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Impact Measurement for ESG Investing: Featured Image

The Complete Guide to Impact Measurement for ESG Investing for Private Markets

Intro

The amount of investment dollars that have flowed into companies where there is a perceived positive impact for the environment, people, or social justice has grown significantly over the last few years. Investors want to see their dollars not just show a positive return on investment, but a positive impact on the planet. Therefore, investment firms (Venture Capital, Private Equity) are under more and more pressure to show the measurable positive impacts of the companies in their portfolios.

This guide will explain how to take the variety of data as inputs from your private portfolio companies, and use standardized frameworks to report on the impact of your assets.

 

What is impact measurement and ESG investing

Before we jump into details, let’s start by defining impact measurement and ESG investing.

  • What is impact? Impact is any extra-financial changes that have either positive or negative impact on human communities. These are often referred to as “externalities” in economics, which is a discipline that we borrow from extensively. For an example of externalities, check out this article. The core idea is that accounting for externalities will create better outcomes for society.
  • What is impact measurement? If impact is non-financial changes, then impact measurement is the practice of quantifiably measuring the impacts on people and communities.
  • What is ESG? Environmental, Social, and Governance (or ESG) is a buzz term that refers to policies and activities that can lead to better/more positive impacts. However, sometimes ESG and impact are used interchangeably.

The diagram below shows how we define impact and ESG and their defining reporting traits.

Investment Type

Impact Investing (includes thematic investing)

ESG Investing

Traditional Investing with no ESG criteria considered

Reporting Type

Positive Impact Screen

Negative Impact Screen

No Extra-Financial Reporting Considered

We see both impact and ESG reporting as extensions of accounting practice.

 

Why impact and ESG measurement?

Impact and ESG investing are driven by non-financial considerations. This can make these growing investment practices look unstructured and undisciplined when compared to the financial accounting analysis that underpins more traditional investment frameworks. Impact and ESG measurement, management, and reporting have stepped in to fill this gap. The practice of impact and ESG reporting are focused on filling the following needs:

  • Due diligence requirements: Impact and ESG investors need to show that they are allocating capital to assets that score strongly in ESG factors that are aligned with their own unique investment thesis. Uniqueness is important here because if a fund is undifferentiated from the market, then investors are better off placing their capital with Exchange Traded Funds (ETFs) or other products that are pegged to market growth and returns. For ESG and impact asset managers, this means that there needs to be a clear, unique set of ESG and impact criteria that are used to complete due diligence.
  • Regulatory requirements/reporting compliance: With new regulations such as the European Union Sustainable Financial Disclosure Regulations (EU SFDR), Taskforce for Climate Related Financial Disclosures (TCFD), and other legislations, it is increasingly important for ESG and impact investors to be able to create new reports as needed by the EU SFDR.
  • Good investor relations: Limited Partners are increasingly asking for ESG and impact data from their General Partners regardless of whether GPs are working explicitly with ESG data or not. Having this data available enables asset managers to:
    • Proactively show their alignment with stated ESG and impact goals. This is essential for ESG and impact asset managers.
    • Proactively show their alignment with new regulatory and reporting compliance requirements. This is essential for all ESG and asset managers who are seeking capital from geographies with ESG and impact regulations.

In our experience, asset managers may start with 1 or more of the above objectives, but ultimately, all of these objectives will eventually be required.

Barriers to good ESG and impact measurement

The benefits of ESG and impact measurement in this new world of impact investing is now well established. But it’s not easy… if it were, everyone would already be doing it. ESG and impact measurement is a new field and practitioners face a number of challenges when launching a successful impact and ESG reporting process. These are:

1.  Establishing the most immediate objectives of your ESG and impact reporting initiatives. As noted above, given the current dynamic nature of ESG and impact reporting, try and also consider how any non-immediate objectives will come into play in your environment,

2.  Establishing which impact and ESG frameworks you are likely to adopt. For example, your team should consider the following frameworks:

  • Sustainability Accounting Standards Board (SASB)
  • Impact Reporting & Investment Standards+ (IRIS+)
  • United Nations Sustainable Development Goals (UN SDG)
  • Impact Management Project (IMP)
Below is a simple guide to help you assess which one(s) are best suited for your goals and assets.

