If an impact fund invests for outcomes that no-one measures is it still an impact fund?
The answer is no, according to Rebekah Swan, AMP Capital NZ ESG investment specialist.
“If you don’t measure the social or environmental intentional goals the investment is targeting then it can’t, by definition, claim to be an impact fund,” Swan said.
She said measurement is one of the key features of “authentic” impact investment that also includes: clear intention; a target of positive change; clear key performance indicators; true-to-label actions; and, ‘additionality’ – or showing that the stated change would not have happened without the investment in question.
And impact measurement is the most difficult of all these characteristics, Swan said.
“Data can be hard to access and there’s also a lack of consistency around it,” she said. “But some organisations are doing it well – especially community-based groups that understand the specific challenges, how to solve them and what metrics are important.”
In its inaugural NZ impact investment report released last week (sponsored by AMP Capital), the Responsible Investment Association Australasia (RIAA) found a wide variation in measurement practices among the 99 entities involved in the research.
“Exactly half of all active impact investors (50%) indicated that they use either their own proprietary framework, a third-party framework (such as IRIS, the Global Reporting Initiative and Impact Management Project), or a combination of both to measure impact,” the RIAA study says. “A further 28% measure impact using anecdotal or qualitative evidence only and 22% of active impact investors indicated that they do not measure impact at all.”
Clearly, with almost a quarter of respondents not bothering to check if they’re impact investments are having the required effect and close to a third relying on anecdotes there is some work to do in raising standards across the industry.
Last week the Financial Markets Authority (FMA) published a consultation document on proposals to tighten definitions on “green bonds and other responsible investment products”.
Although the regulatory consultation does not specifically refer to ‘impact’ investments, Nick Kynoch, FMA general counsel, said in a release that “the current law is flexible enough to accommodate responsible investment products”.
“But in an area like this, with a lack of consistent, agreed-upon definitions, we are keen to benchmark what good conduct and good disclosure look like, to ensure issuers focus on meeting investor needs,” Kynoch said.
Submissions on the FMA proposals are due by October 24.
The RIAA report says while the disparity of measurement methods in NZ “is illustrative of the embryonic state of the sector, ongoing improvement of measurement practice is vital for the development of the sector and its impact”.
“Further research is also required to better understand the intersection between the impact measurement frameworks and practices being used and the Sustainable Development Goals [SDGs].”
Swan said the 17 UN-built SDGs form a useful starting point for both setting impact targets and creating metrics.
For example, she said an impact fund could target improved access to clean water (SDG 6) by investing in companies that are building water infrastructure in emerging economies.
“You could set KPIs around the extended reach of access to clean water, how that leads to less illness among the population, which could see more children going to school and, in turn, a healthier economy in the long term,” Swan said.
To date, most of the impact action in NZ (which RIAA estimates at almost $890 million) has been at the local level – through charities, community trusts or iwi – via direct investments.
But the RIAA study also highlights a growing demand for listed impact alternatives, especially among institutional investors.
“Among active impact investors, three institutional investment managers with a collective $29 billion in total AUM [asset under management] and $108 million in impact investments indicate they are limited to listed instruments.
“These investors indicate that if appropriate investments are available in the future their impact investments will collectively equate to $1.6 billion…”
Listed markets offer some opportunities for impact investors, Swan said, although such products would necessarily “look a little different” than single-issue, direct community-based offers.
She said there was an untapped market in NZ for investors – both retail and institutional – looking for listed impact fund opportunities that attack big picture issues on a global scale in a genuine way.
“People are increasingly concerned with what their investments are exposed to,” Swan said. “If there is a dedicated fund that is targeting environmental and social issues that can make human life more sustainable – why wouldn’t investors be interested?”
Impact investment funds were more likely to be actively-managed vehicles, she said, with a reasonably-concentrated set of underlying securities.
“You can’t do impact with thousands of stocks,” Swan said. “And impact funds are less likely to manage to an index – you’ll probably see performance as inflation plus a percentage.”
After a slow start, impact investing was poised to take off in NZ, according to the RIAA report.
While the RIAA forecast might be slightly optimistic, Swan said it’s clear the “conversation is changing” around impact investing.
“But it’s important that impact investing is authentic and transparent,” she said.
And for impact to be a hit, investors will need to measure how it hits home.