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Commentary Impact Investment

Improving investor confidence in impact investment

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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 Initiative1 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 Management2,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 Map3, 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 Framework4 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 undoubtedly 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.5 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.

1 https://2degrees-investing.org

https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/development+impact/principles/opim#:~:text=The%20Operating%20Principles%20for%20Impact,allocators%2C%20and%20development%20finance%20institutions.

https://www.unpri.org/download?ac=5426

4 https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2019/Handbook-Harmonized-Framework-for-Impact-Reporting-WEB-100619.pdf

5 https://www.carbontrust.com/news-and-events/news/wheb-asset-management-seeks-impact-methodology-review-from-the-carbon-trust

Important Notices:
Risks include: the price of shares (“Shares”) in FP WHEB Sustainability Impact Fund, WHEB Sustainable Impact Fund or WHEB Environmental Impact Fund may increase or decrease and you may not get back the amount originally invested, for reasons including adverse market and foreign exchange rate movements. Past performance does not predict future returns. The Fund invests in equities and is exposed to price fluctuations in the equity markets, and focuses on investments in mid-sized companies in certain sectors so its performance may not correlate closely with the MSCI World Index (the benchmark). For full risks, please see fund prospectus on www.whebgroup.com

 

General: This information, its contents and any related communication (altogether, the “Information”) is issued by WHEB Asset Management LLP (“WHEB Asset Management”). It is intended for information purposes only and does not constitute or form part of any offer or invitation to buy or sell any security including any shares in the FP WHEB Sustainability Impact Fund or WHEB Sustainable Impact Fund, including in the United States. It should not be relied upon to make an investment decision in relation to Shares in the FP WHEB Sustainability Impact Fund or WHEB Sustainable Impact Fund or otherwise; any such investment decision should be made only on the basis of the Fund scheme documents and appropriate professional advice. This Information does not constitute advice of any kind, investment research or a research recommendation, is in summary form and is subject to change without notice. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming shares. WHEB Asset Management has exercised reasonable care in preparing this Information including using reliable sources, however, makes no representation or warranty relating to its accuracy, reliability or completeness or whether any future event may or may not occur. This Information is only made available to recipients who may lawfully receive it in accordance with applicable laws, regulations and rules and binding guidance of regulators. WHEB Asset Management LLP is registered in England and Wales with number OC 341489 and has its registered office at 7 Cavendish Square, London, W1G 0PE. WHEB Asset Management LLP is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 496413.

 

FP WHEB Sustainability Impact Fund

FundRock Partners Limited (formerly Fund Partners Limited) is the Authorised Corporate Director of the Fund and is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 469278 and has its registered office at 6th Floor Bastion House, 140 London Wall, London, EC2Y 5DN. The state of the origin of the Fund is England and Wales. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich . The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the Representative in Switzerland.

 

WHEB Sustainable Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich. The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland. The state of the origin of the Fund is Ireland. The Fund is registered for distribution to professional investors in Austria, France, Germany, Italy, Luxembourg, Norway, Singapore, Sweden and the United Kingdom, and is registered for offering to retail investors in Switzerland, Denmark and the Netherlands. The Fund is also available for professional investors in Belgium and Hong Kong. It is not available to investors domiciled in the United States.

 

WHEB Environmental Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Fund is registered for distribution to professional investors in the United Kingdom. It is not available to investors domiciled in the United States.

 

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