Impact Investing. How is the impact measured?


Master's Thesis, 2019
72 Pages

Free online reading

Table of Contents

List of Tables

List of Figures

List of Abbreviations

CHAPTER I: INTRODUCTION
1.1. Introduction
1.2. Statement of the Problem
1.3. Aims and Objectives of the study
1.4. Objectives
1.5. Research Questions

CHAPTER II: LITERATURE REVIEW
2.1. Introduction
2.2. Overview: Evolution, Theories, Concepts and Definition
2.21. Evolution:
2.22. Theory of Change:
2.23. Concepts and Definitions:
2.3. The Ecosystem of Impact Investing
2.4. The Spectrum of Capital
2.5. Impact Investing Returns
2.6. Impact Investing: Stakeholders
2.61. Asset Managers:
2.62. Asset Owners:
2.63. Service Providers:
2.64. Impact Driven:
2.7. Instruments of Investment
2.8. Drivers and Challenges of Impact Investing
2.81. Drivers:
2.82. Challenges:
2.83. Absence of Intermediation or Moving Capital:
2.84. Absence of Enabling Environment or Infrastructure:
2.85. Absence of Absorptive Capacity of Capital:
2.9. Previous Empirical Studies

CHAPTER III: RESEARCH METHODOLOGY
3.1. Introduction
3.2. Research design
3.3. Research philosophy
3.4. Research approach
3.5. Target Population
3.6. Sampling
3.7. Sample Size
3.8. Data collection methods
3.9. Summary

CHAPTER IV: RESULTS
4.1. Analysis of The Measurement Approach and Reporting Practices of R. I
4.11. Analysis Criteria
4.12. Company Overview
4.13. RǤ IǤ Measurement Approach
4.14. A Thematic Focus
4.15. RǤ IǤ StandardizedProcess
4.16.Analysis
4.2. Analysis of The Measurement Approach and Reporting Practices of BǤ OǤ
4.21. Analysis criteria
4.22. Company overview
4.23. BǤ 0Ǥ measurement approach
4.24. A thematic focus
4.25. Analysis
4.3. Perspective of Impact Investment Professionals
4.4. Perspective of Impact Investors
4.5. Comparison of ‘Regular’ Fund and ‘Impact’ Fund of the same retail fund provider
4.51. Hermes Investment Management
4.52. BNP Paribas Asset Management
4.53. Wellington Management Company
4.54. Amundi Asset Management
4.55. NN Investment Partners
4.56. UBS Asset Management
4.57. Standard Life Aberdeen
4.58. BlackRock Strategic Funds

CHAPTER V: CONCLUSION
5.1. Limitations of the present thesis
5.2. Recommendation

References

Appendicesϲϵ
Survey Questionnaires

Acknowledgement

I hereby gratefully thank Prof. Dr. Manfred Stüttgen for his constructive suggestions, criticism and guidance during my preparation of this Master thesis.

Executive Summary

Impact investments have gained much prominence over the course of past few years. In relation to other diverse forms of investments, the most noticeable aspect pertaining to impact investing is its attention on measuring the social and environmental returns that it creates. As an outcome, substantial efforts have been initiated to build measurement systems that are effective. However, there is some confusion pertaining to the concept of non-financial return, the impact and its evaluation within practice.

This paper delves extensively into and draws from an array of literature to present a primary overview of underlying concepts. In addition, it attempts to critically evaluate the roles and responsibilities associated with measurement, rendering a largely explicit subjective interpretation of social as well as environmental returns. In the process, the paper explores some strains around the coverage width, objectivity, participation, flexibility and rigour and attribution of impact by evaluating two investment enterprises viz., R. I. and B. O. The findings from this research reveal that the measurement techniques are progressing in the right direction but at present are not optimal enough to directly compare the ‘impact’ performance of two different funds.

List of Tables

Table 1. Hermes Global Equity Fund Vs. Hermes Impact Opportunities Equity Fund

Table 2. Parvest Energy Innovators Vs. Parvest Climate Impact

Table 3.Wellington Global Impact Funds Vs. Wellington Global Stewards Fund

Table 4. Amundi CPR Global Resources Vs. Amundi European Equity Green Impact

Table 5. NN Institutional Global Enhanced Vs. NN Global Equity Impact Opportunities

Table 6. UBS Equity Global Opportunity Unconstrained Vs. UBS Global Impact Equity Fund

Table 7. Standard Life: Global Equity Fund Vs. Global Equities Fund

Table 8. BSF Systematic Global Equity Fund Vs. BSF Impact World Equity Fund

List of Figures

Figure 1. Key Figures of R. I.

Figure 2. Impact Themes R. I.

Figure 3.Impact Profile SOLARNOW and Impact Profile ASA International

Figure 4. B. O. Impact across ESG, Impact Themes and SDGs

Figure 5. Principles of SPIRIT 6.0

Figure 6. Top 7 SDG and SPIRIT Score B. O.

Figure 7. Geographical distribution: Hermes ‘Regular’ vs ‘Impact’

Figure 8. Sectoral distribution: Hermes ‘Regular’ vs ‘Impact’

Figure 9. Geographical distribution: Parvest ‘Regular’ vs ‘Impact’

Figure 10. Sectoral distribution: Parvest ‘Regular’ vs ‘Impact’

Figure 11. Geographical distribution: Wellington ‘Regular’ vs ‘Impact’

Figure 12. Sectoral distribution: Wellington ‘Regular’ vs ‘Impact’

Figure 13. Geographical distribution: Amundi ‘Regular’ vs ‘Impact’

Figure 14. Sectoral distribution: Amundi ‘Regular’ vs ‘Impact’

Figure 15. Geographical distribution: NN ‘Regular’ vs ‘Impact’

Figure 16. Sectoral distribution: NN ‘Regular’ vs ‘Impact’

Figure 17. Geographical distribution: UBS ‘Regular’ vs ‘Impact’

Figure 18. Sectoral distribution: UBS ‘Regular’ vs ‘Impact’

Figure 19. Geographical distribution: Standard Life ‘Regular’ vs ‘Impact’

Figure 20. Sectoral distribution: Standard Life ‘Regular’ vs ‘Impact’

Figure 21. Geographical distribution: Blackrock ‘Regular’ vs ‘Impact’

Figure 22. Sectoral distribution: Blackrock ‘Regular’ vs ‘Impact’

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

CHAPTER I: INTRODUCTION

1.1. Introduction

The term ‘ impact investing ’ was coined in the year 2007, as a means of building a global industry striving for investment with a positive environmental and social impact (Harji, & Jackson, E. T., 2012). Thus, unlike conventional investing, impact investing involves mainly aims to combine philanthropic objectives with mainstream financial decision making apart from the financial returns (GIIN, Online). Although the concept of impact investing is a new term, usage of investment to yield social outcomes has been there since the 1940s. The best examples include the World Bank’s International Finance Corporation and the Commonwealth Development Corporation in the UK, both established in the year 1956 and 1948 respectively (Nick, Leijonhufvud, & Saltuk, 2010). Later, the investment market has increased gradually, and new impact investment funds have been created at an unprecedented rate. Various players have been entering the field, engaging as investors (e.g. Goldman Sachs), researching (Sustainalytics), the creation of investor networks (GIIN, IRIS, GIIRS) and many courses on impact investing have been launched (e.g. Columbia University). Impact investing is at par with a broader movement that demands more ethical and socially inclusive capitalism (Dacin, Dacin, & Tracey, 2011). Despite all this activity, a precise definition or a clear understanding of what is an impact investment, at a terminology level is lacking (Christensen, Clawson, & Eurosif, 2008).

While there are several challenges with regard to impact investing, there is no sign of its lowering as estimates revealed that this market would grow to represent a major proportion of all managed assets in the next few years. For instance, the recent study conducted by GIIN reported that almost USD 502 billion assets are currently managed apart from conventional investments. A significant proportion of these assets are held in the emerging world especially with a portfolio concentrated in financial services followed by food and agriculture (GIIN, Online).

