ImpactAlpha, Feb. 8 – It’s not yet the holy grail of impact measurement, but IRIS+ has given investors a starting point for comparable and credible data to manage impact performance. The catalog now includes more than 700 metrics across 17 themes; standardizes measurements for outputs such as quality jobs, agricultural yields and water or energy conserved; and is used by nearly 20,000 firms.
Kelly McCarthy, who shepherded the taxonomy into being over more than a decade at the Global Impact Investing Network, will now get a shot to put it to the test as the head of impact at Chicago-based Vistria, a middle-market private equity firm with a portfolio of three-dozen edtech, health tech and financial services companies.
“It was time for me to walk the talk and work with a firm who was mission-aligned and had really bought into this idea that more impactful companies are more valuable companies,” McCarthy told ImpactAlpha in both an exit interview and a curtain-raiser. One incentive for jumping from nonprofit field-builder to private investment management: “I would actually get to prove out that thesis.”
McCarthy says private equity allows her to work directly with portfolio companies to create positive change. “I’m in the mood right now in my career to really get my hands dirty,” she says.
In December, Tom Adams of 60 Decibels took IRIS+ to task in ImpactAlpha for focusing on social and environmental outputs rather than outcomes. McCarthy acknowledges the limitation, and points to the need for more robust benchmarking. McCarthy says, “If I said something was supposed to be best practice two years ago, and I find it’s total shit, I’m going to say it.”
ImpactAlpha: You’ve moved the GIIN, where you helped build impact investing as a field, to Vistria, a private equity firm. Why now?
Kelly McCarthy: I’ve been with the GIIN for almost 12 years. I had the benefit of a lot of things, seeing that organization grow from a small, spunky startup and laying down a bunch of formative initiatives. Navigating Impact being one of them. And the work that we did with the G8 and the Social Impact Investing Task Force. But also putting in a lot of love and heart and time into IRIS+.
Prior to the GIIN, I was with New Ventures, when it was still part of the World Resources Institute. As part of my role there, this is pre “impact investing” as a label, and we had a portfolio of 250 companies, my mandate was to build out an impact methodology and figure out how to get these companies “impact ready.”
I’ve had this nagging feeling. We’ve been doing so much work to put down the standards, but I kept finding that there were gaps in terms of those who had really pressure tested all the ambition and aspirations that we’ve put out in the market. Do these things work? Do they create value? Are we proving out our thesis that impact and financial returns walk hand in hand?
It was time for me to walk the talk and work with a firm who was mission-aligned and had really bought into this idea that more impactful companies are more valuable companies. And that I would actually get to prove out that thesis.
ImpactAlpha: So in a way it’s taking you back to your previous work, working directly with companies. But it’s also a step forward in putting what you’ve built into practice.
McCarthy: And to be honest about what works and what doesn’t. If I said something was supposed to be best practice two years ago, and I find it’s total shit, I’m going to say it.
ImpactAlpha: We hear a lot about greenwashing, or, impact washing. What is the case for delivering actual impact at a private equity firm like Vistria?
McCarthy: Vistria is a middle-market private equity firm. We take really great companies with great things in place already, have mission alignment on looking to create educational, healthcare or financial services outcomes, and it’s our job to say: Here’s this awesome company. What can we do to optimize impact? And what does that do to the valuation of the company?
We are intentionally trying to say that companies that benefit people in the places that we care about are the companies that we need for the future. They’re sustainable. They’re durable. And they’re also just more valuable. That is what the value prop of this work is Vistria. Vistria is already looking at impact from due diligence to exit and now we’re just going to take it to the next level.
ImpactAlpha: At the GIIN, you had a view of asset managers, asset owners and everything across the investment value chain. Why have you chosen private equity, from an impact standpoint?
McCarthy: I was quite passionate about understanding how different investors in the value chain engage with impact. How does that actually work? Within private equity, there’s an opportunity to be a highly engaged investor. To actually do something to help that company create positive change. It’s not it’s not passive at all. I’m in the mood right now in my career to really get my hands dirty.
I also wanted to think about investor contribution. We talk a lot about that super conceptually. But what does it actually look like? How much engagement should an investor have?
ImpactAlpha: What’s an example of how an investor would engage a firm around impact?
