ImpactAlpha, May 16 – Impact investors are a self-satisfied bunch. Particularly when it comes to meeting their own expectations of impact.
Year after year, nearly all respondents to the annual investor survey from the Global Impact Investing Network indicate the impact performance of their investments is either ‘in-line’ or ‘outperforming’ their expectations (the latest number: 97%).
The statistic rings hollow. Unlike financial performance, investors know very little about the true impact of impact investments across portfolios and across the industry. Investors often use different metrics to track progress toward the same goals. Investors have had little to go on for establishing a baseline for impact performance for any given investment theme or strategy.
A new product released by the GIIN aims to change that. At a digital town hall today the GIIN is launching a revamped version of IRIS, its decade-old catalog of generally-accepted impact metrics, which is now in use by about 5,000 organizations. The GIIN will now offer investors guidance on metrics proven to achieve the impact they’re targeting.
The new tool, IRIS+, will define evidence-based metrics, as it has in the past. It will also now suggest core sets of metrics with which investors can measure and manage to deliver against impact strategies for financial and gender inclusion, affordable housing, clean energy, health and education, and other areas. More investors using common sets of metrics, means a greater ability to compare performance within and across portfolios.
In a tweet, Tideline’s Ben Thornley called IRIS+ “perhaps the most important public good in impact investing.”
The new measurement tool is the latest in a drumbeat of frameworks, principles, guidelines and toolkits meant to beef up the integrity of impact investing. As the industry scales, capital crowds in, and investor sophistication grows, impact investment managers can’t just claim impact. Increasingly, they’ll be held accountable for delivering it.
“No longer will it be OK for a manager to check a box” on impact, says Amy O’Brien, global head of responsible investing at Nuveen, the TIAA-owned investment manager with nearly $1 trillion in assets under management. Nuveen manages $25 billion in responsibly invested assets, including a smaller pool of about $4.5 billion in private-market and fixed-income impact investments.
Says O’Brien, “Measuring and reporting and results are increasingly important to all, and important for industry credibility.”
The proliferation of frameworks and tools is a sign of industry maturation, says O’Brien. “The industry did not grow up in a coordinated way,” she says, but in pockets over the last three decades. The recent convergence around definitions, says O’Brien, is necessary to meet growing institutional and retail interest in impact investing. “To move the demand needle, we need to get this right.”
The 17 Sustainable Development Goals, for example, adopted by the United Nations in 2015, have gained traction among private investor as a simple, common framework for setting social and environmental impact targets.
Earlier this year the GIIN introduced “core characteristics” of impact investing to signal the terms of participation.
Last month, more than 60 investors and institutions managing $350 billion in assets that are invested for impact signed onto to the ‘operating principles’ for impact investments laid out by the International Finance Corp. The principles include nine fundamental practices, from defining objectives to considered exits, of a robust impact management system. Principle One: Align impact objectives with the SDGs.
IFC principle Three mandates measurement and management of impact consistent the Impact Management Project. The effort, led by Bridges Fund Management, has achieved something of a global consensus on the ‘five dimension of impact’: what, who and how much impact, the level of risk – and the contribution that can legitimately be credited to the investor.
Another encouraging sign: “The organization are talking to each other,” says O’Brien.
IRIS+ is meant to help investors turn such impact intentions and strategies into results, says the GIIN. Once live, investors can select themes, sectors and objectives. IRIS+ will spit back metrics proven to move the dial on particular issues. The GIIN worked with more than 600 impact investors to develop IRIS+.
“I hope it can help us align our metrics, develop a common language, and in that sense, help us to understand our impact better,” says Corianne Van Veen of Dutch development bank FMO. To scale impact investing with integrity, Van Veen champions a “focus on collecting information that is useful and meaningful, rather than just as many data points as possible.”
Adding guidance to IRIS is a departure from the GIIN’s long-held neutrality. “For almost a decade we were committed to meeting the market where it is,” says the GIIN’s Kelly McCarthy. “We let the market show what data was useful in decision making.”
Now investors want direction. Internal expectations for impact performance are losing their relevance, investors tell McCarthy. Investors want a “go-to way of understanding more broadly what are the baseline expectations for any given investment theme or strategy,” she says. “This has been missing up until now.”
IRIS+ provides expectations for what should be measured, says McCarthy, and therefore what performance should be discussed among key stakeholders and more openly shared to compare performance.
The new tool also serves to “curate an evidence base upon which to more effectively set strategies and targets for performance based on what we have learned works and doesn’t for any given investment theme,” she says.
Guessing is giving way to more informed metric selection, providing a clearer picture of impact performance across the industry. Says Nuveen’s O’Brien, “If we don’t have that, we won’t achieve scale.”