1.2. Statement of the Problem

There is a pressing need to address social and environmental issues. Inequality and threats to sustainability cannot be addressed merely by the government, foundation grants and NGO rather it needs to be addressed through innovative solutions. To address the issue, one anticipated solution is to look at how private capital can be deployed to bridge the estimated $2.5 trillion shortfall as identified in the 2015 Sustainable Development Goal. Estimates revealed that (Reisman, J., & Olazabal, V., 2016) $287,056,800 trillion capital are under private investment, but their utilisation towards social and environmental aspects is still questionable. Although there are attempts to invest in social and environmental needs, that was not the only mission of the organisations as indicated in several other literature. As an organisation exists primarily to create economic value rather than social value.

Beside preliminary surveys conducted among stakeholders indicated that the lack of clear understanding of the terminology and their boundaries. This calls for a systematic and comprehensive study to understand their perceptions and views concerning impact investing. There are few studies conducted in this line of thought (as discussed in the previous section on Literature Review) had inherent methodological limitations. For instance, the study by Höchstädter & Scheck, (2015) reported the clarity of the definition, but this was mainly derived from the practitioner reports, compiled by one single organisation, the GIIN. The master dissertation by ( Hofe, E. (2017) explored impact investment using a single case (Bridges Fund Management) study design. The present study had replicated this work by using a combination of different articles and reports mainly using a dual case study (R. I. and B.O.). Further to substantiate and enrich with primary research in the form of interview from stakeholders representing from the supply and demand side. In addition to all these, a detailed comparison of impact and regular fund of eight retail fund providers has been made.

1.3 . Aims and Objectives of the study

Impact investing has become a trend in recent years especially as the United Nations Sustainable Development Goals getting mainstream. Although the phrase ‘impact investing’ has been widely used by many asset managers. Still, the clarity on the measurement and reporting of the impact is lacking.

1.4 . Objectives

To examine the current status of impact measurement practices and reporting techniques in impact investing using both secondary and primary data depending on the availability.

- To analyse the current status of impact measurement practices and reporting techniques using secondary data.
- To explore the perceptions and views of ‘Impact Investing’ by investors and asset managers.
- To compare ‘impact’ fund and ‘regular’ fund by the same retail fund provider.
- To provide the strategies and recommendations on how the measurement and reporting process can be improved.

1.5. Research Questions

1. What is the current status of impact measurement practices and reporting techniques in impact investing using secondary data?
2. How asset owners and assets managers have perceived impact investing?
3. What are the differences between an ‘impact’ fund and ‘regular’ fund by the same retail fund provider?

CHAPTER II: LITERATURE REVIEW

2.1. Introduction

Impact investing is considered as the domain of capital investment where capital is utilized to augment the cumulative value of environmental, social and financial performance. Simply said, it is a field of investment where the objective of the investor is to generate an impact which is positive on the social and environmental aspects in tandem with financial returns. Impact investment is also deemed as a fast progressing strategy for investment that is yet devoid of a uniform technique that can be utilized to measure investments and effectively manage the value of investment and analyse decisions related to investments (Bugg-Levine & Emerson, 2011). Impact, from the setting of impact investing can be perceived as a net effect that has been generated based on activities which are usually financed by investments that are made by communities as well as individuals. It is also possible to define impact investing as the goal of creating value that tends to be beneficial in a mutual manner to stakeholders as well as the investors in a particular geographical region. An easy way through which social impact can be elucidated is to perceive it as an opportunity to change the way of life of people, their community, their culture, their environment, their political systems, their aspirations and fears, their personal and property rights, their well-being and health (Reeder & Colantonio, 2013). The objective of this chapter would be to look into research related to impact investing and its measurement that has been conducted in the past by researchers.

2.2. Overview: Evolution, Theories, Concepts and Definition

2.21. Evolution: It is possible to trace back the beginnings of impact investing way back in time in seventeenth century England, in the Quaker community. Decisions related to investments and purchase were quite robustly impacted by a culture in which people who owned wealth were known to be responsible to ensure the well-being on the whole for the community they lived in (Hardill, 2016). Consistently with the passage of time, there have been communities, movements and groups who were known to have practiced specific kinds of contemporary impact investing with the objective of enhancing the society. If a look into fairly recent times is taken, it is possible to observe this phenomenon during the ‘environmental movement’ of the 1970s, socially responsible investing movements and the modern fair trade consumer (Dutt & Ganesh, 2014). Several leading instances from the recent past would comprise the International Finance Corporation (IFC), finance by the World Bank is known to play an instrumental role in providing finance to small and medium enterprises within nations that are still in the phase of development (Allman, 2015), the Grameen Bank, which is considered as one amongst the leaders across the world who are responsible to notch up microfinance initiatives in Bangladesh (Harji, & Jackson, E. T., 2012) and also the Acumen Fund, an organisation that is not-for-profit and operates on a mission to extend support to entrepreneurs who are known to work around existing problems related to poverty on the basis of solutions that are sustainable (Acumen, Online).

In the 1990s, a thought leader and visionary from the social sector, Jed Emerson, conducted several discussions with several actuators that ranged from social entrepreneurs to social investors, founders of mission driven operating on profit organisations, venture philanthropists, people who were actively involved in the process of sustainable development and several others (Blended value, Online). As per the observations of Emerson, it emerged that all the discussions he carried out reflected the rise of an innovative understanding towards the creation of value, one which was quite opposite to the definition from a traditional perspective. Conventionally, the general viewpoint is segregated and implied that it is only possible for investors to either do well or do good (Emerson, 2003). In this world that is largely segregated, value that is economic in nature is generally generated by organisations that operate on profit while social value is generated by organisations that do not operate on profit as well as governments. Nonetheless, this innovative perception in terms of value identifies the actual value from an investment as returns that are economic in tandem with environmental as well as social impacts (Blended value, Online). In order to seize this rising understanding, the framework for blended value was developed in the year 2000 by Emerson. It is possible to elaborate this concept to be interpreted as an act that was pioneering, as it basically disrupted the major viewpoint in terms of creation of value. In addition, the underlying definition also presented the cornerstone of contemporary impact investing. If impact investing is what is being done, blended value would refer to the value that is created (Bugg-Levine & Emerson, 2011).

2.22. Theory of Change: Evaluating impact investing, how can it be done? In an industry that is increasingly driven by data and rich in metrics, it is possible to debate that every stakeholder within the growing impact investing field are apprehensive about such questions. To a substantial degree, this happens to be the case indeed.

Nonetheless, a significant component that is usually underdeveloped within practice and discourse with regards to assessment of performance in this domain. This component happens to be the theory of change (Verrinder, Zwane, Nixon, & Vaca, 2018). It is a tool and construct that actually originates from the domain of programme evaluation, the theory of change can and should be a vital component while evaluating impact investing. This is particularly significant where the impact of such evaluation makes a huge difference; at the point of economic and social impacts on communities that are marginalized and poor, individuals as well as households (Jackson, E. T., & Harji, K., 2014).

Providentially, it can be observed that the theory of change already happens to be a part of the impact investing practice industry at diverse levels and it manifests in several ways. As a matter of fact, there is too much to develop on. Nonetheless, there also happen to be two other problems (Jackson, E. T., 2013). One of them happens to be the fact that in certain areas of practice in the domain, the theory of change cannot be seen, is not clearly visible or is entirely missing. Next, so far, there has not been any kind of evaluation of this state of play on the whole for this critical component in this domain on the whole and the manner in which it can be applied to make a maximum impact (Reisman, J., & Millet, H., 2019). Rendering the theory of change to be clearly visible allows all stakeholders to comprehend the theory of change in an enhanced manner and reinforce the change procedure with a view to augment the impact and at the same time, testing the degree to which the procedures and outcomes are in actual alignment with the expected intervention theory (Jackson, E. T., 2013).

