NB Financial Health
From ‘Nice to Have’ to ‘Need to Have’: The GIIN’s Kelly McCarthy discusses the growing momentum – and ongoing challenges – of impact assessment
It’s hard to find complete unanimity of opinion among any diverse group. But in this year’s JPMorgan/Global Impact Investing Network (GIIN) Impact Investor Survey, 98 percent of investors said it’s very or somewhat important to measure social/environmental performance. Likewise, 99 percent said they measure these impacts through a range of standardized and proprietary metrics and frameworks, with the majority using the GIIN’s IRIS catalog.
As IRIS Senior Manager Kelly McCarthy put it, these numbers indicate that “the impact investing community is embracing the value of social and environmental impact data, which is very encouraging.” McCarthy spoke about the momentum behind impact measurement, investors’ changing attitudes toward it, and the challenges of getting companies on board in the Q&A below.
James Militzer: Are you surprised that nearly 100 percent of impact investors are so focused on impact assessment?
Kelly McCarthy: I’m not as surprised considering how the practice has matured over the last five years. For impact investors, we’ve seen that social and environmental performance data has gone from a “nice to have” to a “need to have.” This is supported by the evidence in the report, and also by several members of the GIIN community.
JM: Do you think that shift is being driven by investor demand, or are there other factors?
KM: What I am surprised about is that, it’s the managers that are pushing this shift. Most would expect demand to come from investors that put money into impact funds. Yet, managers are taking the initiative because they see social and environmental impact as an inherent part of their fund’s mission – in other words, impact is a central focus, not an afterthought, and an increasing number of managers want to ensure that their investments are delivering the maximum impact.
JM: The survey focused only on investing organizations like foundations and financial institutions – is it safe to assume that everyday investors, if and when they get more involved in impact investing, will prioritize impact assessment to the same degree?
KM: It’s too early to say, but I think when you look at the push for certifications and eco-labeling, it’s clear that people value transparency and assurance that their money is being used for good.
JM: As the sector looks forward to perhaps getting more investment from the retail side, does it need to have a simple, standard approach in place, so it’s easier for everyday investors to understand impact and compare different potential investments?
KM: Again, its early days and we’ve still got a lot to sort out on the retail front, but over time, we could see impact measurement become much more accessible for every day investors. As Heather Esper and Yaquta Kanchwala Fatehi noted in last week’s NextBillion posts about the evolution of impact assessment, much of the current impact measurement theory originated from the development community and the analysis has largely been handled by trained analysts or researchers.
As adoption grows amongst a broader audience, there has been a push to make measurement more easily understood, accessible and universal. We’re still years away on the retail front, but the goal for those of us involved in the standards field is to keep working to ensure that we continue to pursue ways to enable the delivery of impact data that is actionable, is value creating (not value consuming), and doesn’t feel overly complex or complicated for all the stakeholders in the process.
JM: Can you give me a sense of how impact assessment has changed over the past five years or so, and any trends that you’ve noticed?
KM: It’s important to remember that the concepts for impact measurement are decades old and a lot of great work has been done by both the development community and the environmental, social, and governance (ESG) or sustainability reporting community. Despite this foundation, five years ago, there was a lot of fragmentation and confusion in terms of approaches to measurement in the impact investing industry. There was no consensus about what metrics should be used to understand poverty levels, access to basic services, or whether or not an investment strategy was having any sort of effect on basic development or environmental objectives. And so, for this community, there were a lot more questions than answers at that point.
When the GIIN was founded in 2008, it was clear to everyone involved that if the impact investing industry was going to succeed, there needed to be at least a basic level of common infrastructure around social and environmental performance metrics. IRIS was built on this principle. We looked at the state of impact measurement and asked: What are the most generally accepted metrics out there, and how can we put them together in such a way that makes sense for this industry based on the sector’s objectives? How can we make that really accessible and bring it together so that we have insightful data about performance? How can this be used to make meaningful decisions about the investments that we’re making? How can this be used to help us understand what investment strategies are working and which ones aren’t? And ultimately, how can we leverage what we learn to enable capital markets to become a strong force for societal and environmental good?
