Measuring impact is no easy task. There are a number of ‘flaws’ in current practice that it is important to realise are there. There are great parallels to measuring and attributing financial performance. An important observation is that impact is not an attribute of your portfolio, but of an activity. That activity produces a result where there is an impact on the real world.
Let’s explore this with a simple example. Pension fund Y buys a Dutch housing portfolio with energy label D. It preserves these houses to label A and sells this portfolio to pension fund X, which itself has just sold houses with energy label C. Y’s portfolio then looks the same again.
What happens to the CO2 emissions? For pension fund Y, the portfolio CO2 emissions first go up, then down and finally, after the sale, it remains the same as the initial situation. For pension fund X, portfolio CO2 emissions go down because of the purchase of houses with energy label A versus the sale of houses with energy label C. In the real world, CO2 emissions go down after pension fund Y makes the houses more sustainable.
Often, measurements (and surveys) assume portfolio stocks. So, if portfolio emissions are measured at the end of a period, it may well be that nothing is measured of the impact realised by pension fund Y. Pension fund X does measure an improvement in carbon emissions and perhaps this is labelled as impact. Let us establish that there is nothing wrong with pension fund X’s action. It is fine to improve your portfolio and this can have several legitimate reasons. Whether it has impact or not may be a matter of definition. Let us also note that pension fund Y comes off meagre in the current measurements when it should really get our recognition for its impact.
What we can clearly observe here is that impact is not a portfolio attribute, but an attribute (or the product) of an activity. This would argue for an entirely different design of impact measurement, namely an Activity Based Impact Measurement (ABIM). This is forward-looking for now, as it already takes considerable effort to set up current impact measurements. It does mean that impact measurement still has serious ‘flaws’. Naturally, this leads to all kinds of methodological questions, e.g. how long does an impact last?