2.23. Concepts and Definitions: Impact investing as a term came into existence in 2007 and was put together by the Rockefeller Foundation (Harji, & Jackson, E. T., 2012) and there are several other terms that are being extensively utilised within the sector to elucidate investing of such a kind which is inclusive of double or triple bottom line, ethical investing, responsible investing, programme related investing, mission oriented investing, economically targeted investing and blended value (Hebb, T., 2013). It can be categorised under the domain of social finance (Weber, O., & Geobey, S., 2012) and it happens to be the development of a system which overlaps and investors are known to invest intentionally for a return which is blended. Considering the fact that impact investment is a term that is comparatively new, there are several discussions that occur regarding its definition. Nevertheless, according to the definition provided by the Canadian Task Force on Social Finance, impact investing is said to be an investment of capital which is active within business and funds that are known to create positive impacts that are environmental or social and bringing in financial rewards at the same time. Under the tenets of this definition, the investor is not only aware but is also known to hold the intention towards blended returns (Strandberg, C., 2013). There are four key traits that have been outlined by the Global Impact Investing Network (GIIN) for impact investing and it comprises a) intentionality, b) investment with expectations on return, c) an array of expectations on return and asset classes, and measurement of impact.

2.3. The Ecosystem of Impact Investing

Within a report presented by the Case Foundation which was titled ‘A Short Guide to Impact Investing’, a list that was non-conclusive was provided with a view to put emphasis on certain possibilities for investment which presented solutions to any issues. For example, small business finance, development of community, microfinance, education, renewable energy, financial inclusion, sustainable agriculture and fair trade were ways through which impact investors were in a position to handle challenges of the world. Subsequently, it is quite clear that impact investing is not essentially all about markets that are niche, on the contrary it would relate to an industry that at times when fully maxed out, a substantial portion of the gross domestic product (GDP) of any nation (Greene, 2014). In addition, scrutinising impact investment examples from the real world, like loans below-market rate by development finance institutions (DFIs) to small businesses in post conflict zone, providing loan guarantees by foundations that are charitable in nature in a fund for affordable housing and units or shares within a fund for green energy that later makes investments into renewable energy projects locally (solar, wind) within communities that are poor, project the diverse and intricate nature of impact investing (Harji, & Jackson, E. T., 2012). In order to segregate the multidimensional impact investing domain, the sections below outline in detail the ecosystem of impact investing.

2.4. The Spectrum of Capital

Using terms that are indifferent with the objective to define impact investment that consider environmental and social outcomes are said to have created a certain confusion during the past. The social impact investment taskforce has been making attempts to elucidate the spectrum of capital within impact investing by embracing a framework that was developed by the Bridges Fund Management. A conventional investor is known to pursue financial returns exclusively with no regard whatsoever to any environmental, social and governmental (ESG) criterion (KPMG, 2018). Moreover, an investor who is said to be socially responsible tries to safeguard value by identifying and eradicating investments that can prove to be a probable risk to ESG. As opposed, investments and businesses are targeted by sustainable investing which are known to generate value on the basis of practices that are ESG friendly. Lastly, impact investing differentiates itself from other kinds of investments by trying to find investments that handle pressing problems in the environment and the society. In tandem with the definition provided by GIIN, the social impact investment taskforce further segregated impact investments into three groups on the basis of their capability to create financial rewards (Brest, P., & Born, K., 2013). The first group would be made of impact investments that are in a position to create financial rewards at the rates prevailing in the market or higher. A second group would comprise investments where the returns that are expected might not be clear and the third group would compile all the investments with return rates that are below market where a trade-off in terms of finance is essential to create the expected social results.

2.5. Impact Investing Returns

In tandem with the definition of impact investing provided by GIIN, the returns that can be generated on the basis of impact investing can be described as environmental as well as social impacts in addition to financial returns. Considering that impact investors are further bifurcated into impact-first or finance-first investors, the expected returns might vary as per the orientation of the investor (Garmendia, C. & Olszewski, A., 2014). In the annual survey of 2016, it was observed by GIIN that a large portion (59%) of investors who had been observed, were targeting the market rate returns that were adjusted for risks. However, it is yet a matter of debate whether realising a return at market rate is actually normal or whether concessionary returns happen to be an unavoidable portion of any kind of impact investment (Gray, J., Ashburn, N., Douglas, H., & Jeffers, J., 2016).

During the period of 2015, the benchmark for impact investing was established by the GIIN in association with Cambridge Associates to generate data that was reliable with regard to financial returns related to impact investment and provide answers for the question above mentioned relating to the returns generated by impact investments. This benchmark happens to be the outcome of an analysis of 51 private impact investment funds on the whole that aspired for market rate returns that were adjusted for risks with a vintage year between 1998 and 2010 (Cambridge Associate, 2015).

2.6. Impact Investing: Stakeholders

There are several stakeholders within impact investing, and they can be segregated into four key categories. While asset managers and asset owners would make up the supply side, service providers and impact driven organisations would come under demand side.

2.61. Asset Managers: Impact investing in its early days, the number of fund managers who extended impact investments were quite limited, and they were considered as a dampener in terms of growth. Nonetheless, with the increase in demand for impact investment, several organisations were setup, the development of corresponding products occurred and the sector on the whole was rendered rather main stream (International Finance Corporation, 2018). Though during the initial days, impact investment funds that were largely specialised were the only one open to commit to the developing domain of impact investment, in the present day prominent intermediaries of investment throughout the world are following this as an example. Bain Capital LP and Black Rock Inc., during the period of 2015 formed new divisions that exclusively focused on investments (Mahn, K. D. (2016). In a like manner, Goldman Sachs Asset Management also additionally augmented its participation within the industry by acquiring Imprint Capital, an investment organisation with exclusive focus on impact investing. In addition, governments in the present day are also playing a major role in effectively managing huge portions of current assets with the help of their DFIs (The Goldman Sachs Group, 2015).

2.62. Asset Owners: As of now, a major portion of impact investing is being carried out by individuals who are wealthy who are also referred to as high net worth individuals (HNW), governments through the medium of DFIs, private foundations and select corporations who have identified the necessity as well as scope to step beyond charitable dispositions to resolve the existing problems of the world. A poll that revolved around investors was executed by Morgan Stanley and it was stated that HNWs, especially the younger generation are known to reveal a growing interest in making investments that have environmental as well as social objectives (Stanley, M. (2018). Further, from an institutional basis, nowadays, most large organisations like pension funds, insurance organisations and other financial organisations seem to be more interested in impact investing.

2.63. Service Providers: Within service providers, there happens to be several organisations like bodies that set standards, non-governmental organisations (NGOs), networks, governmental bodies and consulting organisations too. Nonetheless, there are key players in this sector like the B Lab and GIIN who are in the process of bringing continuous evolution into the domain of impact investing by developing and improvising popular standards, database for impact investments, measurement tools as well as networks throughout the sector (B the Change, 2016). The Group of Eight (G8) establishment pertaining to the taskforce under the aegis of the United Kingdom presents a clear picture of the key roles that are supposed to be executed by service providers in regard to extending support towards developing a global market for impact investing.

2.64. Impact Driven: Organisations investing in impact funds on the demand side happens on one hand to be marked by those who provide service whereas on the other hand, it is marked by the individuals / entities who happen to receive those investments. Those who are known to invest largely comprise of social enterprises (such social enterprises can also be non-profit entities that do generate income but also ventures with a social mission but having a for profit structure), microfinance institutions and development banks (Connaker & Madsbjerg, 2019). To make it simpler, impact driven organisations are collectively made up of the above-said entities. Impact driven organisations that are largely popular and widely renowned happen to be organisations that extend microfinance.

