New Horizons in Impact Measurement and Management for Improving Investment Decision Making
May 29, 2024
Author: Shiemaa Ahmed is a member of the CAFIID Thought Leadership Committee, a Skoll Scholar at the University of Oxford and an Impact Consultant.
Impact Measurement and Management (IMM), as a core characteristic of making an impact investment, is gaining more attention within the impact investment landscape. While multiple organizations have created their own processes and frameworks to measure, manage, and report on the impact they are creating, calls for standardization and for unifying practice have become louder and more urgent. Recognizing the importance of IMM and in response to interest from expressed by its membership, the Canada Forum for Impact Investment and Development (CAFIID) launched an IMM Community of Practice (CoP) as a collaborative platform to enable and enrich the conversation around the latest trends in IMM, and to allow members to exchange information on challenges and potential solutions.
To launch the IMM CoP, CAFIID invited Mike McCreless, the Executive Director of Impact Frontiers, to share his expertise in a webinar titled “New Horizons in Impact Measurement & Management for Improving Investment Decision Making”. The webinar included a discussion on the newly launched Impact Performance Reporting Norms.
What is Impact Management and Measurement (IMM)?
According to the Global Impact Investing Network (GIIN), “Impact measurement and management includes identifying and considering the positive and negative effects one’s business actions have on people and the planet, and then figuring out ways to mitigate the negative and maximize the positive in alignment with one’s goals, Impact Management is iterative by nature.”
The discipline of financial investing is quite developed with clear guidelines on different investment approaches and standard financial reporting mechanisms, however, funds with an interest in a double or triple bottom line might struggle to quantify and report on the social and environmental impact compared to reporting on financial returns. That said, environmental measurement and disclosure practices are more developed. Increasingly, organizations and investors need to report on not only the financial return of their investment, but also on their impact on people and the planet to stakeholders including shareholders, investors, and customers. However, the lack of standards and frameworks make navigating the space challenging for traditional investment fund managers.
The practice of impact measurement emerged as a response to this need. It has been evolving as the community of impact investors continues to grow and create collaborations for knowledge sharing and standards building. One of the important efforts by the ecosystem to create a shared understanding of IMM is the Impact Project (IMP), known in its second stage as the Impact Management Platform (IMP). Impact Frontiers was incubated within the IMP and inherited the norms facilitated by it, as well as launched a cohort program to facilitate peer learning and market building for investors. The IMP functioned as a forum to build consensus on how to interpret, manage, and report on social and environmental impact. The IMP established a definition of impact management and shifted the conversation from focusing on measuring impact to using the measurement and insights for decision making.
The need for Impact Financial Integration:
Impact Frontiers, like the IMP, emphasizes the importance of changing the mindset of impact investors towards IMM from a performative “check the box” exercise to impact management for decision-making.
The IMP defines impact management as: “the process by which an organization understands, acts on and communicates its impacts on people and the natural environment, in order to reduce negative impacts, increase positive impacts, and ultimately to achieve sustainability and increase well-being.”
Starting the impact measurement and management journey can be overwhelming. Mike McCreless describes it as “climbing three mountains, one at a time”. It includes integrated impact management, financial management and risk-return-impact. It is important for impact investors to have the systems in place to measure impact KPIs, develop a theory of change, and engage various stakeholders. However, this is only the first step towards a successful impact integration. This step can often take a few years to develop and must be approached with an iterative mindset.
It is a mistake to build silos with impact and finance functions operating separately when building an impact management approach. To fully integrate impact into the investment process, it must be incorporated with financial management and actively used in decision making. Impact management is most productive when both the impact and investment teams have visibility of each other’s analysis. Impact investors need to have the ability to link impact management and investment management and think of them in a connected way to enable impact for decision making. Ideally, the organization can then manage its portfolio using a risk-return-impact analysis as an integrated approach.
Investor Contribution:
According to the IMP’s first iteration of defining investor contribution, investors describe four strategies or actions by which they can contribute to the impact of the assets they invest in:
Signaling that impact matters by proactively and systematically considering measurable impact of assets in their investment decision making.
Engaging actively to proactively support or advocate for assets to create positive impact or reduce negative impact.
Growing new or undersupplied markets by anchoring or participating in new or previously overlooked opportunities.
Providing flexibility on risk adjusted financial return, the concessionary subset of investors.
Impact Frontiers worked with the redistribution initiative to update the strategies for investor contribution through a public consultation. The feedback received, informed the evolution of the second iteration of defining investor contribution:
Impact Frontiers sees investor contribution as "investor actions that cause or are expected to cause a change in outcomes for stakeholders and/or the natural environment that would not have likely occurred in the absence of those actions."
