The rise of impact investing is undeniable, and a cause for celebration this Good Money Week. But at the same time, the growth in this area has made the need for better measurement and access to data more pressing, with some managers saying a suitable framework is still yet to be found.
That said, many managers are pushing for more consistency and improvement in this area.
Now on its ninth edition, this year’s Good Investment Review from 3D Investing and Good Money Week noted a 14% increase in assets under management (AUM) in the past six months to £138bn, with 26 new funds being added to the 3D investment universe.
With this comes the acknowledgement of a need for standardised measurement and reporting, particularly when it comes to impact investing.
As noted by Brunno Maradei, global head of responsible investment at Aegon Asset Management, in another of ESG Clarity’s Good Money Week articles this year, impact investing risks being marred by subpar measurement and reporting, leaving investors disenchanted with asset managers’ overly positive claims.
“My cynical self would argue that the new impact trend is just about obfuscation and an attempt to differentiate in an increasingly crowded ESG investing space,” he said.
The Good Investment Review includes examples of managers sharing best practice and acknowledging the shortfalls when it comes to standardised reporting.
“By far the most significant challenge to this, or any other methodology in the impact investment universe, is negotiating the data gaps,” said Victoria Leggett, head of impact and co-portfolio manager of UBAM – Positive Impact Equity in reference to the fund’s method of distilling the sustainable development goals (SDGs) into six themes.
“Disclosure of non-financial data is limited, not standardised and rarely audited. At UBP we negotiate this with a combination of top-down aggregate data where it is available and bottom-up KPIs extracted from companies through bilateral engagement. We recognise this is an intermediate solution, but must participate in the push for improvement.”
Meg Brown, executive director, marketing and business development at Impax, said her firm also finds the SDGs helpful, along with the Paris Climate Agreement.
External frameworks are also used by Wellington. “We have found that the multi-dimensional framework provided by the Impact Management Project (IMP) — a forum seeking to build consensus on how to measure, assess and report impact — gives us a more holistic, balanced understanding of how the securities we own are addressing these global challenges,” said Marjorie Winfrey, sustainable investment research analyst; Campe Goodman, CFA, fixed income portfolio manager; and Jake Otto, CFA, investment specialist, at the firm.
“The IMP distinguishes between two forms of contribution to the overall effectiveness of an impact investment. The enterprise contribution refers to the benefits and consequences of the products and services provided by a company or issuer. The investor contribution refers to the value added by the impact portfolio manager and team.”
But others are taking matters into their own hands. “While there are many initiatives emerging, our conclusion was that none of the frameworks we tried was useful – yet,” said Mike Appleby, investment manager on the Liontrust sustainable investment team.
Impact investor Wheb has developed its own methodology to assess the impact ‘intensity’ of different investments. The ‘impact engine’ captures five dimensions: how vulnerable the client is; how important the impact is to the client’s survival; how central the product or service is to making change happen; how large the impact is; and how unique the company’s contribution is.
These form a score, which when combined with analysis on operational qualities is plotted onto an ‘impact map’. Only companies with a positive impact are considered for investment. More than 80% of listed companies receive negative scores in the impact engine and are not candidates for investment. This year Wheb also worked with The Carbon Trust to peer review its impact measurement methodology.
A greater focus on this area should yield positive results As Maradei concludes: “Despite the problems, it is an exciting time to be in impact investment.”