ESG Investing

Why Impact Measurement Is Key to the Industry’s Future


Even as impact investing has expanded from a niche strategy into a $500 billion global industry in recent years, it is still relatively young. The industry’s continued growth will rely in part on ensuring a consistent and effective method of impact measurement, especially as investors start demanding information about exactly how their dollars are moving the needle on the issues they target.

But standardizing this piece of the impact investing process is far from simple. From the unique complexity of each initiative to the variety of players proposing solutions, industry alignment has been difficult to achieve—and the high stakes mean development cannot be rushed.

Here’s a look at what one recent Forbes article describes as “investing’s final frontier.”

What Is Impact Measurement?

Impact measurement is the process by which investors track the impact outcomes of their investments to ensure they are achieving the desired impact returns alongside their financial returns.

While investors take varied approaches to this process, the Global Impact Investing Network (GIIN) suggests four actions at its core:

  1. Set goals and expectations, not only for on-the-ground impact but also for financial considerations such as risk and returns.
  2. Define strategies best tailored to the investments’ goals and the investors themselves.
  3. Select metrics and targets to benchmark against goals for success, both at the outset and over time.
  4. Measure, track, use the data, and report to synthesize and share material information gleaned from the investment process.

Why Impact Measurement Matters

Data has become an integral component of investment decisions, and impact investing is no exception. It’s impossible to know whether an investment is effectively delivering impact without measuring and recording its progress.

This is why investors need reliable, standardized data. Sophisticated investors use this information to make decisions about specific investments as well as to inform their overall strategy, with the goal of feeling confident that they’re realizing the greatest possible impact with their capital. From a bigger-picture perspective, impact measurement paired with thoughtful reporting builds industry knowledge of what works and what doesn’t. In turn, well-designed reporting illustrates the progress made toward tangible outcomes and helps raise the industry’s profile.

Despite the growing consensus around the need for uniform data, efforts to standardize remain fragmented.

Coherent reporting can also combat the growing perception that some investments are being “impact washed,” or labeled as sustainable for marketing purposes regardless of their actual impact. “Encouragingly, impact investors are cognizant of this concern and emphasize the importance of greater transparency around impact to mitigate this risk,” Abhilash Mudaliar, Research Director at the GIIN, writes in the organization’s most recent annual survey.

Eight in 10 industry members surveyed said that more transparency around impact investing strategies and results would help reduce impact washing and “industry-mission drift.” Four in 10 favored third-party certification as a potential solution, while others pointed to shared principles or a code of conduct.

Challenges—and Potential Solutions

Despite the growing consensus around the need for uniform data, efforts to standardize remain fragmented. Fund managers often use proprietary impact measurement systems tailored to their own investment frameworks, complicating comparability. It doesn’t help that the breadth of strategies and projects gathered together under the “impact” banner means that there are innumerable nuances across impact investments. And considerations of what’s material to each investment’s potential impact make finding a one-size-fits-all solution difficult.

Several industry groups have put forth processes for measurement, among them a set of nine principles from the International Finance Corporation and a framework from The Investment Integration Project.

But private fund managers and trade groups aren’t the only stakeholders with ideas about impact measurement and management. The European Union recently approved disclosure requirements regarding the impact of environmental, social and governance factors for asset owners and financial services companies operating within its borders.

Asset managers are entering the fray as well. In January, TPG Capital announced that it had developed a new company, Y Analytics, as well as an impact measurement metric, the “impact multiple of money,” which incorporates independent research to assess each of its investments. “If capitalism is to be a force for good, we have to be able to measure when it’s doing good and when it’s doing harm,” U2 front man Bono, who has partnered with TPG to create the company, told the Wall Street Journal.

The takeaway for many investors is the same: while the industry clearly sees the need for standardizing evidence of impact, a consensus hasn’t yet emerged regarding the best tools for collecting and distributing that data. Given that many of the bespoke tools available are not yet widely accessible, the safest approach may be to take a “wait-and-see” attitude.

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