Reporting Framework

Particularly Suited for

Often critiqued for

Contains data strategy?*

Sustainability  Accounting Standards Board

SASB is pretty strong in most areas of impact

SASB is often critiqued for being focused on more mature companies when VC and PE focuses on younger startups

Yes

Impact Reporting & Investment Standards+

IRIS+ was initially developed by stakeholders that included Acumen Fund. Acumen works in developing contexts, and this is reflected in the metrics available in IRIS+. Therefore, IRIS+ is good for agriculture, environment, nutrition, and disaster contexts.

Lack of health and safety and supply chain metrics

No

United Nations Sustainable Development Goals

High level metrics across a portfolio

Being very high level, these metrics are often  better for advocacy or NGO work. However, mapping custom metrics to the UN SDG goals is common and should be pursued where possible. For an example of where this has been done previously, check out the IRIS+ indicators.

No

Impact Management Project (IMP)

Understanding the scope of impact

Not having specific impact metrics. We recommend using IMP in conjunction with one or more of the reporting frameworks above.

No

* A data strategy is the plan for how to evidence indicators with data. The data strategy includes information on required calculations, data transformations, and data sources (whether collected directly from portfolio companies or sourced from third parties such as Bureau of Labor Statistics) that will be used to evidence each indicator in a framework.

3.  Review the above frameworks and identify metrics and indicators you will be reporting against. You may find that there are some metrics that are missing, in which case you can custom create metrics. For example:

  • For education outcomes: Percentage of students with full-time enrollment who attained high school graduation.
  • For healthcare outcomes: Total value of patient savings due to more accessible medications and healthcare.
  • For employment: Total number of high quality full-time equivalent jobs created that include paid time off (PTO) and health benefits.

4.  Create the data architecture for each metric. What we mean by data architecture is:

  • What data do you need to collect in order to evidence this indicator?
  • Once this data is collected, do you need to use that data in a specific formula or calculation in order to evidence the indicator?
  • Note that you will need three types of data:
    • Data collected from your portfolio companies on their activities;
    • Data collected from your internal staff to identify contribution of your activities to the impact of your portfolio companies;
    • Third party data such as the Bureau of Labor Statistics or Statistics Canada

Below is an example of data architecture for a simple metric. This needs to be created for every metric that has been developed.

5.  Establish the frequency of data collection. This is going to depend on how frequently you need to report data based on your ESG and impact reporting objectives.

6.  Once you’ve created your data architecture, it’s time to put it all into practice. You can choose a software provider, or dependent on budget, also create a DIY approach using Google Forms and Google Sheets, or spreadsheets. If you’re using a DIY approach, the structure needs to look something like this:

Impact reporting strategy
Reference McKinsey and Bloomberg articles.

7.  Remember to create and implement a training program for your internal staff and portfolio companies. This should cover:

  • For internal staff: Overview of the metrics developed, and what data needs to be collected and when.
  • For portfolio companies: Where they need to go to enter data, what data needs to be entered, and by when.

Options for impact measurement

We’ve reviewed the key steps to measuring impact and ESG. In order to put this into practice, here are some options:

  • The DIY approach: Use a Spreadsheet + Google Forms, or similar as per Figure 1. Make sure to build in enough time for quality assurance and testing of any in-house builds.
  • Financial asset manager or ERP platforms: Other platforms such as Salesforce or SAP provide some ability to monitor and track your ESG and impact metrics. However, given the wide variety of data needed to evidence your indicators, expect that there will be some metrics that need to be tracked separately.
  • Choose a purpose-built ESG and impact specific platform like SAMETRICA: This will automate all aspects of your ESG and impact reporting to get to initial results faster, and as you grow your AUM and impact measurement requirements.

These options  with their average implementation timelines are listed below:

Rewards of good impact measurement and ESG reporting

This guide reviews the options available to asset managers in private markets. Regardless of whether you implement an ESG/impact measurement platform, or go about it with spreadsheets/forms, you should follow these steps to turn the qualitative impact data into quantifiable numbers that your investors want to see.

One last point as you launch into your impact and ESG reporting – burgeoning regulatory requirements are pushing private asset managers to adopt impact and ESG reporting systems. Adopting a system that is easily changeable and flexible to dynamic requirements is essential.

Anshula Chowdhury (She/Her)

Anshula Chowdhury (She/Her)

As Founder & CEO of SAMETRICA, Anshula brings 10+ years of experience in non-profit, private, and public sectors. A recognized expert in impact metrics, she is passionate about using social impact to drive business profitability.

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