PERSPECTIVE3-5 min to read

Establishing standards for impact investing that go beyond just measurement

In a recent webinar, we discussed the evolution of impact investing and the increasing importance of independent verification in achieving desired impacts with BlueMark, a leading provider of impact intelligence and independent verification. This article summarizes their conversation.

06/05/2024
Impact investing

Authors

Whitney Sweeney
Sustainability Investment Director, North America
Maria Teresa Zappia
Head of Sustainability and Impact, Schroders Capital
Catherine Macaulay
Impact Investment Lead

Impact investing has evolved considerably in recent years, and independent verification of the processes used to achieve desired impacts has become critically important. This evolution has occurred simultaneously with a growing interest and demand for impact investments from institutional investors. These topics and much more were discussed in a recent webinar, “Impact intelligence & independent verification,” by Schroders and BlueMark in April. Whitney Sweeney, Investment Director, Sustainability at Schroders, hosted the webinar. She was joined in the discussion by Maria Teresa Zappia, Global Head of Impact at Schroders and BlueOrchard; Catherine Macaulay, Co-Head of Impact Management at Schroders; and Christina Leijonhufvud, CEO of BlueMark, a leading provider of impact intelligence and independent verification for the sustainable and impact investing market.

Following are highlights of their conversation and the answers they provided to multiple questions from the institutional investors who joined the event live.

Impact investing has grown both in size and in demand

We have seen increasing global institutional investor demand for impact investing. Our 2023 Institutional Investor Study, which analyzes the investment perspectives of over 700 global institutional investors, showed that almost 60% of global institutional investors identified impact investment as their preferred approach to sustainable investing. The focus on impact has grown, from 34% in 2020, 48% in 2022, to 59% in 2023. Our Study also highlighted that investors want impact investments that are easily measured and understood.

The Operating Principles for Impact Management

With the massive growth in impact investing, disclosure and transparency have become crucial to ensure that asset owners, asset managers and asset allocators are all operating with integrity and applying a rigorous discipline to their approach to avoid greenwashing/impact washing. In the earliest days of impact investing, the focus was on measurement, given that impact investing, by its definition, seeks to achieve a positive and measurable social or environmental impact. After some years of learning, it was concluded that measurement alone is not enough to demonstrate an impact strategy’s integrity and authenticity. The intentionality of the investment process needs to be baked in, well-developed and translated into a clear approach to conduct impact due diligence, measure both positive and negative impact potentials and risks.

The nine Operating Principles for Impact Management, established in 2019, are considered the best-in-class industry standard that brings clarity and transparency on what best impact practice looks like across asset classes and sectors. The Impact Principles comprise nine key principles that guide how impact can be rigorously embedded in the investment process across the entire investment/fund lifecycle. The ninth pillar centers on disclosure and independent verification.  Overall, the Impact Principles have introduced several key features to the impact investing asset class:

  • a guiding framework to embed impact in the investment process from origination to exit;
  • a discipline in terms of compulsory annual disclosure of the alignment to the Principles (i.e. a disclosure statement published and available to all stakeholders); and
  • a long-awaited obligation to have impact investing processes and tools assessed by external independent specialized providers (e.g. an external audit).
OPIM chart for Insights article_1296pxW_OPIM chart

Schroders became a signatory to the Operating Principles for Impact Management in 2022, following in the footsteps of BlueOrchard, which was one of the first signatories when the Impact Principles were established in 2019. The publication of our Disclosure Statement and associated independent verification marks the first-year anniversary of being a signatory to the Impact Principles. A year on from becoming a signatory to the Impact Principles, we are delighted that an external assessment of the impact framework that we have developed in our impact practice across listed and private markets has been recognized as “Leading” by the independent verification provider BlueMark.

While the process may differ in the specifics, we have found that the Impact Principles can be applied across a range of asset classes—including equities, debt, real estate and infrastructure—in both public and private markets.

Robust answers to a wide range of client questions on impact management

What is the biggest challenge to impact investing?

As the market grows in size and sophistication, transparency has become crucial to maintain market integrity. This rapid growth, though exciting, does, however, present risks of impact/green/SDG washing. New market entrants may lack a history or depth of expertise in impact, and we've seen a divergence in the level of rigor and robustness applied by different managers.

Additionally, the panelists agreed that managing impact at exit often presents the greatest challenge.

Will impact-linked compensation become more common across the industry?

Mechanisms should be in place to ensure that investment and impact management teams are as incentivized to achieve desired impacts as they are to deliver financial returns. The mechanism that has gained the most attention with private equity assets is an impact-linked carry structure. It is by no means a panacea, however as indicated by BlueMark. Industry-wide, there has been an overreliance on KPIs [key performance indicators] that may be too narrow to capture how impact is generated. To this point, Schroders is adopting an approach that can analyze impact at the portfolio level, given the challenge that the KPIs at company/asset and transaction level might not be appropriate in multi-asset strategies. A combination of KPIs bottom-up and top-down (at portfolio level) proves to be more effective to link performance both in terms of investment returns and achievement of impact objectives.

Where are the opportunities in impact investing?

Bringing impact approaches to listed equities is a major opportunity. This potential has been positively influenced by the Guidance for Pursuing Impact in Listed Equities that was released by the Global Impact Investing Network (GIIN) last year. We believe that the same leading industry standards such as the Operating Principles for Impact Management (Impact Principles), Impact Frontiers’ Impact Performance Reporting Norms, and IRIS+ that have been critical in establishing impact integrity in private markets can and should be equally applied to listed equities.

We also see opportunities in private equity and thematics across public and private markets such as: community banking in the US, microfinance in emerging markets, EV infrastructure and the energy transition more broadly around the globe. There is also considerable interest in investments in hard-to-abate climate areas, such as heavy industry, long-distance transportation and certain types of energy production.

Place-based investing, such as investments that could foster affordable housing in the US or UK, has also become a keen interest of investors who want to have a more local impact. On the approach side, there are also considerable opportunities to gain insights on impact from investment teams, who have an in-depth understanding of the companies and management teams within particular areas, such as US small-cap stocks. These teams know which companies are committed to impact and whether impact is core to a company’s business model.

How are regulations affecting impact?

They can serve as both a tailwind and headwind. On the tailwind side, the regulations coming out of Europe, both the Sustainable Finance Disclosure Regulation (SFDR) and the UK’s Sustainable Disclosure Requirements (SDR), have been revolutionary, in requiring all financial market participants to articulate why they are, or are not, incorporating sustainability and impact considerations into their investments and financial products.

As a potential headwind, regulation, when it’s too prescriptive, can become a compliance burden and a distraction from focusing on what the best practices for impact are. BlueMark has found, however, that when an impact investor is well aligned with the Operating Principles for Impact Management, they have the building blocks in place for determining how to comply with regulations like SFDR.

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Important information

All investments involve risk including the loss of principal. Investments in private equity are only available to qualified investors. The views shared are those of the individuals quoted and may not reflect the house views of Schroders Plc or BlueMark. There is no guarantee any forward looking views will be realized. Any mention of asset classes are for informational purposes only and should not be interpreted as a recommendation to adopt a particular investment strategy. Reliance should not be placed on the views and information in this article when taking individual investment and/or strategic decisions. BlueOrchard is an affiliated Entity of Schroders. BlueMark and Schroders are not affiliated. Schroder Investment Management North America Inc (SIMNA Inc.), SEC registered investment adviser, CRD Number 105820

Authors

Whitney Sweeney
Sustainability Investment Director, North America
Maria Teresa Zappia
Head of Sustainability and Impact, Schroders Capital
Catherine Macaulay
Impact Investment Lead

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