Fast forward to today and the progress we’ve made is clear in that investors are no longer asking us, “Why is impact measurement important?” Instead, they are asking us very tactical, actionable questions like how to “DO” impact measurement or implement it into the day-to-day investment management process – and we’ve seen many investors like Acumen or Root Capital begin to do so with increasing sophistication.
JM: Have you detected any reluctance or pushback from the companies that are getting the investments? Do they resist this new pressure to deliver measurable results?
KM: The ideal situation is where the goals of the investor align with the goals of the company. When this happens, gathering reporting and collective learning from impact data should occur organically and make business sense. There are some fundamental points of alignment business leaders want to know how well their products and services are performing in the market, whether they are reaching their target customer base or not, or whether they are aware of and managing business risks. For example, if their business model is to provide health care solutions to an underserved population, they want to know if and how well their products are serving their target demographic. So does the investor.
But when these goals don’t align, that’s when we get into questions about the value of impact measurement and the data delivered. In other words, when the investee has to look for information that is not material to their business or that they otherwise would not have had a reason to track there are challenges and resource issues to be strongly considered. For data collection for example: Where does the data come from? Who pays to get and manage the data? How was it tracked? How accurate is it? I can’t emphasize enough the principle of mutual value creation for all investment stakeholders.
JM: Would it be better if the IRIS model became “the standard” approach to impact measurement? Or is there an advantage to having multiple overlapping approaches?
KM: That is an interesting question. We look at IRIS not as an approach, but as a tool to promote a common language. It’s important for those in the industry to speak a common language, so that we can all talk about social and environmental performance in a way that makes sense to everyone.
That said, there is a place for diversity in rating systems, different types of assessments, and reporting tools based on the stakeholder, type of products, objectives, or – depending on the stage of the business – on other variables. If we take rating systems as an example, a comparison I like to draw upon is the traditional financial markets, where there are organizations like Morningstar, Moody’s and MSCI – all ratings and indices are different ways of understanding the quality or performance of a particular investment, yet they are all underpinned by common financial metrics. In essence, IRIS metrics can serve as the metric standard that underpins the way information is reported and these different reporting mechanisms all help to create a richer picture around the market.
JM: How close do you think IRIS is to being that common language?
KM: Well there’s always work to be done, but in the JPMorgan report, most of the investors that we surveyed use IRIS in one way or another, whether it’s entirely IRIS or whether it’s IRIS alongside proprietary metrics that they’ve developed themselves.
JM: Looking 10 years into the future, how do you think impact investing will evolve in the real world – and how would you like it to evolve in an ideal world?
KM: Ideally, impact considerations will be seamlessly integrated next to financial performance data – and not just for the impact measurement community, but for the greater financial world to get a true picture of how businesses are creating profit and acting as a force for positive societal and environmental change. As mentioned earlier, we’d like to see IRIS metrics align with and complement a variety of assessments, types of indices and tools that truly help stakeholders gauge relative performance. On top of this, I’d like to see participants holding themselves accountable for intended impact and being transparent about what’s working and not – again at the business level and at the investor level – with social and environmental performance information, so that the industry can collectively learn and grow.
We can expect impact measurement to move more fully from an option to a necessity for investors and managers. There will be more focus on what metrics are important for different sectors and impact objectives. Our hope is that the investment and business community will not be asking the same questions about how and why anymore, but will be well ahead on using both qualitative and quantitative impact data to drive important business decisions – that ultimately help to improve lives and the environment.
Note: The public comment period for the next iteration of the IRIS metric catalog will open the week of November 2. Those interested in helping shape the development of IRIS and impact measurement can provide input on the IRIS website.
James Militzer is the editor of NextBillion Financial Innovation.