What does impact really mean to an investor and how can you achieve maximum through your investments? Willem Vosmer, Partner at consulting firm Steward Redqueen, explains what it takes to steer on impact in an investment portfolio.
Impact investing seems to be hot in the financial industry these days, but what is it exactly?
The unique feature of impact investing is that it places the societal purpose of capital at the heart of investment decision-making. An impact investment is an investment that intends to generate a positive social, economic and/or environmental impact alongside a financial return.
How is this different from other types of responsible investing we know, like ESG investing or sustainable investing?
Good point, there are also types of responsible investment that get very close to impact investing, but there are important differences. You could say that responsible investing operates on the basis of ‘doing no harm’ while in addition, impact investing operates on the basis of ‘doing good’. An ESG investor excludes companies with a poor sustainability performance. A sustainable investor takes the reverse approach of selecting companies based on their high sustainability standards. But an impact investor goes much further than that. This investor has a specific societal issue it wants to address with its capital (for example food security, access to finance, or climate change) and it only selects those companies that contribute to solving that specific problem.
Why is it so important for investors to measure their impact?
That’s because for an impact investor it’s not enough to just try and hope for the best. If your whole investment proposition is built around addressing a societal problem, you should also be able to tell if you’re successful in achieving your goals. Both asset owners and asset managers are starting to get serious on this. Asset owners are holding the asset manager accountable for the impact it achieves over time. And the asset managers want to better understand and steer the impact they generate. The industry is moving towards proactive impact management rather than impact measurement, and rightly so. Otherwise you’re just quantifying the effects that you accidentally stumbled upon.
Who is pushing for this shift for impact management? The asset owners or asset managers?
It’s actually coming from both directions, I think. When you look at the impact investment funds, you see that LPs want to push GPs for maximum return on impact and the GPs want to be rewarded for their success. The most advanced LPs and GPs even agree on financial incentive structures based on impact performance besides the common financial metrics we all know. But you can only do that if there is a solid impact measurement framework in place.
What does a good impact framework look like?
A good impact framework is one that is fully integrated in the investment cycle and which enables investors to take better informed investment decisions based on strategic impact information. With the right data, the framework should allow you to compare between investment opportunities and select the ones with the strongest potential to contribute to your impact objectives. And post-investment, the framework should help track impact results at portfolio level and analyse performance across various segments in portfolio.
So where does an impact investor start? Are there best practices or standards to pull from?
What you need is four building blocks; (i) an impact strategy that outlines what impact you want to make and through which pathways you’re going to achieve that; (ii) a metrics framework that determines what you will be measuring on in order for you to know if you are achieving what you set out to achieve; (iii) a methodology that tells how you’re going to quantify your effects and deal with challenges like attribution and counterfactuals; and (iv) a process that describes how you collect, check, analyse and aggregate data. There are many useful guidelines out there such as the IFC Operating Principles for Impact Management, the GIIN’s IRIS+ system, or the Impact Management Project (IMP). I find all these initiatives relevant and useful, although it is quite challenging to understand how they exactly relate to one another. But besides that, they are useful reference points for investors who are designing their own bespoke impact framework. And I say bespoke because there is no ‘one size fits all’ solution to impact management. I’m sure other approaches can inspire you, but it all starts with your own impact strategy which is something that makes your fund unique.
And last but not least; what is a tip you have for the interested readers?
I always tell people not to forget the story they want to tell. Measuring impact is nice, but there is a reason why we do it; we want to show that we’ve made a difference. Well, you can’t do that just based on numbers. You need to place the numbers into context and explain why your result is actually a great achievement. It will also help you illustrate your dilemmas and challenges. So yes; prove your point with numbers, but start by making a point.
Under the spotlight: Willem Vosmer
Willem has fifteen years of experience in the field of impact investing and impact measurement. He works with a wide array of clients from developed markets and emerging markets and helps them put impact management into practice. His client base ranges from commercial banks, institutional investors, private equity firms, development finance institutions and niche impact investors. Willem is frequently asked to facilitate discussions and train staff on how to measure and steer on impact.