Who says apples can’t be compared to oranges?
The ability to generate a “consolidated impact statement” alongside consolidated financials has long eluded private equity funds, asset managers and wealth advisors. The diversity of issues and metrics, not to mention priorities and values, has made reporting hand-tooled, anecdotal and inconsistent.
iPAR, a new reporting tool launched today, promises to overcome these obstacles to allow wealth and fund managers to roll up social and environmental impact across portfolios. The visual display is intended to help impact investors make sense of the welter of disparate data. That should promote rational decision-making and ultimately smarter — and bigger — capital allocations.
[blockquote author=”Matthew Weatherley-White, The Caprock Group” pull=”pullleft”]Capital markets are an optimization engine. The question is: to what end do we want to optimize?[/blockquote]
Caprock Group, a wealth management firm that manages more than $3 billion for dozens of wealthy families, has been using the system internally for several years. Now, it is making iPAR’s framework and basic directories available for free. Importantly, the service already includes several hundred impact fund managers, categorized by their thematic and geographic foci.
“Impact reporting is particularly painful,” says Matthew Weatherley-White, a managing director at Caprock based in Boise, Idaho. “Many groups are doing many things, some helpful, some chaotic. This lack of harmonization, lack of standardization has resulted in extreme stress and pain for us. Our job is to harmonize this information.”
Such harmony is elusive between, say, a fund of funds targeted at financial inclusion in developing markets and a developed-world growth fund with job-creation and environmental sustainability goals. That inability to “roll up” impact has arguably hampered the flow of capital to funds and firms, even as an increasing amount of qualitative and even quantitative information becomes available about the social and environmental impact of individual enterprises.
Building Blocks
It’s too early to tell what part of the ultimate impact data, profiling and reporting solution iPAR will represent. Caprock made iPAR public, at iparimpact.com, so the rest of the growing impact investment industry can kick the tires and help build out or integrate the tools.
An early look at the system suggests there do seem to be some simple but profound conceptual advances in the tool’s initial design. iPAR reflects an investment’s intents and risks through separate Impact Strategy and Execution Risk scores, which can be updated with new data from investees. The goal is an ongoing, easy-to-understand dashboard of impact performance and risk.
By separating out only the impact criteria from financial return expectations, the two scores are intended to apply across asset classes and investment structure. That also makes it possible to evaluate the impact of commercial and philanthropic investments equally — one of the thornier apples and oranges comparisons.
The reporting starts with a classification of impact strategies along two axes, theme and geography. The themes, themselves a bit of apples and oranges, include People (democratizing opportunity) and Resources (easing demands on natural ecosystems). Because of the urgency of climate change, mitigating the buildup of greenhouse gases, merits its own to-level theme, as does “upholding values” via publicly-traded securities, which are a large component of many investors’ portfolios.
Beneath the themes, 16 “building blocks” classify the range of impact approaches to identify the intentions of fund managers or even philanthropic investors. Under People, for example, impact can be rated across equality, finance, employment and access. Drilling down further surfaces 50 sub-building blocks — specific impact strategies — and ultimately 570 impact metrics, which are adapted from the industry-standard IRIS taxonomy.
Paradoxically, Caprock as a finance-savvy wealth manager, is well-positioned to put the focus of the reporting tool squarely on impact, which is increasingly in-demand among high-net worth clients. After all, it is the impact, not the financial returns, that distinguishes the emerging category.
“If we could pull off organizing ourselves, as impact investors, by the change we’re trying to make in the world rather than by the investing strategies we’re using to make that happen, that would be a big step,” Sasha Dichter, chief innovation officer at Acumen, wrote recently in a separate context. Acumen itself is seeking to simplify impact reporting by social enterprises through its Lean Impact initiative.
Weatherley-White, an engaging and thoughtful contributor to the impact investing discussion (see his provocative recent post, “Opting Out: A Modest Proposal”), says he has been working on the ideas behind iPAR for seven years.
“Capital markets are an optimization engine,” he says. “The question is: to what end do we want to optimize?”
