Understanding Impact Investing: Avoiding the Risks of Impact Washing

Understanding Impact Investing and Impact Washing

• Mark Berryman, the managing director and partner at Caprock, emphasizes their commitment to private impact investing, with over 90 private impact funds totaling $1.5 billion, serving ultra high net worth individuals and family foundations.

• He introduces the topic of impact washing, a risk in the industry where investors overstate or falsify impact results, potentially hindering the growth of impact investing.

• Cecilia Chow, co-founder of Van Capital's Double Impact strategy, shares the distinction between ESG and impact investing. ESG focuses on risk mitigation for financial returns, while impact investing intentionally drives both financial and social/environmental returns.

• She discusses the challenges of delineating impact investing from ESG, especially as companies evolve and transition between private and public markets. The importance of frameworks like SDGs, SASB materiality, and B Impact Assessment in providing a common language and identifying material impact metrics is highlighted.

• Chow also emphasizes the need for transparent and rigorous measurements while cautioning against being driven solely by fears of impact washing, as it may hinder mission-driven companies from achieving their outcomes.

Understanding Impact Investing and Impact Washing

Understanding Impact Investing and Sustainable Finance

• Many fund managers claim to invest across the sustainable development goals (SDGs), but simply stating this is not enough. Bain's view is that SDGs alone are not sufficient and need to be backed by real outputs and outcomes. It's important to go beyond just identifying the SDG targets and focus on achieving the 169 indicators at the company level.

• Regulations, like the sustainable Finance disclosure requirements in Europe, can be beneficial for the industry, especially in addressing negative externalities like carbon emissions. However, it's crucial to ensure that the regulations do not hinder innovation and efficiency in the markets.

• Bain's decision to create a dedicated impact team and business was driven by the belief in conscious capitalism and the desire to catalyze the market for impactful investments. They strive to achieve market rate returns while integrating social and environmental impact measurements at every stage of investment, from screening deals to exit strategies.

• Bain's approach to impact reporting involves using the B Impact Assessment tool to measure both what the company does and how it operates. This tool helps in quantifying specific impacts, such as access and quality of services, while also evaluating broader factors like living wages and carbon footprint. The transparent reporting of these impact metrics is provided to limited partners and investors to ensure accountability and clarity.

Understanding Impact Investing and Sustainable Finance

Investment Impact Measurement and Verification

• The speaker discusses the importance of measuring impact outcomes in addition to program completions, with the goal of achieving improved living wages for program participants.

• They highlight the transition from measuring program completions to implementing a Penn Foster LED survey and eventually moving to a third-party survey to assess salary increases resulting from the programs.

• The speaker emphasizes the need for the industry to push for outcome-based measurements and mentions the influence of private equity funds in driving impact at the company level.

• They give examples of companies like TeachTown and BlueMark to illustrate the journey towards outcome-based impact measurements and the role of private equity funds in driving impact.

• The discussion also covers Bain's engagement with impact verification through independent firms and the evolving landscape of impact measurement in the investment industry.

Investment Impact Measurement and Verification

Nascent Field of Impact Investing

• The speaker emphasizes the importance of consistency, comparability, and not losing sight of the main goal in impact investing.

• The conversation touches on the early stages of impact investing, with references to the 1930s and the evolving rules and regulations over the past hundred years.

• The speaker discusses the need for fund managers to provide impact metrics before receiving funds to ensure the accuracy of their reported data.

• There is a mention of new tools and systems for impact reporting, but it is acknowledged that the industry is still in its early stages, and the tools are not yet fully developed.

• The conversation also highlights the challenges of measuring impact and the push for more transparency and consistency in data collection.

• The speaker expresses optimism but also concerns about impact washing, particularly in venture capital, and emphasizes the need for meaningful and accurate impact reporting.

Nascent Field of Impact Investing

Key Points on Impact Investment Management and Evaluation

• The speaker discusses the challenge of fund managers providing lengthy impact reports that are not practical for clients to review.

• They have developed a software that allows clients to access and review their real assets portfolio easily through a financial portal.

• The software enables clients to view the impact of their investments, such as in affordable housing and climate infrastructure, in a user-friendly manner.

• The speaker emphasizes the importance of co-investments with partner fund managers rather than competing with them, especially when it comes to investing in innovative opportunities.

• The topic of increasing employee ownership at portfolio companies is brought up, and the speaker acknowledges the complexities and challenges involved, particularly in the middle market.

• The focus on providing living wages, benefits, and affordable PTO days for employees is seen as a priority before considering employee equity.

• The discussion also touches on the evaluation process to prevent 'impact washing', and how the speaker's firm requires fund managers to report on impact metrics as part of the investment requirements.

• Furthermore, the differentiation of impact priorities between institutional and individual investors is addressed, highlighting the transparency in the fundraising process to ensure alignment with the firm's investing approach.

Key Points on Impact Investment Management and Evaluation

Conclusion:

In conclusion, navigating the landscape of impact investing requires a deep understanding of the risks associated with impact washing and the importance of transparent, rigorous measurements. By embracing the principles of impact investing and sustainable finance, the industry can mitigate the risks of impact washing and continue to drive positive social and environmental change through impactful investments.