The new strategies highlight the need to broaden our understanding of investor contribution from just strategies to results that can be positive or negative. The firm can also impact the wider society with its own management and governance alongside its investment activities, and most importantly, there is an evolution in how we address investor contribution in terms of the magnitude, the likelihood of impact, and the contextual evidence to inform it.
Impact Performance Reporting Norms:
In 2023, Impact Frontiers initiated a process for consensus building on impact performance reporting for investors and published the draft Impact Performance Reporting Norms to serve as a social contract in the impact investing community including report preparers, users, and reviewers with the aim to create a less onerous process for impact reporting, facilitate the flow of information to inform decision making, create open-access criteria that would enhance consistency and enable reviews to assure, evaluate, and verify, and to offer a market-tester prototype for future impact performance disclosure standards.
Impact Frontiers published a draft of Impact Performance Reporting Norms to fill the gap of impact reporting standards. However, the norms are not standards, but rather a voluntary social contract between impact report preparers and report readers, General Partners (GPs) and Limited Partners (LPs). They are being developed as norms to allow for flexibility in their adoption and give organizations with different sizes and stages in their impact journeys the opportunity to implement them in full, or in part. The development of the impact reporting norms presents an evolution in approaching impact reporting by investors that balances standardization and flexibility in the reporting practice.
The norms are designed to support in reducing impact washing and cherry picking by identifying the suggested content to include and not include in an impact report. The impact performance reporting norms will serve as a pilot and a possible step towards standardization of impact reporting, thus, they fill an important gap in standards, frameworks, and guidance in the System Map for Investors and Financial Institutions relating to the disclosure of impact performance by investors and impact investors.
To produce the norms, Impact Frontiers conducted a public consultation process that ended in December 2023. The norms are to be published in 2024. The proposed content and structure highlights six types of information that must be included in impact reports but leaves it to the investor to dive deeper. This information includes three main sections: Impact Thesis, Impact Management Process, and Impact Process. As well, they include information on governance, case studies, and an approach to independent verification.
A challenge with the lack of strict impact reporting standardization shared during the webinar include a difficulty to compare information around impact, so Impact Frontiers suggests creating categories of data to increase flexibility and allow organizations in different sectors to benefit from the norms. Comparability is not the end goal of the impact reporting norms, but the ability to present impact in a way that contributes to decision making.
“Information does not have to be comparable to be useful, so long as it is accurately and faithfully represented. Like must be presented alike, and different things must look different.” Mike McCreless
The CAFIID IMM CoP aims to equip its members with the knowledge and expertise to understand and implement Impact Measurement and Management approaches. Convening monthly, the CoP will host a mix of learning webinars that typically include a guest discussant, and action sessions where members can present challenges they’re facing in IMM and get insights from other members of the CoP. If you are interested to join the CoP, get in touch at info@cafiid.ca
The first version of the Impact Performance Reporting Norms was published on April 2024 and entered its official implementation phase. In this phase, Impact frontiers launched multiple workstreams to support report preparers, users, and independent reviewers in adopting the Reporting Norms, more information on the workstreams and goals can be found here.
References:
Global Impact Investing Network (GIIN). Getting Started with Impact Measurement & Management (IMM). Available at: https://thegiin.org
Impact Frontiers. Impact Management Norms. Available at: https://impactfrontiers.org/norms/
Impact Frontiers. Investor Contribution 2.0. Available at: https://impactfrontiers.org/work/investor-contribution-2.0
Impact Frontiers. Impact Performance Reporting. Available at: https://impactfrontiers.org/work/impact-performance-reporting/
Impact Management Platform. Clarifying Impact Management. Available at: https://impactmanagementplatform.org/
Impact Management Platform. System Map for Investors and Financial Institutions. Available At: https://impactmanagementplatform.org/wp-content/uploads/2023/06/16x9-ratio-Impact-Map-IFI-icons-v4-full-hyperlinks-LINKS.pdf
Impact Frontiers. Impact Performance Reporting Norms (consultation draft). Available At: https://impactfrontiers.org/wp-content/uploads/2023/10/Exposure-Draft_Impact-Performance-Reporting-Norms_Public-Consultation.pdf
Impact Frontiers. Impact Performance Reporting Norms Version 1 available at: https://impactfrontiers.org/wp-content/uploads/2024/04/Impact-Performance-Reporting-Norms-V1.pdf