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12 February 20
12 February 20
Ian McLennan, Partner at Triple Point, explores how the industry can better measure the social impact of an investment.
The proliferation of impact investing- investments that generate both financial returns and social or environmental good – has been considerable over recent years. Indeed, the impact investing market as a whole is now estimated at $502bn, almost double that of the previous year.
However, there is a growing demand for fund managers and pension schemes to be equipped with clear and standardised tools for measuring the social impact of their investments. Such tools would empower investors to question their own pension schemes and fund providers on where they are investing, the types of companies and assets that they are investing in, and the true social impact they achieve. This will be an important step for the impact investing market and will go a long way towards improving transparency and stimulating access to a broader range of investments.
It’s no surprise that an increasing number of investors are looking to allocate their pensions and savings into funds that have a positive social impact. The rationale is hard to refute; the evidence suggests that impact investing is compatible with both doing well, and doing good, and can withstand the same scrutiny as traditional investments.
The logic is that the long-term risk-adjusted returns are superior because the investment approach is in tune with the forces shaping the global economy; for example, the intensified role of the climate change agenda, the drive for reducing poverty, addressing inequality and expanding global access to quality healthcare and education. Put simply, beyond generating social good, it makes financial sense to invest in firms that are aligned with these values. Recent data from Morningstar found that sustainable and social impact funds performed better than their non-sustainable sister funds. Indeed, 41 of the 56 (73%) Morningstar’s ESG indexes have outperformed their non-ESG equivalents since their inception. Profit, and purpose, therefore, go hand in hand.
However, as more financial institutions such as pension funds and asset managers get on board with impact investing, ensuring that investors have clarity on the social impact of their investment is crucial.
Currently, there are several different methods proposed for improving transparency and the UN Sustainable Development Goals (SDGs) are a valuable starting point. The goals signal a commitment to 17 global objectives, ranging from addressing hunger to stopping climate change, and are used to drive public and private investment towards creating a sustainable economy and society. While SDGs are helpful in providing the basis of a common framework, they are extremely broad, acting more as a benchmark than a quantifiable strategy.
Another method is Social Return on Investment (SROI). The method was developed from traditional cost-benefit analysis which produces a narrative on how an organisation creates or destroys value and a ratio that states how much social value (in £) is created for every £1 of investment.
There are several other proposed methodologies, but none seem to fully provide a monetary estimate of a company’s impact that is measurable, comparable and is delivered through an appropriate level of resource. At Triple Point, drawing on various methodologies, we’ve proposed our own measurement strategy which includes estimating the monetary value of Impact. This involves the following steps:
As part of our pre-investment process, identify the key societal benefits that we believe an investee company will generate.
Our KPIs relate to these key societal benefits. We select KPIs in consultation with investee companies, to ensure data can be collected without undue burden on the business.
After a period of time, KPI data provides the starting point to confirm the existence of a measurable positive social change and its scale.
Establish what would normally have happened, versus the positive change the product has created, to assign a quantity of positive change.
Calculate an initial monetary value of social Impact by using reference data or making reasonable data assumptions.
Adjust the initial monetary value for factors that contribute or detract from the positive impact being measured. They include duration (how long the impact will last) and depth (the level of change the impact creates).
A further adjustment is made to reflect the stake we have in the company and over the reporting period.
The estimate of Monetary Value of Impact is produced in pounds and pence as a result of the investment.
We accept that the resulting, seemingly precise monetary value for impact is based to some extent on subjective inputs. Thus, the results need to be treated with due caution. Nevertheless, we believe this is a step in the right direction in terms of quantifying impact.
While no method is perfect, we believe our approach creates a valuable starting point in terms of introducing some precision to impact measurement. Clearly, impact investing represents a transformation in the mainstream perspective and approach to investment and mirrors a much deeper shift in people’s attitudes. Clearer measurement, by spurring investors to demand better insight into the investments made on their behalf, will help ensure the capital they commit has the maximum positive impact, for their benefit and for society as a whole.
This article was originally published in Finance Monthly