A Guide for Impact Investment Fund Managers

A step-by-step resource to creating and managing a private equity impact fund

Integrating Impact Measurement and Management

One hallmark of impact investing is the commitment to measure and manage impact, known as impact measurement and management (IMM). IMM, which is integral to making effective impact investments, includes identifying and considering the positive and negative effects business actions have on people and the planet, and then determining the best ways to mitigate the negative and maximize the positive in alignment with impact goals. Successful IMM increases a fund manager’s ability to demonstrate, articulate, and discern impact which, when communicated effectively, can mobilize more capital into the fund. Many impact fund managers release yearly impact reports that demonstrate their mission-related performance.

Additionally, fund managers increasingly find that proper measurement practice can improve the management processes and investment decisions that drive financial, social, and environmental performance. In a 2017 study released by the GIIN, The State of Impact Measurement and Management Practice, over 60% of respondents reported engaging in impact measurement and management (IMM) because they find impact data have business value.[1] Investors are using impact data to drive business strategy including informing portfolio allocations, facilitating due diligence, or integrating these data in investment management practices.[2] The most common use of impact data in impact management is to communicate results to stakeholders (85%), including existing or potential fund LPs.[3]

Despite growing levels of interest in impact measurement, commonly accepted best practices are still relatively few. Impact investors consulted by the GIIN use various available tools, indicator sets, and standards in their IMM practices, most commonly the IRIS metrics (62%), the UN Sustainable Development Goals, or SDGs (42%), B Analytics (41%), and the Principles for Responsible Investment (26%).[4]

The foundation for successful IMM practice through a fund’s lifecycle is laid in the early stages of fund design. One way to embed such practices is through impact-based incentive structures. A growing number of funds are attempting to improve commitment and accountability to their social mission by offering explicit incentives to staff to achieve social and environmental performance. In the GIIN’s 2017 study on IMM, 35% of respondents that set impact targets also have explicit strategies to incentivize staff to achieve those targets.[5] An impact-based incentive structure raises the GP’s and the rest of the fund management’s financial stake in their funds’ non-financial performance.

Besides incentivizing staff, impact investors can incentivize their investees to achieve impact targets, perhaps by making impact targets prerequisites to receiving capital (either follow-on capital or the initial investment), incorporating targets into the terms of the investment, or enacting governance changes if the targets are not met.[6] Fund managers should, early in the design process, be aware of the possibility to codify these impact targets in legal documents, such as loan agreements, term sheets, LP and investor agreements, or private placement memoranda (to name but a few options).
 

Additional Resources for Developing Impact Measurement and Management (IMM) Practice:

  • The GIIN’s Impact Measurement and Management (IMM) Training: This training is specifically designed for investors looking to develop an impact measurement practice that fits their unique operational and strategic contexts. Through a dynamic format comprising small group-learning, practical simulations, and case study analysis, this course helps investors to construct solutions to key challenges in IMM performance, including designing an IMM framework, metric selection, efficient data collection, and managing stakeholder expectations.
  • Impact Toolkit: Discover fit-for-purpose impact measurement and management systems, methods, indicators, and data.
  • Navigating Impact: The GIIN’s Navigating Impact project provides a simple means to align impact goals and expectations with credible, evidence-backed investment strategies—such as those targeting housing, clean energy, or smallholder agriculture—and select metrics that indicate performance toward specific impact goals.
[1] Mudaliar et al., State of Impact Measurement and Management, 23.
[2] Mudaliar et al., State of Impact Measurement and Management, 49.
[3] Mudaliar et al., State of Impact Measurement and Management, 48.
[4] Mudaliar et al., State of Impact Measurement and Management, 15.
[5] Mudaliar et al., State of Impact Measurement and Management, 55.
[6] Mudaliar et al., State of Impact Measurement and Management, 55.
 

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