2.7. Instruments of Investment

Apart from the number of stakeholders who are involved within the process of impact investing, there are several vehicles that facilitate impact investing. A major portion of such instruments are known to arise directly from the sector of conventional financing. Examples of conventional financing would comprise real assets, private equity or private debts (Clarkin & L. Cangioni, 2015). More significantly, the continuous increase in terms of demands for products that offer a social reward has resulted in an array of products which are innovative and are known to include community bonds (an instrument of debt that facilitates organisations of a non-profit nature to finance their functioning on the basis of their supporters), community investment notes (an instrument of fixed income that is exclusively utilised to offer funding to organisations that have the intention to generate social change), and social impact bonds (Roundy, Holzhauer, & Dai, 2017). Nonetheless, as per the survey for annual impact, which was conducted by GIIN, private equity and private debt happen to be the most prominent methods for investment, whereas new and innovative projects such as performance instruments (for instance SIBs), were only known to account for around 0.2 per cent of the capital allocated on the whole. With regards to the diverse number of asset managers, pension funds / insurance organizations and the family offices have been known to largely utilize real assets and private equity whereas debt happens to be the most preferred instrument that is utilized by financial organizations and DFIs (Gripne, S. L., Kelley, J., & Merchant, K. 2016). Further, foundations are also known to utilize an equal measure of both and at the same time fund managers are known to deploy every kind of investment vehicles that are available.

2.8. Drivers and Challenges of Impact Investing

2.81. Drivers: During the course of the past 6 years, the industry of impact investing has been witnessing a rapid growth with renewed interest and activity being reported. This catalyst of interest is being driven by several factors and these factors comprise of; failure on part of the prevalent resources to tackle issues globally such as; environmental depletion and poverty, the capability to extend finance to business models that are scalable which tend to create environmental as well as social value, the current generation of high net-worth individuals who are keen to acquire capital allocations in tandem with their individual values and taking into account the scope for risk within decisions of investment on the basis of the financial crisis that occurred during 2008 (Harji, & Jackson, E. T., 2012). Furthermore, there has been an increasing interest in providers of capital owing to diversification and an innovative approach to investment. This is considered as medium for collaboration within family and involving younger generations, fresh talent groups owing to interest on the part of young professionals and there is an early success ratio in the development of an affirmative reputation on the part of microfinance, clean technology industries and community development (Freireich, J. & Fulton, K., 2009). Each individual within the investment sector has been faced with the mutual reality that irrespective of the people who prevail in political circles or what the present social trend might be, the environmental and social bottlenecks are far too wide and the existing financial resources are restricted to the prevalent work approaches (Bugg-Levine & Emerson, 2011).

The sector thus provides very promising growth opportunities. Also, organizations have a rather special role to execute to further the progress of this industry sector. There are several charitable institutions that perceive themselves to be mediums that naturally drive the sector of impact investment. Particularly, the type that holds the most severe financial risks and the scope for reaping the greatest social returns (Clark, Emerson, & Ben Thornley, 2014). Matching steps with the investments of a charitable foundation and their mission is deemed as a natural step as well as a very strategic approach offering the scope to make a greater impact (Clark et al., 2014). This presents the scope for harnessing funds from philanthropy towards impact investments and recycles the returns to compound the impact that has been achieved.

2.82. Challenges: Though there are several factors and opportunities that drive growth in the impact investing sector, there is also another side to the coin – challenges. The impact investing sector does have its own challenges and barriers that restrict this sector of the industry in progressing ahead. Operations in the impact investing sector occur in a world that has two diverse systems in place, one of these systems pertains to making investments with a view on profits, whereas the other system relates to making investments for the purpose of philanthropy. In a world that is thus segregated, systems for leadership development, regulations and laws, institutions as well as systems for measuring value (commonly termed as environment that enables) is setup to distinctly enable donors and investors. This tends to act as a barrier for the further growth and development of the impact investing sector (Huppé & Silva, 2013). There is a need for impact investors to alter this kind of bifurcation and develop a value system which is blended. Any success in terms of impact investing warrants an essential alteration in several systems, from public policy to capital markets to measurement of performance (Ormiston, Charlton, Donald, & Seymour, 2015).

Three major challenges that impeded growth in the impact investing sector were outlined by the 2009 Monitor Institute Report. These three challenges comprised; a) an absence of effective intermediation that results from supply and demand which is fragmented, intricate deals and absence of knowledge about risk, b) absence of infrastructure which enables, arising out of a segregation in the sector and c) absence of adequate absorptive capacity in terms of capital. Further, according to Kleissner et al. (2009), challenges for development in the impact investing sector comprises of; existence of layers of intermediaries and having active ownership, no link between objectives for long-term investment and short-term evaluation of consultants, lack of agreement on the manner in which impact can be measured, absence of infrastructure for investment and absence of understanding of the impact theory amongst advisor and investor. The following sub-sections elaborate on the three key challenges as mentioned by the Monitor Institute Report.

2.83. Absence of Intermediation or Moving Capital: The absence of an effective intermediation is known to largely arise owing to the segregation in the sector. There are several fund managers who are not very eager to seek returns apart from those that are financial which restricts growth in this sector (Ormiston et al., 2015). Absence of intermediation also renders the technical intricacy pertaining to deals more of a bigger challenge. There are several investors who are demotivated with impact investing owing to the complexities associated with attempting to achieve an environmental and social impact and to formulate deals that include diverse kinds of investors and capital (Ormiston et al., 2015). Further, investors who are supposed to undertake extra efforts in conducting and sourcing due diligence on their investments reduces the overall appeal for investors. Moreover, (Evans, M. 2013) also found that managing and placing capital was more of a challenging proposition as compared to raising funds. The complexities were in effect an outcome of the absence of exit strategies, absence of products on offer, risk evaluation models and extremely high costs of transaction.

2.84. Absence of Enabling Environment or Infrastructure: Considering that the sector of impact investing is yet an industry that is still emerging, it is devoid of theories, protocols, established language, models, policies and standards that would allow its growth. The infrastructure and the environment in the market (tax, regulatory, legal) is largely structured around investments which are traditional. This restricts actors who attempt to enter into or engage in the impact investing sector (Cordes, Rochelle Gunn, & McCoy, 2017). Many a times, actors who are engaged in impact investing are unable to comprehend the risks and trade-offs needed for investments of such types and there are no benchmarks established for metrics, performance measures, frameworks for risk assessment or agencies for rating that have been widely acknowledged and accepted or established to add more transparency (Mendell & Barbosa, 2013). There are also complexities in terms of communication related to opportunities for investment as there is no universal language. With regards to reporting impacts, there are several global projects and many smaller projects of a decentralized nature which is presently in progress and gaining substantial momentum. These have a shared objective of offering a set of tools that are common for social measurement (Robertson, 2012).

The prevailing legal type of not-for-profit organizations act as a barrier for development in the impact investing sector as such organizations are not in a position to issue shares and thus their capitalization options are restricted to debt. As an outcome, efforts have been initiated in several nations towards the development of a new legal body for social enterprises. This body would be unique and does not focus on maximizing profit or non-profit (Florek, 2013). The objective of the new legal body would be to enable social enterprises to overcome certain regulatory burdens of non- profits, to facilitate ease of investments in such organizations, to develop an industry which is more standardized and to enable assessments that are more quantitative in nature for evaluating organizational performance from an impact investing perspective.

2.85. Absence of Absorptive Capacity of Capital: Several investors are now observing that certain specific businesses having established business models for investments and the fact that they are coming to a halt as other investors. In view of the fact that there are only some social enterprises where one can make immediate investments and also the aspect that impact investors are following-up on the same deals, it becomes basically very challenging owing to the additionality principle (Roundy, Holzhauer, & Dai, 2017). The additionality principle demands that impact investors to focus and target on businesses that private investors in other circumstances cannot capitalize on. In the event that there will be additions in terms of capital, there is a need to expand the pipeline for investments. Further, investors would also be required to initiate programmes for mentoring, implement competitions for business plans and combined pools of seed-stage funding.

