If we look at the current state of impact measurement on liquid investments, it is striking that it is mainly about the extent to which we find the current portfolio impactful or not. What is often missing is a philosophy/policy on the change/activity of the portfolio. If we look at the similarities with ESG, you have a range of strategies there: for example, selecting only best in class or selecting parties that lag behind and can be motivated to better ESG through engagement (which may also have a positive return expectation).
If we apply this to impact, we could also apply different strategies to this. In any case, the condition is that we can measure the progress of the impact over time. With this you are concretely mapping the impact-generating capacity of the portfolio.
This way of thinking can (fortunately) also be read at the GIIN in their ‘Guidance for pursuing impact in listed equities’. For now, let’s leave aside the discussion about additionality and the degree of impact of listed stocks, given the purpose of this blog. For this, see the introduction in this GIIN publication or our previous blog ‘Scoring Impact Dimensions explained’.
The GIIN guidance goes far beyond solely selecting companies that have a good impact score (regardless of the data provider of choice). In addition to the concrete impact goals that are pursued in a portfolio or fund and the associated Theory of Change, the case must be made for each company how it is relevant / contributes to these set impact goals. It should also clearly indicate how the fund or portfolio manager contributes to the acceleration of the impact of the companies. These are elements that you should include ‘by design’. Engagement is seen here as an important tool of which you have to design both the policy and process in an impactful way, in order to also measure its effectiveness.
When measuring/evaluating the impact performance, it is not the intention that you get stuck in comparisons with peers/benchmarks, but actually link to outputs that have an effect on the real-world impact and your impact goals. It is clear that this is easier said than done at the moment. Often the information that providers deliver is more process-oriented or on metrics that are not yet sufficiently specific. The advice is then to link these non-specific metrics to other available data points, making it clearer how the impact goals are or are not achieved.
The GIIN indicates that simply linking SDGs to existing impact characteristics of a portfolio is insufficient. The focus of a portfolio (or fund manager) to achieve impact goals and the way towards achieving this, is what matters, so the way towards (measurable) progress.