WHEB Commentary

Seb Beloe

Improving investor confidence in impact investment


This article was co-authored by Thora Frost, Senior Client Manager, Carbon Trust and Seb Beloe, Partner-Head of Research, WHEB

The impact investment market has grown rapidly in recent years as investors increasingly allocate capital on the basis of both potential financial returns and the intention to generate positive societal and environmental impacts.

How are these intentions measured and how credible are impact claims?

The International Finance Corporation (IFC), a member of the World Bank Group, estimated that in 2019 assets managed by private funds with impact intentions totalled US$405bn, of which US$205 billion were identified as having the impact of their underlying assets measured. Adding assets managed by developmental financial intuitions, the total assets under management with impact intentions reached US$2trillion in 2019, of which US$505bn include measurement and reporting of impact.

Risk of ‘impact washing’
A lack of clear definitions, common standards and guidelines has led to some confusion amongst investors. As the market for impact investment matures, investors are scrutinising reporting methods more closely. The risk of ‘impact washing’, where traditional investments are merely labelled as impact investments in an attempt to benefit from any positive attributes linked to this relatively new asset class, is emerging as a concern. Not only does this have the potential to weaken and distort the market, it will also hinder growth by undermining investor confidence.

The Two Degree Investing Initiative found, for example, that among retail investors who said they were not interested in investing in ‘impact’ funds, 48% said it was because of scepticism about the claims being made. Transparency and consistency in impact reporting methodologies is therefore key to instilling investor confidence. Investors need to be able to have confidence in claims to identify opportunities effectively and accurately compare investment products.

Emerging good practice
As the demand for greater transparency increases, the guidance and structure around impact analysis and reporting has continued to advance. Recently developed frameworks, guidelines and standards strengthen efforts to definite good practice around impact reporting.

In 2019, the IFC published the Operating Principles for Impact Investment Management, a high-level framework for impact investment with over 100 signatories. Consisting of nine principles, it was designed to build on a range of existing standards, tools and frameworks, including the Impact Management Project (IMP) which focuses on measurement and not process, and IRIS+1 a publicly available system of indicators.

In 2018, the UN Principles for Responsible Investment (UN PRI) published an Impact Investing Market Map, which set out a method to identify impact investment companies based on thematic investments (i.e. renewable energy) and lists common KPIs to help monitor performance. The method compliments the IFC framework which for example requires fund managers to assess the expected impact of each investment, based on a systematic approach, without providing a specific method to do so.

The green bond market has also benefited from a set of common standards, such as the ICMA Harmonized Framework for Impact reporting, which were developed to report the impact of green bonds in response to investors seeking greater transparency.

Impact in a time of Covid-19

With the impact of Covid-19 rippling across global economies and an emerging focus on green recovery, now more than ever investors are turning their attention to investment options that deliver a positive impact on societies – reviving jobs, tackling inequalities and helping to accelerate the move to net zero carbon economies. This creates an opportunity for impact funds to respond to this demand, and committing to transparency and ensuring credibility will be key to their success.

Importance of an independent review
One of the reasons behind the success of the green bond market is undoubtedly2 the development of clear standards and the emergence of independent certified verifiers providing second party opinions. Similar developments should support the market for impact investment as investment managers increasingly seek independent verification.

An independent review of impact reporting methods and underlying models improves confidence in the data and the integrity of the impact reporting. It is therefore unsurprising that the 9th principle of the IFC framework states that: ‘The Manager shall publicly disclose, on an annual basis, the alignment of its impact management systems with the Principles and, at regular intervals, arrange for independent verification of this alignment’.

Encouragingly, this message is landing and we are seeing an increased appetite from asset managers and issuers of green finance products for assistance and assurance around impact reporting. A positive continuing trend that we believe will help to underpin a healthy and vibrant market.
The Carbon Trust recently worked with impact investor WHEB Asset Management to peer review its impact measurement methodology. We also examined the underlying calculations to ensure the reliability of the impact figures reported.

WHEB has one of the longest established impact investment strategies in listed equities. Appointing the Carbon Trust demonstrated WHEB’s continued commitment to improving the transparency of its impact reporting.

As impact becomes a more central part of the value proposition to investors we expect to see a growth in the demand for more rigour and standardisation of impact measurement and reporting. We were pleased to be able to work together to progress good practise in impact measurement and hope to see more investors ensuring their claims are verified independently to increase investor confidence.

 

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