2.9. Previous Empirical Studies

Many followers were attracted by impact investing as it is a $1.3tn market. In developing countries, the World Bank body supports investment and has moulded a definition of impact investing so as to stop organisations from using the strategy’s popularity for gain (Financial Times, 2018). An Effective Principles for Impact Management in collaboration with asset owners, development banks, asset managers, and financial institutions were provided by the report of International finance corporation (IFC). Based on the best practices evolving in the private and public institutions investing for impact, the principles for impact management are drawn (International Finance Corporation, 2018). Further, a report by (Lomax, P., Rotheroe, A., & Harrison-Evans, 2015) analysed the impact of investment portfolio and the movement-building and stated that in a global effect investment portfolio an attempt can be made on the impact measurement for diverse investments. Thus, it may offer reliable information on the impact achieved by the individual investments, across the whole portfolio, and across themes. Another report from (Oxfam and Sumerian, 2017) Partners enquiries about the expectations of impact investment and then stresses on the enterprises experience which contributes to the reduction of poverty.

Further, (So & Capanyola, 2016) develops an integrated model for investors who seeks to develop their practices of impact measurement. It suggests various set of methods for impact measurement which is created based on the investee and investor maturity. (Verduin, 2018) study discovers about the impact measurement used by the impact investors for the organisational learning. These investors use impact measurement to improve their process of investment so as to maximise the social impact. The study indicated that the impact investors and approaches of impact investors to their organisation learning can be assumed as a range from simple to complex. Thus, it is not that all the impact investors equally use impact measurement to improve their process of investment to maximise the social impact. Moreover, (Voß, 2017) study attempts to study the view of inhibitions of impact investing which has been defined in the literature with social return, financial return, and market infrastructure dimensions. The study findings revealed that there is a sign of shift concerning social enterprises financial profitability and investment objectives to social impact in the mind. However, the impact investments are not restricted to particular area, but the selection of the area is based on the investor objectives. The Sectors that are stated commonly include “clean energy, agriculture, health-care, education, housing, financial facilities for poor and water” (Höchstädter & Scheck, 2015)

Höchstädter & Scheck, (2015) provided a comprehensive review on impact investing where the author had provided clarity by highlighting delimiting aspects and overlaps with similar concepts. The report by Staskevicius, A. & So, I (2015) explored the specific practices and methodologies adopted by investors to measure the social impact generated by their investment. Their findings showed that their expected returns are measured through social return on investment, economic rate of return and benefits cost ration. Mainly theory of logic model has been used to map theory of change while social value criteria and scorecards are widely used to monitor the key performance metrics and quasi-experimental methods used to determine the impact of the intervention. established impact investors The thesis by Alenius, (2016) assessed the state of impact investing practices and its relationship on stock selection using a quantitative study based on a survey from the impact investors in Europe. The findings indicated that those investments in both social and sustainability projects have a stronger impact than those who had invested only in either sustainability or only social. Similarly, those who can maintain a portfolio of more than 100 million euro have a stronger impact while compared any other investors; fund managers have stronger impact measurements process. The master dissertation by (Hofe, E. (2017) explored recent standardisation efforts of the industry and elucidated the measurement methods and tools used by investors to measure the environmental and social effects of their investment using case of Bridges Fund Management. The findings highlighted the discrepancy between the customised, profound and superficial measurement approaches led to challenges in comparing the investment. On the same line, another thesis by Lairikko, (2017) examined the emergence of impact investing and key challenges that hinder the emergence in Finland using qualitative research design. The findings obtained from investing actors highlighted three main challenges such as novelty of the field, shortage of attractive deals and characteristics of impact investment.

CHAPTER III: RESEARCH METHODOLOGY

3.1. Introduction

In general, research methodology is adopted widely by the researches to estimate the problem of the research with a suitable application of logic. Research methodology is perhaps the most significant aspect of a research study (Pandey & Pandey, 2015). This chapter will discuss the research methodology adopted in the present study. Initially, research design and research philosophy adopted for the present research will be detailed and further type of research approach utilised for this study will be elaborated. Moreover, the methods used for data collection and the samples used in the study will be deliberated extensively. Finally, this chapter ends with a summary which summarises this entire chapter.

3.2. Research design

The research design is specified as a set of practices that are followed to identify accurate data so as to attain the objective of the research. There are several types of research designs such as cross-sectional theory, grounded theory, longitudinal, experimental theory, ethnography and time series (Walia, 2012). However, most the researchers widely use descriptive research design, exploratory research design and the explanatory research designs (Monsen & Horn, 2017). Exploratory research design articulates the problems in a detailed manner, to simplify ideas, collect details and get insight and to eradicate the unrealistic views (Dinesh, 2014). Hence, the present study adopts exploratory research design to identify and evaluate the measurement and reporting of the impact and to evaluate the answer for the research question. The ‘impact investment’ field is still growing and hence with given the nature of the topic, this study adopts the exploratory research design. However, this type of design also enables the researcher to understand the meaning individuals ascribe to a human or social problem. Since this study aims to explore the current perception of impact investment from the point of stakeholders, the choice of exploratory research design is justified.

3.3. Research philosophy

Research philosophy is specified as the enhancement of knowledge with the help of beliefs and assumptions. It involves the method of collecting and analysing and the primary data (Saunders et al., 2012). In general, there are four types of research philosophies, namely; realism, pragmatism, phenomenology and positivism philosophy. Among which positivism and interpretivism are the two types of philosophy which are used most commonly (Sinha, 2012). A positivism philosophy specifies the research phenomenon truth. On the other hand, interpretivist philosophy stresses that reality rests stable, and the data should be established after it is collected and is built only based on observations. Therefore, the present study adopted the interpretivist method as it is considered to be a suitable philosophy for qualitative research since, the knowledge is experienced personally.

3.4. Research approach

An imperative tool used to associate theory and the research is the research approach (Saunders et al., 2012). There are two research approaches that are used frequently by the researches; they are the inductive and deductive approach. In deductive approach, the hypothesis is framed based on the review of previous studies and are tested with the help of survey method and is also called as a top-down approach (Gabriel, 2013; Saunders, Lewis, & Thornhill, 2009). On the other hand, the inductive approach is meant for presenting a theory based on the outcomes acquired from the collection data and this approach is also termed as the bottom-up approach (Bryman & Bell, 2011). Generally, the inductive approach is carried out for the qualitative research and deductive approach is carried out for the quantitative research (A. Bryman & Bell, 2011). In this case, an inductive approach is chosen as it enables the researcher to explore a new phenomenon with little existing theory or literature (Creswell, 2015). This approach will allow the researcher to generate novel insights about the underlying factors that influence the term ‘impact investment’ and thereby generates new theories from data (Levitt, Motulsky, Wertz, Morrow, & Ponterotto, 2017).

3.5. Target Population

The impact investment professionals and investors are considered as the target population for the study.

3.6. Sampling

A sampling technique is chosen for research based on aspects like access, approach, and representativeness. There are two types of sampling technique that are commonly used; they are probability and non-probability sampling techniques (Alan Bryman, 2016). Since this research includes the respondents who have awareness on impact investing, the non-probability sampling design; especially the purposive sampling method is adopted so as to get valuable insights based on their experience. Therefore, this study adopts a purposive sampling technique for selecting the samples and uses an open-ended and semi-structured interview method for collecting data. For the comparison of funds, the Impact Funds in the ‘IFZ Sustainable Investments Study: measurement and reporting’1 were chosen. All of these funds which had a regular fund as well from the same asset manager were analysed.

