Progress and Frustration: How Investors are Pushing Impact Investing Toward Greater Transparency
Not very long ago, impact investing was deemed a small, boutique and mainly esoteric investment strategy by the majority of investors and investment service professionals. That has changed. Last year, the Global Impact Investing Network (GIIN) reported that assets totaling more than $500 billion were invested in companies and projects that positively and directly benefit people, communities and ecosystems across the planet. At this rate of acceleration, and as investors continue to respond with more urgency and commitment to solving the world’s social and environmental challenges, it is likely that impact assets will top $1 trillion in the not-too-distant future.
As the amount of impact investments grow, so will the demand for greater transparency about who is benefiting, in what ways, and to what degree. Impact asset managers will need to demonstrate, with more sophistication than in the past, their ability to create and sustain the impact they promise, to satisfy an investor public that is becoming more knowledgeable and discerning by the day.
Institutional Investors Move Toward Standards and Accountability
Large and small institutions alike have taken notice of this growing priority. At an October breakfast event Aeris held during the SOCAP conference, leaders from PGIM, The MacArthur Foundation and other institutions committed to impact investing noted the field’s movement toward greater transparency and accountability. They stressed both the critical importance of demonstrating and reporting quantifiable impact results, and the absolute necessity of integrated investment practices that guide the qualification, measurement and management of impact.
This move toward standards and accountability was advanced last April when the International Finance Corporation (IFC) launched the Operating Principles for Impact Management, which define a set of practices for measuring and managing impact, with the goal of assuring investors that an asset manager has the ability and capacity to deliver promised impact. Because the Principles require independent verification of a signatory’s practices, they have the potential to drive needed accountability and transparency in the field. To date, 82 asset managers and development finance institutions from across the globe have become signatories to the Operating Principles of Impact Management.
Frustration in the Retail Impact Investing World
At the same time, in the retail channel – which many argue will be critical to the future growth of impact investing – the pressure for accountability also is growing. The push for transparency by individual impact investors was evident in a 2019 survey by the Rockefeller Foundation that explored the attitudes of individual investors and their advisors toward impact investing.
Looking through the findings, we were struck by an observation: Despite the growing appetite for impact investing and the many efforts underway to build an infrastructure for measuring and reporting impact, the benefits of these emerging practices are not consistently reaching retail investors.
In the survey, 80% of retail investors said they found it difficult or extremely difficult to measure the impact of their portfolios. Similarly, roughly a third of the financial advisors who responded said the industry’s approach to measuring impact is unclear, and that the lack of a consensus on impact measurement is hampering growth.
This retail investor frustration underscores the need for asset managers and institutional investors to adopt conventions aimed at strengthening impact measurement and management (IMM). Change is on the near horizon. A recently released report by the GIIN, “The State of Impact Measurement and Management Practice,” indicates significant growth in the adoption and integration of IMM practices by asset managers—both large and small. Yet asset managers face their own frustrations. Challenges abound in collecting quality data that shed light on the meaningful impact that’s attributable to an investment. And how do managers know if that impact is actually meaningful, without performance standards or benchmarks to compare it to the overall market performance? Fortunately, progress on both data and benchmarks is tangible, per the GIIN’s report, as the field continues its march toward greater accountability and standardization.
Practical Challenges—And Emerging Solutions—In Impact Management
In Aeris’ decade-and-a-half of using ratings analyses to assess the impact of community-based loan funds, we have seen the shift from reporting on the outputs of an investment—e.g., the number of affordable housing units, solar panels, or women- or minority-owned businesses financed—to a commitment to measuring what happens after an investment is made. This emphasis on qualifying, measuring and managing impact results across the life cycle of an investment is already second nature to the strongest performers in impact investing, and it is gaining agency across the broader impact investing field. At the same time, incorporating sound IMM practices into the investment process can be an enormous practical challenge and resource drain for asset managers. It is no exaggeration to say that in many cases, impact data is still collected from portfolio companies by email, then copied and pasted into increasingly complex spreadsheets.
This is one area where Aeris is applying our muscle. In 2013, we launched a cloud-based platform to streamline the collection, analysis and management of data and documents that we use in our ratings analyses. The days of copying and pasting or manually entering data into a spreadsheet are long behind us. The funds that report data to Aeris on a quarterly basis export data from their systems and upload it directly into our platform. That data instantaneously populates the analytic tables and graphs we use for due diligence and monitoring. As it turns out, the tool we built to bring efficiency and accuracy to our work is very similar to what many asset managers need to simplify impact data collection and management for themselves and the portfolio companies that report to them. We call it Atlas, and later this year, Aeris will extend the use of this proprietary cloud-based software to managers of impact assets. Our goal is to make IMM more efficient for asset managers and, over the long term, to help them build a database that provides insights into effective impact investment strategies, and progress toward achieving global impact goals.
With new enabling technologies, a focus on more rigorous impact measurement and management standards, and a commitment from senior management to providing investors with the richest information set possible, asset managers are making tangible progress in the effort to quantify impact. And this progress is essential. Investors are demanding it, and the continued growth of the industry—and, more importantly, the industry’s ability to continue effecting social, economic and environmental change—depends on it.