The news is mixed when it comes to impact investors and how they approach measuring and managing their investments.
Impact investors pretty much uniformly set clear objectives for measuring the impact of their investments and consider impact due diligence. And most regularly monitor each investment’s impact performance.
On the other hand, many don’t tie their staff’s compensation to impact performance or use a consistent method for following up with the companies they invest in when impact results are under par.
Those some of the findings of a recent report from impact verification firm BlueMark, which compiled detailed data from its first 30 verifications about the impact management practices used by impact investors. Those investors, ranging from KKR to Blue Orchid, have a total of $99 billion in impact assets under management.
BlueMark also announced the creation of a benchmark for tracking and comparing just how impact investors are managing their investments. That’s important, of course, for rooting out impact washing, as well as establishing which investors are ahead of the pack when it comes to their management practices. The benchmark is based on how closely investors are aligned with the Operating Principles for Impact Management, an influential standard for impact management practices.
“Asset allocators are hungry for this information,” says Christina Leijonhufvud, CEO of BlueMark and lead author of the report. “They want to know, how can I trust that what you say you’re doing is what you’re actually doing.”
The benchmark categorizes investors according to three categories. Practice Leaders lead the pack in their impact management practices. Practice Median means those who are mostly doing what needs to be done, but have room for improvement. Practice Learners have good intentions but a way to go.
- Uniform record when it comes to setting objectives. All the investors establish clear and measurable impact objectives.
- Growing consensus around the SDGs. Some 93% of impact investors in the sample align their investments with the Sustainable Development Goals (SDGs), and 48% align with the 169 targets underlying the SDGs
- Impact an important part of due diligence. Almost all—97%—conduct due diligence on the impact potential of each investment.
- Alignment of incentives with impact has a way to go. Just 43% directly align staff incentive systems with impact performance, including 17% that tie annual bonuses to impact.
- Few follow up consistently on impact underperformance. Only 20% have a systematic approach for following up when impact results aren’t satisfactory.
The report analyzes investors according to eight principles guiding impact management practices, from “Define strategic impact objectives, consistent with the investment strategy,” to “Review, document and improve decisions and processes based on the achievement of impact and lessons learned.”
The results for investor practices related to some principles are stronger than for others.
Consider principle 7, “Conduct exits considering the effect on sustained impact”. Around 57% have an approach to helping ensure that impact lasts after they exit. For private debt investors, that could mean assessing the sustainability of impact near the time of loan maturation. Private equity investors might consider such factors as how the track record of potential buyers might influence the sustainability of impact. But just 17% have a standard, documented process for doing so.