3.7. Sample Size

This study has not set a number of sample sizes as it adopts interview method which depends only on the research question. However, the concept of information power has been widely suggested for attaining a suitable sample size for qualitative studies (Malterud, Siersma, & Guassora, 2016). Hence, based on the above fact, this study aimed to conduct eight interviews with asset managers and eight interviews with retail investors to get insights based on their real-time experience. However, due to the limited interest from asset managers to give an interview, the author was able to interview only three asset managers and one impact investment consultant. Likewise, with strict privacy laws and lack of interest from interviewees, the author was able to interview only four retail investors.

3.8. Data collection methods

Primary and secondary data are the two types of data collection methods used in researches (Creswell, 2015). Primary data collection method directly collects raw data from real-time participants based on the research problem. This method is used when the researcher aims to examine the motivation, attitudes, behaviour and characteristics of a specific research area and it also includes a direct relationship with the study participants (Hair, Celsi, Money, Samouel, & Page, 2015). On the other hand, secondary data is collected from sources such as website, books, and journals, published papers, reports etc, which are already available and is inexpensive. However, this study adopts a qualitative method where both the primary and secondary data collection method is used. Two case studies were conducted using the impact report of R. I. and B.O. Then, interviews are conducted to discover the perspective of impact investment professionals and investors. Based on the review of previous studies conducted on impact investing, Open-ended interview questions were framed while wording and it changed during the interview based on the discussion flow. Further, a comparative study is conducted between ‘impact’ and ‘regular’ funds of the same retail fund provider. The requisite data for the study is collected from the official KIID and factsheet of the fund provided by the asset management companies with further usage of external data providers, namely Morningstar2, Trustnet3 and Financial Times4.

3.9. Summary

This research has attempted to explore the current trends in impact investing, measuring and reporting techniques. This research uses an exploratory research design where the interpretivist philosophy and deductive approach is applied. Furthermore, data for the research are collected from impact investment professionals and investors who were selected using purposive sampling. The collected data is then thematically analysed to achieve the objectives of the research . Finally, to make the research more reliable, all the ethics related to study are considered in this research. The next chapter details the results obtained from the collected data through the qualitative interview.

CHAPTER IV: RESULTS

4.1. Analysis of The Measurement Approach and Reporting Practices of R. I.

R. I. is an asset manager in the field of development investments, providing investment solutions to private, institutional and public investors. The company is selected for analysis of measurement and reporting practices due to their presence for 15 years since 2003, conducts business operations worldwide, has plans to increase its equity exposure in companies in India (Ramakrishnan, 2018) and has publicly accessible information. R. I. has published a vast amount of information on its measurement method online and via several reports. The key figures of the company are as provided in the figure.

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Figure 1. Key Figures of R. I.

Source: Adapted From R. I. (2018)

4.11. Analysis Criteria

In order to monitor development impact, a systemic, evidence-based approach is necessary. A framework of six impact themes is formulated by the company based on a study by the University of Cambridge, which focuses on how best to align impact investor activities with the United Nations’ SDGs (Sustainable Development Goals). The six impact themes are listed as in the figure as basic needs, well-being, decent work, healthy ecosystem & resource security, climate stability, and markets & infrastructure.

In order to address topics that are of highest relevance across all six impact themes, three more broadly focused topics are applied namely gender equality, rural populations and resilience.

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Figure 2. Impact Themes R. I.

Source: Adapted From R. I.(2019)

4.12. Company Overview

R. I., since 2003, a swiss based asset manager has been active in impact investing. Aim of the company is to drive the growth of development-related sectors of finance, agriculture and energy through return-seeking debt and equity investments (Global Impact Investing Network, 2019). USD 3.2 billion of assets under management invested in 550 companies in 97 developing countries is the status as of 2017. Dedicated technical assistance facility was established by R. I. in 2009. Four such facilities are managed by a dedicated team as on 2017. Each facility focusing primarily on climate finance and energy access and is dedicated to different investment strategies. Focused on agribusiness, plans are underway for a fifth facility.

opportunities and investee needs that can be addressed through capacity-building support. R. I.’s team is contacted by investment team to verify that the identified need falls within the scope, based on a set of criteria defined jointly with the facility’s donors. To specify the need in detail and ensure the investee’s commitment to the project, exact scope, timing, and conditions are discussed with the investee. As a second step capacity building project is designed, tailored to the investee’s needs. Identification of the different tasks involved in the project, outlining the qualities sought in an external consultant, and defining milestones by which to measure the project’s execution and success is done at this stage. The request is presented by technical assistance team to finance the project to the Technical Assistance Committee, comprising representatives or nominees of the facility’s donors. Third step involves implementation of capacity building project and step four is monitoring and assessment of the project. The company funds its capacity building support with three core mechanisms namely external donors, investee cost sharing and management fees.

4.13. Responsability’s Measurement Approach

R. I. has been continually developing and improving its approach in a systematic way to measure impact during the previous decade. Primary focus of the company is to guarantee achievement of impact objectives, to comprehend risks of their investments and the impact returns and to track and increase impact by collaborating with investees.

Since inception of IMPACT, each of responsAbility’s portfolio companies provides a positive impact for low income households, SMEs and the broader community in developing countries. They focus on the developmental activities while delivering attractive returns. These same investments benefit the staff and clients directly and indirectly in SME banks, microfinance institutions, smallholder cooperatives, solar home system providers, developers of hydropower plants and other countless inclusive businesses.

4.14. A Thematic Focus

Across all six impact themes in order to address topics of highest relevance, gender equality, rural populations and resilience are three more broadly focused topics are applied. The topic on gender equality best demonstrates how one topic can be applicable to every aspect of development despite representing half of the population as women systematically have less access to basic services, jobs, land and financing. The developing world faced many of the biggest challenges with problems mostly faced by women as a result, they experience worse levels of income, quality of life, and economic and political empowerment. These challenges need to be addressed otherwise there is failure in the goal to achieve development as a whole. Rural population and resilience are similarly critical in the overall development.

4.15. R. I. Standardized Process

ESG is a set of standards set by the company which investors can use to screen potential projects and companies in three core dimensions. Abbreviated as ESG, Environmental, Social and Governance criteria are the core areas identified. Environment criteria observes the performance of the company performs as a steward of the natural environment. Management of relationships with employees, suppliers, customers and the communities from its area of operation forms Social criteria. Leadership, executive pay, audits, internal controls and shareholder rights are dealt with in Governance criteria. The ESG risks are evaluated by R. I. by attributing an ESG rating to every investment. Aims of ESG management is to make risks in these areas transparent and to be used in shaping portfolios either by selecting portfolio companies with the highest relative ESG-scores or by preventing negative, unintended externalities. Identification of significant ESG risks during the due diligence process, mitigation measures are introduced before proceeding further with an investment. The definition for each category is aligned with international standards (IFC, 2019), and defines the magnitude and severity of potential negative consequences. Investors add a sustainability filter to conventional portfolio by applying ESG criteria.

4.16. Analysis

The impact of R. I. could be analysed with the two portfolio companies namely solarnow and ASA international. Solarnow’s impact under the 5 themes and focus area namely rural population are based on themes of responAbility. Basic needs are met with access to electricity for over 12,000 households, wellbeing is impacted with reduced domestic pollution for 60,000 users, 897 jobs were created with decent work theme, climate stability is achieved with reduced CO2 emissions by 2,909 tons, healthy ecosystem and resource security is reached with 80% reduction in customer kerosene usage and market, infrastructure and innovation is satisfied with 174MW of clean energy capacity installed. 60 branch offices are established in rural Uganda and Kenya to address the issues of rural population.

ASA international is another of portfolio company of R. I. whose impact spans the 5 themes in terms of loans disbursed, taxes paid, stable formal job creation (10,046), establishment of microfinance institutions and branches established. Focus area of gender equality is addressed by providing finance to 2 million female clients and resilience is addressed with loan of USD 122.6 m in countries highly vulnerable to climate change.

