By Paige Chapel, CEO, Aeris
This article originally appeared in Financial Advisor IQ – ThinkTank.
Enthusiasm and a compelling narrative, which largely fueled the impressive growth of impact investing over its first 10 years, may still be necessary, but they are no longer sufficient, as market participants sharpen their pencils and welcome a new phase of accountability and quantitative rigor in impact investing. That was the core takeaway from a roundtable event recently organized by Aeris and a theme that can be expected to play out over the coming decade.
More than two dozen impact investing leaders and practitioners—including senior executives from Prudential Financial and the MacArthur Foundation—gathered for a rich discussion about emerging impact management practices. Participants shared experiences and perspectives as impact investors, fund and asset managers, and thought leaders in the field.
“We believe the next 10 years will be all about results; can you be confident if you make an impact investment that there is actually impact that is going to happen?” — Debra Schwartz, MacArthur Foundation
An inflection point
Debra Schwartz, Managing Director-Impact Investments at MacArthur, neatly summed up the state of play, depicting an industry at an inflection point: “The demand from investors for impact authenticity, integrity, and credibility is growing.” While impact investing has witnessed extraordinary growth over the last 10-plus years, Schwartz suggested that the time has come to focus more acutely on outcomes.
“We believe the next 10 years will be all about results; can you be confident if you make an impact investment that there is actually impact that is going to happen?” Schwartz said. She averred, however, that the “mechanics” of demonstrating veracity and authenticity can be a challenge for asset managers.
That’s why she said MacArthur has supported the development of new tools that can make it easier for asset managers to quantify and report impact and new frameworks, like the Impact Management Project. For example, she noted that more than 15 years ago MacArthur backed Aeris in the development of a rigorous process for evaluating Community Development Financial Institutions (CDFI) funds for risk and impact capacity. Now the Foundation is supporting the firm’s efforts to expand that process to other impact strategies and to make its proprietary data collection, analysis and distribution software directly available to asset managers.
A practitioner’s perspective
Reuben Teague, who heads Prudential’s real estate investment portfolio for impact and responsible investing, shared his first-hand knowledge of the challenges asset managers face when it comes to demonstrating impact. Prudential has been active in impact management for years and today it tallies about $1 billion in impact investments. He said that over the past several years, he has seen an incredible growth in the sophistication and demand from investors for more information about how funds are managing their investment impact, and what impact results should look like at the portfolio level.
When its real estate asset management arm, PGIM Real Estate, recently launched a strategy to invest in private real estate assets on behalf of third-party investors, he said that managers were charged with developing “best-in class,” gold-standard practices around impact management, and that began with seeking a third party to pre-certify its policies, procedures and operations.
Teague said third-party verification can be especially helpful in getting investors comfortable with a strategy. “We talk to people who are on the fence about whether they want to advise their clients to become impact investors or whether they themselves want to put more of their portfolio into impact, and one of the things they say is, ‘I have to start from the beginning and try to understand whether this organization is serious about impact and whether its thesis actually tracks into its operational structure.’ It would be great to just get past that, to have a way to move that discussion along and advance more into ‘How much money do you want to put into the space?’ rather than ‘Is this even a real thing?’”
Upshots from an open forum
Following the remarks from Schwartz and Teague, Aeris CEO Paige Chapel opened up the discussion to other attendees by asking, “What are you hearing from investors about accountability and transparency?” The following themes emerged:
- Ultimately, investors want to know what impact an investment is creating. An impact narrative is essential, but so is the data that supports that narrative.
- It was generally acknowledged that measurement alone does not indicate intentionality and an audit of impact results is insufficient. The ability of a manager to deliver promised impact is dependent on the protocols, practices, and procedures a manager follows to qualify investments, monitor the resulting impact, and anticipate and address unintended negative outcomes.
- Smaller funds should not be disadvantaged because of their size—a large number of impact funds are small but effective.
- Transparency is important—a fund may not identify as an impact investment but still may create positive impact; similarly, a self-defined impact fund may create unintended negative impact. Both should be scrutinized.
- Impact comparability is still a goal but remains an unsolved challenge—aggregated impact data across a portfolio may be less meaningful to the investor and less relatable.
- An independent verification of impact management is a big step forward in growing investor confidence. What would it take to make that a norm for fund managers?
The salutary effect of shared principals
The room also acknowledged the leadership work of the International Finance Corp. in the launch of the Operating Principles for Impact Management, particularly Principle 9 which requires an independent verification of a signatory’s alignment with the Principles. The IFC’s Diane Damskey, head of secretariat-operating principles for impact management, commented that signatories to the Principles (77 since April of this year) are proving to be highly collaborative as they explore how to best meet the standards. Since signatories are all sizes and types, there is not yet a uniform approach, but Damskey said she expects greater uniformity of practices to emerge over time.
Paige Chapel is CEO of Aeris, a rating and information service for impact investors.