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. Investors are using impact data to drive business strategy including informing portfolio allocations, facilitating due diligence, or integrating these data in investment management practices. The most common use of impact data in impact management is to communicate results to stakeholders (85%), including existing or potential fund LPs.
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%).
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. 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. 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 Global Impact Investing Network is the global champion of impact investing, dedicated to increasing its scale and effectiveness around the world. Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.