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Figure 3.Impact Profile SOLARNOW and Impact Profile ASA International Source: Adapted From R. I.(2019)

The impact profiles of SolarNow and ASA International both look very promising. But, deeper thoughts make us question the claims. Let us start with SolarNow. The company seems to have very poor after sales service. The company’s official page in Facebook is filled with complaints from customers.

Let us analyse the impact profile of ASA International now. The taxes paid is being classified under the well-being criteria. This classification is misleading. Further, it is in 10 poor countries which are amongst the poorest 50 in the world. Poor countries are known for corrupt regimes and state sponsored atrocities on domestic people. Next, their operations in climate change vulnerable countries has been classified as ‘Resilience’. If the loan to client is for buying a tailoring machine to generate income, does it really create any resilience in relation to climate change?

4.2. Analysis of The Measurement Approach and Reporting Practices of B. O.

B. O. was selected as it is an initiative of the UN as the first commercial manager of microfinance debt investments worldwide and is a pioneering impact investor that fosters inclusive growth with attractive returns for investors especially in the developing countries. Furthermore, an important selection criterion is the publicly accessible information. B. O. allows all classes to have access to financial services, an inclusive financial system which is essential for shared prosperity and inclusive growth. Entrepreneurship and job creation is fostered by financial inclusion and improves their livelihood at levels of financial security, access to health care and education, climate change mitigation and adaptation and so on (B. O., 2019). Since its inception in 2001, B. O. provided access to financial and related services to over 200 million people worldwide (Zappia & Stodiek, 2018). B. O. has significantly contributed to conceptualization as part of a consortium of global public and private organizations involved in the development

4.21. Analysis criteria

To make an intentional, positive, social and environmental impact across a variety of sectors in emerging and frontier markets is the mission of B. O., at the same time providing attractive returns for investors. Client centeredness is the conviction at the heart of B. O. impact credo. The impact practice is continued to be developed through partnership with investees to achieve greater impact and deliver on the SDGs. B. O. contributes across nine different impact themes over all three ESG criteria. Figure 4. illustrates the close connections between these three aspects and depicts how B. O. investment portfolio them. The figure from the centre outwards shows the first level as the ESG dimensions, the second level depicts B. O. impact themes, and the third maps B. O. contribution to the SDGs. Looking at the social dimension for example of the ESG criteria, the figure shows how B. O. contributes through its engagement in inclusive finance, education finance, affordable housing and health to the achievement of seven SDGs (Zappia & Stodiek, 2018).

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Figure 4. B. O. Impact across ESG, Impact Themes and SDGs Source: Adapted from (B. O., 2019)

4.22. Company overview

Founded in 2001, B. O. was initiative of the UN as the first commercial manager worldwide of microfinance debt investments. The company provides equity financing and debt to institutions in emerging and frontier markets, also giving premium investment solutions to qualified investors. Authorized by FINMA, B. O. is a licensed Swiss asset manager of collective investment schemes., Impact Investing: How is the ‘impact’ measured? - Arasan MJ B. O. Asset Management S.A., its Luxembourg entity is a licensed UCITS management company and authorized by CSSF, it is a licensed alternative investment fund manager (AIFM). B. O. has disbursed in excess of USD 6 billion to 475 institutions across 80 different countries as of April 2019. Over 200 million individual lives are impacted with low incomes and contributing to 13 out of the 17 SDGs.

4.23. B. O. measurement approach

B. O. has been continually developing and improving its approach to measure impact in a systematic way during the previous decade. Guarantee achievements regarding impact objectives are the company’s primary focus. Comprehending the impact returns and risks of investments, and to collaborate with investees so as to track and increase impact. B. O. has been implementing solid social performance management practices throughout its nearly 20 years of existence. For enhanced social and environmental impact and financial returns for both its investors and investees, the company has been developing proprietary impact management tools and tracking its impact footprint. Based on a strong company credo certain practices are developed, consisting of five key principles that constitute the building blocks of impact

The impact management practice at B. O. is led by the Blended Finance Impact Management (BFIM) team. Development and maintenance of impact management tools and processes is the responsibility of the team and it also produces impact data reports. The BFIM team interacts closely with and advises all teams at B. O. to deliver collaboratively on B. O. impact credo (Zappia & Stodiek, 2018).

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Figure 5. Principles of SPIRIT 6.0 Source: Adapted from (B. O., 2019)

Social Performance Impact Reporting and Intelligence Tool (SPIRIT), introduced in 2009, it is a B. O. proprietary tool for social performance management. It i s a n i n - h o u s e assessment tool of B. O. For the expanding offerings as well as better serving its investees andinvestors, B. O. is continuously adjusting and enhancing its processes and procedures to comply with industry best practices.

In order to be considered for the company’s investment offering, each investee has to undergo SPIRIT which is an integral part of B. O. triple bottom line investment analysis. The company’s product offerings have been extended to asset classes beyond private debt, since the first version of B. O. proprietary impact management tool was introduced. While its investment universe has expanded to include new types of investees across more frontier and emerging markets. SPIRIT has reached its sixth iteration in line with this evolution.

4.24. A thematic focus

Practices of B. O. are based on a strong company credo, consisting of five key principles that constitute the building blocks of impact management. The five principles are stated as Keep impact in sight, Measure impact, build skills and tools, stay client centred and contribute to industry best-practices. This first principle involves everyone at B. O. and asks them to always keep the company’s mission namely creation of tangible social and environmental impact, in sight during their daily work activities, as well as while developing and implementing internal processes and procedures. B. O. is to measure its social and environmental impact with the second principle. The company is enabled to learn from its experience and field implementation and to take informed future strategic decisions with the impact data gathered to measure and analyse B. O. impact. The third principle is creation and further development of the firm’s impact investment skills and proprietary impact management tools. The fourth principle calls for B. O. to remain client centred in its efforts to set impact targets and develop measurement tools. B. O. has been an active member as per fifth principle of and signatory to, organisation and principles that is involved in promoting best practices in SRI and impact investing. The impact investment, growth since 2013 and social performance data for MFI in B. O. managed funds are provided in the following figures.

4.25. Analysis

B. O. has a very advanced and stable impact measurement metric that allows us to the impact in a comparable form.

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Figure 6. Top 7 SDG and SPIRIT Score B. O. Source: Adapted from B. O. Monthly Fund Report

B. O. enables investors to see specifically the SDGs towards which the portfolios are concentrated. Also, the spirit score lets the investor to compare different funds in a single no. The SPIRIT is based on the IFC Operating Principles for Impact Management. B. O. scores the investees using primary data collected during the diligence. This alleviates most concern that arise out of doubtful data.

Apart from the fact that the impact figures are not independently audited by a third party and later stage data collection is left out to self-declaration of the investees, B. O. has a highly standardized impact measurement system in place.

4.3. Perspective of Impact Investment Professionals

Expert interviews were conducted with Impact Investment Professionals based on the questionnaire attached in the Appendix 1A. Their views are as follows:

Personal Investment:

All the respondents claimed that they whole heartedly believe in the concept and are personally invested in impact funds.

Social Impact vs Financial Returns:

The respondents were clear that financial returns took precedence over social impact if the investment opportunities meet their minimum criteria of impact.

Sourcing:

The asset managers have different ways of sourcing such as open competition, banks, incubators, word-of-mouth and agricultural fairs. In most cases, it is a proactive approach where they approach the client.

Investment Criteria:

The foremost criterion for any investment is the suitability of it to the fund. The business should be generating income with positive free cash flows. The impact funds don’t engage in VC style investments. The asset managers also engage with only with clients who can produce accounting statements for two years at minimum. Finally, compliance requirements and ESG impact are assessed. In addition to all these, asset managers also favour local employment generation as a vital criterion.

