Mission Impossible? How Large Asset Managers Can Avoid ‘Mission Drift’
In recent years, an increasing number of large asset managers have entered the impact investing arena. The space has grown in popularity in the last decade due to its projected major growth and the rise in the number of investors asking for sustainable products.
After years of focusing exclusively on financial returns, these asset managers are now turning their heads towards making sustainable investments. This follows a prolonged period of increasing scrutiny over their behaviour towards stakeholders – for example, the preoccupation that private equity investors focus on profit above all else.
However, a significant proportion of impact investing at large asset managers still focusses either exclusively or predominantly on financial returns. Despite their best intentions, this group has so far been unable to develop a truly “impact first” approach.
The 2018 Impact Investor Survey from the Global Impact Investing Network (GIIN) highlights this issue from the perspective of those most involved in impact investing. Investors, enterprises and other impact investment advocates have welcomed the arrival of large asset managers, but they have identified the risk of “mission drift” – diluting the impact of their investments.
asset managers can learn from an ‘impact first’ approach
Clearly, large asset managers entering the impact investing sector for the first time need to avoid mission drift, also commonly known as “greenwashing.” The problem is that financial returns are stitched into the DNA of leading asset managers, and the impact element of funds has been labeled by many as “tree hugging.”
A true impact-first approach, similar to what the founder of Bamboo Capital Partners, Jean-Philippe de Schrevel pioneered over a decade ago, is what is required to move asset managers forward. It can also develop further commercial opportunities by initially encouraging higher risks.
Bamboo took higher risks and targeted a more moderate investor rate of return in favour of generating significantly higher social returns. After our tenth anniversary Impact Report, we made it clear that our approach to impact investing “combines purpose with profit.” The proof? Our investments have been able to create over 30,000 jobs, and have impacted 96 million lives over the last decade. Today, thanks to this impact-first approach, we have been able to identify and double down in our most promising sectors, launching commercial-first funds to scale our impact and financial returns further.
But returning to the issue of greenwashing: Four in five respondents to the GIIN survey stated that large asset managers should be more transparent when articulating their impact strategy and results. This is easy to say, but how in reality can they achieve greater transparency?
Accurate impact measurement brings greater transparency
Adopting an accurate measurement methodology to record and report the impact of investments throughout their life cycle is imperative in impact investing. From our experience, there are three main ingredients that asset managers should implement to measure and deliver legitimate impact.
The first is to ensure that the impact of an investment is aligned with a clear, meaningful and measurable scope. Nowadays, the 17 United Nations’ Sustainable Development Goals – a widely recognised, global framework that resonates with investors – are of great guidance. These goals range from gender equality, clean water and sanitation, to affordable, clean energy and zero poverty.
The second ingredient is to use a rigorous third-party measurement methodology. The two that are highly regarded and widely recognised in the industry are the GIIRS rating and IRIS metrics. These are tools that collect relevant performance data and project whether certain investments will deliver on their goals. For example, the environmental return of an investment into a renewable energy company could be measured by the total amount of CO2 offset recorded in a certain period.
The third and perhaps most complex ingredient is to incentivize the alignment of investees’ financial and impact goals. It is important to understand that impact-first strategies can have very different benefits, targets, risk profiles and measurements compared to commercial- first impact strategies.
However, we also have seen that these two different investment schemes have synergy, and can be beneficial for the investee’s later performance. One example of many at Bamboo is XacBank. We invested quite early in XacBank, a Mongolian microlender, as part of our impact-first strategy. But over time, the company’s business model evolved and its commercial appeal developed. XacBank has since grown into the country’s third largest bank, with 86 branches serving 700,000 customers across Mongolia.
Hence, by taking initially higher risks on our impact-first investments, we were ultimately able to develop our actual commercial-first impact funds, in spite of the emphasis on transparent impact measurements. In this respect, large asset managers can also quash any concerns over their behaviour and intentions, by focussing on and measuring a real impact-focused “theory of change.” This will improve their approach to impact investing and ultimately reduce and remove the risk of possible mission drift.
Florian Kemmerich is Managing Partner of
Image provided by Bamboo Capital.