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Editor’s Note: Led by contributors from NextBillion’s Managing Partner, New Ventures, this is the second in a series of articles showcasing the achievements of environmental entrepreneurs with insights from impact investing leaders on how to further scale sustainable enterprises. This article focuses on the environmental metrics available to impact investors. The next article in the series will address the challenges of developing a pipeline of environmental enterprises.

Separating Social from Eco: Why It’s Time Think Differently About Impact Investing

The term impact investing is a convenient catch-all for harnessing profit-seeking investments to generate positive impact. But of course, there is no single tool to measure that impact – regardless of whether it’s societal or environmental.

The first blog post in this series tracked the history and the importance of impact measurement for the growth of impact investing. As more mainstream investors enter this space and more investment firms strive to meet the demand (UBS being among the most recent), the ability to confidently – and I would argue – separately measure these impacts is critical.

While both social and environmental outcomes must be understood to assess the full impact of a business, there are fundamental differences between the two. Compared with environmental impact, measuring social impact requires a very different approach, often because scientifically quantifiable and verifiable data simply isn’t available..

What does environmental impact mean in the context of impact investing?

Depending on the type of ecological impact they seek, environmentally focused businesses can be broadly divided into three groups. There are some businesses that actually enhance the planet’s environmental services. Examples of these “environmentally positive” activities are sustainable forestry and green roofs. Other businesses provide “sustainable” goods or services, which have a very limited environmental impact. Clean energy technologies such as wind and solar would fit into this category. A third type of environmental business sells products or services that are more efficient than conventional alternatives, for example energy efficient light bulbs and electric vehicles.

While “more efficient” and “sustainable” businesses still use natural resources and cause some pollution, they do so in much smaller quantities than their conventional equivalents. The concept is that they avoid the negative environmental impact that would otherwise be caused if the company’s product or service did not exist. This is referred to as a net environmental benefit.

Why are environmental benefit metrics vital to the development of the impact investing space?

Environmental benefit metrics are needed both for initial due diligence and ongoing performance reporting. For any environmental business, the environmental impact story is a core part of their investment pitch. While anecdotes make good reading, they need to be backed up by figures to ensure confidence in the business model and to avoid potential “green washing” by both companies and investors. Using environmental benefit metrics to report fund performance will enable comparisons of impact investment funds and help to identify what investment practices really contribute to environmental and social good.

What impact measurement tools exist for impact investors?

A degree of standardization of impact measurement is already taking shape, with two initiatives that have made good progress over the last few years in helping companies and investors report and compare impact. The Impact Reporting and Investment Standards (IRIS) provides a common set of impact metrics for companies and funds to use when reporting. More recently, the Global Impact Investing Rating System (GIIRS) has begun rating companies and funds based on their social and environmental impact (using the metrics developed by IRIS). By providing a single rating system for all companies and funds, they afford a level of comparability that would otherwise be difficult for investors to obtain.

Aside from impact investors, who else is measuring environmental benefits?

The equity investment community is getting relatively comfortable with environmental metrics relating to negative environmental impacts (e.g. how much pollution a company emits), but environmental benefit metrics are still illusive. This is mainly because there is no agreed upon method for calculating a company’s environmental benefit (although the best attempt to provide guidance, for greenhouse gases at least, has been carried out by the Low Carbon Leaders Project). Many companies, such as Siemens and GE, are already reporting the environmental benefits of the products they sell.

Interestingly, the most impressive environmental impact reporting I have come across in the investment space has been developed for clean tech private equity funds. Environmental Capital Group (ECG), based in California, has developed a framework called ‘CLEAN’ for assessing the environmental benefit of clean tech companies, which they first used for the CalPERS AIM Clean Energy and Technology Program back in 2008. According to their website they now measure the environmental benefit of approximately 200 companies in 24 top clean tech funds initially valued at nearly $9 billion. The funds they assess include the European focused WHEB Partners.

What is the definition of an environmental Impact Investor?

ECG’s pioneering work in the measurement and reporting of the environmental benefit of investment portfolios brings to mind questions prompted by the first blog post in this series – can any type of investor with a positive environmental impact be classified as an impact investor? For example, can clean tech investors now call themselves impact investors too? Well, it depends. Impact investors can’t choose to address only environmental impact and ignore social impact. While it might be assumed that a clean tech investor’s mission includes both environmental and social responsibility, this should not be taken for granted.

For measuring the environmental benefit of any company or fund, this question of where to draw the line between impact investing and other types of environmental/clean tech investing is irrelevant. Impact investors, clean tech private equity investors, environmental equity investors – they all need the same environmental metrics to assess the environmental benefit of the companies in their portfolios. Much could be gained by knowledge sharing between these groups as they all work towards a similar goal. And the goal is an important one – the environmental metrics that these groups develop will be an important way to draw attention to transformative environmental businesses and investors that will help lead us towards a sustainable, zero carbon economy.