Thinking Ahead Institute outlines five-step guide for measuring investment impact

Investment firms need to look beyond just maximising return and minimising risk to measuring impact

A research report by the Thinking Ahead Institute has proposed a five-step guide for asset managers to measure and communicate the impact of their investments on society.

The working group behind the report, consisting of representatives from a number of financial organisations, including AXA Investment Managers and Federated Hermes, has warned that investment firms can no longer consider investment and fiduciary duty as a “two-dimensional problem: maximising return and minimising risk”.

In today’s environment, a third variable – impact – should be a key part of the investment process. Furthermore, firms need to clearly communicate to their clients how and where exactly this impact is being created in a tangible way.

“Only by measuring it can investors know what impact their capital has on stakeholders and how they might want to change their deployment and stewardship of capital in light of this,” the working group said. 

“Only by communicating it do raw impact statistics turn into narrative to help stakeholders understand what value our activities have had on their daily lives.”

See also: – The Impact Revolution

The five-point framework presented in the report, entitled Sustainability: understanding impact and value creation, describes how managers can not only measure the impact of their investments, but also translate these metrics into evidence.

Marisa Hall (pictured), co-head of the Thinking Ahead Institute, said: “Most investors tend to focus on the measurement of their impact but stop short when translating this into an evidence-based narrative that clearly explains how these sustainability metrics translate into value and outcomes for each stakeholder.

“Critically this should also include future expectations that can inform investors’ deployment and stewardship of capital.”

The five-step framework investors can use to understand and communicate the impact of their investment activities consists of the following steps:

  1. Define your purpose; document your beliefs
    Identify who the key stakeholders are and understand their expectations and needs in order to determine what is valued
  2. Draw your value creation boundaries
    Align organisational purpose with the desired outcomes by understanding which stakeholders the organisation prioritises
  3. Measure your impact
    Identify gaps between current practice and desired norms that align with the organisation’s beliefs and value systems, evaluating these systematically through tools such as  questionnaires and scoring systems
  4. Understand the value created
    Openly discuss the results and gaps to develop an internal action plan.
  5. Communicate
    The output of this impact and value creation assessment should be communicated externally.

However, the working group also warned that asset managers need to be more realistic on what is actually achievable in terms of sustainability.

See also: – Schroders: Making an impact

Otherwise, the Institute warned, institutional investors risk a real disconnect between ambition and reality if they focus on measuring investment impact without linking it to value creation.

Hall added: “Historically articulation by the investment industry of value creation linked to purpose and impact has been poor. But this is changing as stakeholders increasingly expect authentic, intentional and transparent communication of  the value they can expect now and prospectively.

“While challenging, we believe this can be achieved by using the Integrated reporting framework or, in practice, producing an Integrated report.”

Avatar

Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...