatest challenge to the impact investing industry’s development to be the ability to compare impact results to peers. In a recent survey, 91% of investors indicated that comparing impact is a challenge to at least some degree and 37% noted that it is a significant challenge.4 Transparency not only strengthens your company’s credibility, but also ensures that investors can confidently interpret and compare your results and report to their stakeholders.
Illustration: Impact reports often present standalone impact metrics, such as the number of patients served in a certain year. While useful, this data can be difficult to interpret without context, as a single number says little about progress or relative performance. Adding context, such as a time series of data or an industry comparison, can add significant value to your impact data. Additionally, including the calculation methodology for your data points, especially for complicated ones such as greenhouse gas emissions avoided, can strengthen your impact credibility. Context enables investors to analyse impact effectively and report credibly to their stakeholders. A helpful tool for understanding what kind of impact information investors are looking for is the Impact Management Project’s Five Dimensions of Impact, an industry-recognised framework for understanding impact on the planet and people.5
2. Be open with your investors if your impact journey is not going as expected.
Impact investors understand that issues may arise, and impact targets may sometimes not be met because they are also working through impact measurement challenges. To advance the space and continue to stimulate the flow of capital in the field, reliable, transparent, and complete impact information is needed from every participant. Investors are your partners on this journey and honesty is critical.
Illustration: For early-stage companies, finding the most effective way to quantify their impact can be a winding road. New or better data may emerge that allows the company to improve its impact measurement. Conversely, a business may find that its impact calculation, originally thought to be more accurate, is not scalable, so it may revert to a simpler calculation used earlier. Investors often support evolutions in approaches to impact measurement, if supported by a robust evidence base.
3. Seek impact advice from your investors whenever needed.
Impact investors are often willing to share their industry expertise and networks to support you in measuring your impact. Brainstorming alongside your investors (rather than feeling you have to come up with all the answers yourself) can often yield innovative results.
Illustration: Portfolio companies frequently ask us for advice on impact-related topics. Recently, we advised a software company playing a key role in the energy transition on the most effective ways to measure its impact. We also provided feedback to a company operating in the solar sector on its debut sustainability report. In fixed income investing, recommendations on sustainability practices and deal structuring have formed a part of our engagement during premarketing of sustainable debt offerings. Our sustainability teams (encompassing both ESG and IMM) have deep experience in both the public and private markets and are happy to offer guidance tailored to our portfolio companies’ businesses, at every stage of their growth and impact journeys.
As the impact investment industry evolves, we believe transparency and communication are critical to success. We hope these recommendations will help both impact investors and companies seeking to address some of the world's most pressing social and environmental challenges better understand and manage each other's expectations.
1Source: Global Impact Investing Network, “2022 Sizing the Impact Investing Market,” report. October 2022. | 2Source: Global Impact Investing Network, “Core Characteristics of Impact Investing,” 2023. | 3Source: Impact Alpha, “Putting ventures at the helm of impact measurement and management,” 20 April 2022. | 4Source: Global Impact Investing Network, “Emerging Trends in Impact Investing,” August 2023. | 5Source: Impact Frontiers, “Five Dimensions of Impact,” 2023.
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