Moving from impact measurement to impact management
If impact investing is to reach and uphold its ambitions the industry norms need to leap beyond impact measurement and reporting and progress to the meaningful work of impact management.
Impact investing is a niche area but growing, with some estimates that the current (2022) US$1.6 trillion AUM will increase by 30% by 2025. Proportionately, it is expected to also become a more significant component of responsible (sustainable) investments (growing from 6 to 11%).
With the increase in allocations to impact investing and a rising profile, there are concurrently increasingly loud calls for improved professionalisation of the industry to ensure impact integrity or to mitigate impact washing, which also covers green washing in relation to environmental issues.
But more importantly, if we are motivated to contribute to creating positive impacts for people and planet then isn’t it important that we understand how well we are doing?
‘The work to scale the market with integrity is crucial if the world hopes to reverse the tide of climate change and address social inequity head on. All industry players have a role to play in ensuring that impact investing meets the moment and fulfills its promise.’ Amit Bouri, CEO of the GIIN
Managing for impact differentiates impact investing from other responsible investments. Impact investing is more than having the intention to create impact to checking to see if you have. It includes assessing the extent to which the intended impact occurred and whether the investment contributed to the change; putting feedback loops in place during investment periods, not just assessing at exit; and communicating performance information to others in the investment chain to help all actors manage towards impact. This later activity also aims to contribute to the growth of the industry, another characteristic of impact investing highlighted by the Global Impact Investing Network.
‘Impact investors have to declare their intention to generate impact before investments and set up a measurement system to track their progress toward declared impact objectives.’ European Venture Philanthropy Association, 2022
Improvements in impact management practices over recent years are encouraging. In the GIIN’s 2020 state of impact measurement and management report, 99% of respondents reported progress in the sophistication of IMM. But it is also work in progress. Further improvements are needed if impact investing is to realise its potential to address social, economic, and environmental challenges. IMM is still a significant challenge for investors. The IFC estimates that 72% of the assets under management (US$1.6 trillion) lack measurement systems or credible processes for assessing contribution.
Over the last decade, the focus has been on developing guidance for developing impact theses, and standardised IMM definitions, metrics, and assurance systems. The work of the Global Impact Investing Network, The Impact Management Project, and many others has been invaluable.
More attention is needed to:
- assess actual impact on people and planet.
- integrate assessments of financial and impact performance.
- communicate full performance information to key stakeholders.
- move beyond seeing managing for impact as reporting for accountability and/or a public relations exercise.
What can investors do to strengthen impact management?
It can be difficult to know where to start or figure out how to take the next steps after the initial stages of developing impact theses, identifying metrics and developing reporting templates. It can seem particularly challenging for small investment teams. Effective impact management is an ongoing effort, that can be guided by a longer-term vision and achieved by putting in place meaningful building blocks over time. Small steps are positive.
The progress principle: Of all the things that can boost emotions, motivation, and perceptions during a workday, the single most important is making progress in meaningful work. And the more frequently people experience that sense of progress, the more likely they are to be creatively productive in the long run. Whether they are trying to solve a major scientific mystery or simply produce a high-quality product or service, everyday progress — even a small win — can make all the difference in how they feel and perform. Teresa M. Amabile and Steven J. Kramer, ‘The Power of Small Wins’ in HBR, 2011
Strategies to strengthen impact management include:
- Prioritise resources (time, people, money) and using different impact management approaches according to impact classifications or risks. For instance, an ‘A’ investment will likely have different impact measurement and management needs than a ‘C’ investment. A different, higher quality approach for impact management practices of ‘C’ investments could be developed and piloted.
- Use different strategies to engage with investees and/or fund managers on impact issues depending on the size of the investment, the level of risk or whether it is a direct or indirect investment and perceived levels of influence.
- Focus first on sharing and discussing performance internally, rather than producing external reports. Recent research, Raising the Bar by BlueMark in 2022, found that internal-only reports are more likely to include balanced information about the performance of portfolios and individual investments. While internal reporting doesn’t contribute to greater transparency in the sector, it can facilitate better analysis and reflection to improve impact management. Over time, investors can increase external reporting once they have embedded reflective practices internally.
- Strengthen governance: Reinforce the board’s ability to drive impact by including members who have IMM experience and bring a different perspective to the more typical skill sets of financial management, risk management and HR. Or set up an impact advisory group to support senior executives or the board.
