How to measure impact a work in progress

Institutional investors require certain tools for making decisions — clear definitions of asset classes, performance benchmarks, ratings and ways to compare.

When it comes to impact investing, however, those tools are still works in progress.

In May, the Global Impact Investing Network released its Compass methodology to give investors insight into three critical impact performance figures: scale, pace and efficiency. It also makes it possible to compare impact results. The ultimate goal of the methodology is to help develop impact benchmarks, ratings and other tools.

The idea is to standardize the components and process of impact performance analysis at the aggregate investment, fund or portfolio level.

The GIIN also has a catalog of performance metrics, IRIS+, that is used by impact investors to measure social, environmental and financial success. That gives its 17,000 users worldwide a common metric "and gets people speaking the same language," said GIIN CEO and co-founder Amit Bouri, New York, but common benchmarks that allow investors to compare their results against market performance are "the big thing that is missing right now."

"When I sit down and meet with CIOs, what they want to talk most about are impact performance data," he said. Getting that data should spark a race to the top when it comes to allocation.

"Once you get a benchmark, everybody wants to beat the benchmark," he said. "Demand is coming from major institutional investors, asset managers and data providers. Asset owners are really seeking this, and asset managers are because their clients want it," he said.

The GIIN and the International Finance Corp., another impact investing proponent, have also produced joint impact indicators, starting with gender, jobs and climate, that investors can use to measure and report their investment activities. They should also reduce the reporting burden on the companies they invest in by clarifying expectations, and provide comparable impact data by harmonizing impact measurements, they say. More than 100 asset managers and others are signatories to IFC operating principles for impact management launched in 2020 by the private-sector investment arm of the World Bank.

Another advancement came in May with the launch of independent verification service provider BlueMark's benchmark for best practices in impact management. The benchmark is based on 30 impact verifications from investors with a combined $99 billion in impact assets, and includes prominent leaders and funds in impact investing such as Bain Capital Double Impact, BlueOrchard Finance Ltd., Calvert Impact Capital Inc., the Franklin Templeton Social Infrastructure Fund, KKR & Co., LeapFrog Investments, Partners Group AG and Prudential Financial Inc.

It looks at how well impact managers aligned with operating principles for impact management, and was "designed to root out impact washing," said an announcement from BlueMark, a Tideline Advisors LLC company. In the process of creating the benchmark, BlueMark learned that 93% of impact investors sampled align their investments with the United Nations' 17 sustainable development goals and 48% specifically align with the 169 targets underlying the goals.

It will take time for measurements to take hold, and with all the various terms and standards for ESG, sustainable and impact investing, "it's still very confusing," said Jane Bieneman, a senior adviser at Tideline in New York. "I think there are a lot of strides being made. We will work through it. We have to," Ms. Bieneman said.

For now, "measurability is definitely a challenge," said Berenice Lasfargues ESG analyst and SDG lead with BNP Paribas Asset Management in New York who is the lead on SDG. "Because there is no industry standard, there really is a concern about impact washing. More work definitely needs to be done."

GIIN Research Director Dean Hand, New York, sees the Compass methodology as a prototype and would like to see service providers develop their own methodology. "We certainly have an enormous amount of enthusiasm from investors and analytic houses," Ms. Hand said.

Joshua Kendall, head of responsible investment research and stewardship at Insight Investment in London, managing $1 trillion with a focus on responsible investment themes within fixed income, welcomes a clear methodology. "What we have been learning is that institutional investors were pretty poorly served by traditional service providers focusing on equities," Mr. Kendall said. "I think we need a (Sustainability Accounting Standards Board) for impact."

In the meantime, some asset owners have their own methods for assessing impact investments. "We wanted to create a systematic platform in the private market space, so we developed an internal assessment of what we would define as impact," said investment officer Nicholas Abel, who co-manages the $300 billion California State Teachers' Retirement System's Sustainable Investment and Stewardship Strategy.

Ms. Bieneman sees the gap in data closing over time as asset owners and managers share their information, and further analysis, such as Harvard Business School's Impact-Weighted Accounts Project, is undertaken. The project aims to create accounting statements that reflect a company's financial, social, and environmental performance.

When it comes to impact investing metrics, "I think we are worlds ahead of 10 years ago, and 10 years from now we'll say the same thing," said Casey C. Clark, managing director and global head of ESG investments and portfolio manager at Rockefeller Asset Management in New York. Weaknesses, including the lack of standardization and coverage of some asset classes such as emerging markets and smaller cap markets, are "the No. 1 issue that skeptics point to. I think we have enough data to make necessary conclusions" and to better understand risk and return, Mr. Clark said.

"Part of the reason there is such an opportunity here is if there was enough data, there is less ability to generate alpha. The fact that it has the challenges is creating the opportunity today," he said.