McCarthy: I do believe this is a dance. Ultimately it is the company and the management team of the company who are on the front lines of knowing their customers and value creation and working with their employees and understanding their stakeholders. So it’s taking that and saying, “Okay, where do we have alignment? What does value creation look like within the construct of the mission, vision and values already of this company?” And not ever discounting that these are great companies to begin with.
Let’s say one of the companies operates in Detroit. Maybe there’s another way to think about their client base and actually have an additional offering that will both serve an underserved market, but also create additional value for the company itself. These win-wins are the ways that one could really start to explore co- value creation.
ImpactAlpha: What is the role of a “head of impact” inside a private equity firm?
McCarthy: I love this question. I think it’s still being defined. There are an increasing number of chief impact officers or heads of impact, however you want to define it. It’s a role which is responsible for embedding impact at every stage of investment management. At the heart of it, it’s holding somebody accountable to helping make sure that that always is a conversation and a dialogue. And creating the tools, resources and trying to make sure that the conversation is user friendly, so that it’s accessible.
ImpactAlpha: What is the biggest contribution of your work on IRIS+ to the investment field?
McCarthy: Starting around 2019 when we launched IRIS+ there was a noticeable pivot in the dialogue. It was less about, “should I? Why should I? What’s the value proposition?” and more about “How?” And that “how” just started to snowball.
IRIS+ demystifies a lot of the fear around engaging with impact. The guesswork of just getting started, like “how should we be thinking about impact? How do I create a mental map about it? Where do I start? Is there any evidence?” IRIS+ is a cheat sheet, almost, but it’s trusted, reliable, credible, vetted by thousands and thousands of experts. So I guess in a word: accessibility. There’s so many more ways that it can become more accessible, but like if I were to juxtapose it now versus 10 years it’s a way more accessible conversation.
ImpactAlpha: In the same vein, what are some of the limitations of IRIS+? As just one example, in December, Tom Adams of 60 Decibels took IRIS+ to task in ImpactAlpha for focusing on social and environmental outputs rather than outcomes.
McCarthy: I’m gonna frame it like this. I’m an eternal optimist. These are opportunities that we need to tackle. In the catalog, there are 17+ themes. These themes are incredibly helpful as an organizing construct. Many platforms out there are already taking them up. Pitchbook. Sustainalytics. They’re becoming normalized as ways to thematically orient investment portfolios.
The speed at which that stuff needs to get adopted is a limitation. If we want comprehensiveness and to expedite the process of all investors engaging with impact, having a pathway to entry across all themes is absolutely necessary. If I can’t find a comprehensive set of resources around climate and impact, and I have a portfolio that cuts across a bunch of environmental issues then I’m going to bounce.
That leads me to the second point. We can not get to benchmarks fast enough. Everybody and their Aunt are asking for them. To this point about greenwashing, the industry can say whatever it wants about how great X, Y and Z funds are performing, but against what bar? What’s the industry doing? What’s the benchmark against which we’re comparing ourselves? That is a huge frontier and a huge need and it’s a limitation.
IRIS+ needs to cover off benchmarks across all those themes before it can be truly comprehensive. And I totally appreciate the point, I’m not dodging it, around outcomes. As the benchmarks become more comprehensive, we’ll start to see how each of those metrics and KPIs starts to show actual performance within the context of an outcome versus the individual data points.
ImpactAlpha: Stepping back, with the politicization of ESG, worker and climate policies out of Washington, the growth of the industry, where do you see opportunity going forward for impact investing as a field?
McCarthy: There are a whole bunch of conversations right now about ESG. Having good environmental management systems in place and managing risk to supply chains or workforce risk, and having good governance practices in place. This is good business. So I would say, let’s not get caught up in that. Instead, think about it as table stakes.
Where there’s a real opportunity is to talk about how we create value on top of that. That’s where this impact conversation comes in. If we’re thinking about it as value, I think that’s a really powerful concept. There’s value in creating a positive change. There’s value in addressing the Sustainable Development Goals. If we’re doing it very tactically, what does value creation look like in that environment?
That’s where we should put our effort. It’s less about what metrics, it’s less about what cool frameworks, and it’s more about, what value are we creating with each of these efforts and how can we create more of it?