Impact Frontiers and the Predistribution Initiative seek to create a common approach to reporting on and managing an investor’s negative and positive contribution to impact.
A new project to improve how investors manage and disclose their contribution to impact has been launched, with the issue rising up the agenda after the UK’s Financial Conduct Authority (FCA) included it as a proposed key performance indicator as part of its sustainable finance labelling regime.
The new project on measuring ‘investor contribution to impact’ is being led by Impact Frontiers and the Predistribution Initiative (PDI) a non-profit focused on investment structures that share more wealth with communities and workers. Impact Frontiers is the successor organisation to the Impact Management Project.
Delilah Rothenberg, Co-Founding Partner at PDI, said it had launched the project to address a gap in the impact investment market for investors.
“I used to work in private equity and if you think about all the different frameworks out there, like Global Reporting Initiative (GRI), the Sustainable Accounting Standards Board (SASB) [now part of the International Sustainability Standards Board] or IRIS+, the Impact Management Project was one of the only frameworks that touched on investor contribution to impact, the other frameworks are primarily focused on portfolio companies.”
Rothenberg said there were dynamics not reflected in existing impact investment frameworks such as how fund manager compensation could be so high it exacerbated inequality or how fund managers sometimes use leverage to overburden companies with debt to the point that they couldn’t offer quality jobs, goods or services.
Mike McCreless, Executive Director of Impact Frontiers, said there was much debate over whether impact investing has an ‘impact’ but “the fact is there is no one answer to it,” he said. “Some investments in of themselves cause more changes in real-world outcomes than others.”
He added that providing a “common language” to have a discussion would improve the ability to identify investments that cause the biggest positive impact.
Impact Frontiers and PDI have identified at least four channels through which investors can influence outcomes that create impact:
- Capital allocation (e.g., investment and/or divestment)
- Non-financial engagement (e.g., providing guidance or technical assistance to portfolio companies)
- Choice of investment structures (e.g., degree of leverage, potential for tax avoidance, compensation ratios, fund and holding periods)
- Internal firm management (e.g., incentive structures, accountability mechanisms, responsible political conduct, approaches to DEI)
Within each channel, some investor actions do deliver outcomes, such as investor contribution to impact, while for some, investor action on its own does not deliver outcomes – but if all investors took similar actions, then it would likely lead to improved outcomes which delivered impact. For example, shareholders en-masse selling their shares in a soft drinks company for public health reasons.
Also, within each channel investor actions could lead to not only positive, but also negative outcomes such as too high incentive structures or investment structures which avoid tax.
A consultation has opened until 30 April to build market consensus on how best to measure and manage investor contribution with a guide set for launch in mid-2023.
Rothenberg said the PDI and Impact Frontiers want to encourage investors to think about impact at a systems level, not just about the impacts of their portfolio companies.
“There are existing issues with distribution of risk and return across the capital markets value chain,” she said. “If investors want to holistically address the SDGs, which is increasingly embraced even in mainstream financial markets, then we do need to start thinking about issues related to inequality and people’s ability to build wealth and stakeholders ability to provide input into how the financial system itself works – not just how portfolio companies are operating.”
Impact investors have welcomed the work.
Caitlin Rosser, Director, Impact Management at Calvert Impact, said there were no resources to show it how to measure its contribution to impact apart from resources that development finance institutions use which were not completely applicable to private investors such as themselves.
“No-one was incorporating different elements of investors contribution in such a multi-dimensional way. We’ve been banging the drum on this since 2019, sharing our impact rating tool with other investors. We are thrilled to contribute to this project from PDI and Impact Frontiers.”
Jake Levy, Investment Manager and Impact Lead at impact investor Snowball, added that if investors don’t understand how the decisions they are making are leading to change, then ultimately, it’s not improving outcomes for people and planet.
He also said market building and creating better standards and frameworks was a key part of moving the impact investment market forward.