Costs:

All the respondents unanimously agreed that the extensive manpower and logistics required to conduct the field due diligence were the highest cost factor of impact funds. Otherwise, they say that the impact funds don’t cost more than any regular fund. Some added that they took a pay cut when they joined impact investment firms from mainstream hedge fund or PE firms as they were personally motivated towards the work.

Distribution of Investors:

On an average 40% of the investors are institutional (Family offices, Pension Funds and Insurances), another 40% are development finance institutions (IFC, World Bank, Swiss Agency for Development and Cooperation) and 20% retail clients. One of the asset manager pointed out that the current Swiss law on Collective Investment Schemes is making it difficult to work with retail clients.

Strategic Support:

Depending on the investment whether equity or debt and the proportion of ownership, asset managers take various roles in their investees. It includes but not limited to board seat, observer status in board meetings, advisor and support roles.

Impact Measurement and Reporting:

The most common way is impact based on UNSDGs. The impact on each of the SDG criterion is quantified. In most cases they rely on the investee’s self-declared impact data. After which they independently verify it. IRIS+ by GIIN6 and the Operating Principles for Impact Management by the IFC7 are the recent trends in the industry.

Regulatory Landscape:

All the asset managers are in favour of a standardized impact reporting procedure similar to IFRS. Also, they want the government to introduce some hard laws against ‘impact washing’.

4.4. Perspective of Impact Investors

Expert interviews were conducted with Retail Impact Investors based on the questionnaire attached in the Appendix 1B. Their views are as follows:

General Perception:

All the respondents were positive in their conviction that Impact investment shall be leveraged to create significant social developments.

Social Impact vs Financial Returns:

Surprisingly, the retail investors were ok to compromise a little bit on the financial performance to achieve a higher social impact if need be.

Impact Tracking:

Most of them said they rely on the asset manager to deliver the impact mandate. Except for one respondent, the others said they don’t track it.

Theme based Investments:

The retail asset owners are more inclined to invest in funds that were related to the themes they are personally interested in. Poverty alleviation, education, environment, clean energy and fair trade were the most favoured themes.

ESG vs Impact:

The respondents were familiar with the words. However, they were unable to clearly distinguish them. The word ‘impact’ gives a stronger perception of change in real terms than ESG.

Future:

The investors feel that impact investing is gathering mainstream and expect it to grow well in future. Also, a standardization of terms and reporting could be helpful.

4.5. Comparison of ‘Regular’ Fund and ‘Impact’ Fund of the same retail fund provider

4.51. Hermes Investment Management

Table 1. Hermes Global Equity Fund Vs. Hermes Impact Opportunities Equity Fund

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Figure 7. Geographical distribution: Hermes ‘Regular’ vs ‘Impact’

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Figure 8. Sectoral distribution: Hermes ‘Regular’ vs ‘Impact’

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Analysis

Both the funds are very different in terms of their objectives. The retail fund is more concentrated in developed markets while the impact fund is more diversifies and is invested in Latin America, Africa and Middle East as well. On the performance front, the retail fund has outperformed the impact fund but not the benchmark. The impact fund holds assets that are active in the field in the field of genetic research8, sustainable energy9 and chemical technologies10 among others. Morningstar sustainability scores are not available for both the funds.11 12

4.52. BNP Paribas Asset Management

Table 2. Parvest Energy Innovators Vs. Parvest Climate Impact

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(Source: KIID & Factsheet; Morningstar; Financial Times; Trustnet)

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Figure 9. Geographical distribution: Parvest ‘Regular’ vs ‘Impact’

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Figure 10. Sectoral distribution: Parvest ‘Regular’ vs ‘Impact’

Analysis

Both the funds have very similar investment sectors with different objectives. The retail fund invests in companies related to energy sector, mostly oil and gas while the impact fund focusses on climate. The impact fund has a well-diversified and highly sustainable portfolio. It is holding assets that are engaged in sustainable forestry13, textiles14, energy productions15, water management16. It has strongly outperformed both the retail fund as well as the benchmark. Also, it has a lower on-going cost than the retail fund. As expected, the climate impact fund has a high Morningstar sustainability score of 49.6517 while the energy innovators fund has 46.8018.

4.53. Wellington Management Company

Table 3.Wellington Global Impact Funds Vs. Wellington Global Stewards Fund

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(Source: KIID & Factsheet; Morningstar; Financial Times; Trustnet)

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Figure 11. Geographical distribution: Wellington ‘Regular’ vs ‘Impact’

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Figure 12. Sectoral distribution: Wellington ‘Regular’ vs ‘Impact’

A nalysis

The two funds are highly different in terms of their investment styles. The ‘impact fund’ has exposure to Middle east and African securities while the regular one does not. Also, the impact fund has 25% of its assets in the emerging markets while the regular fund has just 11%. The holdings of the regular fund are predominantly blue chip stocks. The impact fund has an interesting portfolio with assets such as Grameen Phone, Safaricom and First Solar. These companies have earned a positive reputation globally for their community oriented business19 20 21. The performance is not being analysed as the impact fund is only two years old. Even in the short period, the fund has outperformed the benchmark. An interesting fact is the impact fund’s sustainability score is 48.4222 while the regular fund has a higher score of 49.8523.

4.54. Amundi Asset Management

Table 4. Amundi CPR Global Resources Vs. Amundi European Equity Green Impact

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Figure 13. Geographical distribution: Amundi ‘Regular’ vs ‘Impact’

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Figure 14. Sectoral distribution: Amundi ‘Regular’ vs ‘Impact’

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Analysis

The two funds are investing in the energy sector with significantly different approach. Both the funds are heavily invested in European and American stocks. The ‘impact’ fund has a high degree of sectoral diversification while the retail is concentrated in just two sectors. The impact fund has been consistently outperforming the retail fund. In- line with the objective, the impact fund is invested in companies such as Air Liquide SA, Acciona SA, Ferrovial SA, Linde Plc and Veolia Environnement. These companies are actively developing technologies that impact transport24, energy25, water and waste management26 etc. The Morningstar sustainability score of the impact fund is far higher than the regular fund at 56.84 which the latter is only 47.99

4.55. NN Investment Partners

Table 5. NN Institutional Global Enhanced Vs. NN Global Equity Impact Opportunities

Abbildung in dieser Leseprobe nicht enthalten

Figure 15. Geographical distribution: NN ‘Regular’ vs ‘Impact’

Abbildung in dieser Leseprobe nicht enthalten

Figure 16. Sectoral distribution: NN ‘Regular’ vs ‘Impact’

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Analysis

Both the funds are very different in terms of their objectives. The retail fund is more concentrated in developed markets while the impact fund is more diversifies and is invested in Latin America, Africa and Middle East as well. On the performance front, the retail fund has outperformed the impact fund but not the benchmark. The impact fund holds assets that are active in the field in the field of genetic research27, sustainable energy28 and chemical technologies29 among others. Morningstar sustainability scores are not available for both the funds.30 31

4.56. UBS Asset Management

Table 6. UBS Equity Global Opportunity Unconstrained Vs. UBS Global Impact Equity

Abbildung in dieser Leseprobe nicht enthalten

(Source: KIID & Factsheet; Morningstar; Financial Times; Trustnet)

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Figure 17. Geographical distribution: UBS ‘Regular’ vs ‘Impact’

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Figure 18. Sectoral distribution: UBS ‘Regular’ vs ‘Impact’

Analysis

The two funds are highly different in terms of their investment styles. The regular fund tries to beat the benchmark by investing in all possible ways while the impact fund has a clear ESG mandate. The impact fund has a higher exposure to emerging markets while the regular fund is more concentrated on developed economies. The impact fund is invested in companies related to food32, transport33, life science34, and education35 among others. A deeper look into these companies show they more commercial than social. It is also reflected by the lower Morningstar sustainability score of 47.5636 while the regular fund has a higher score of 49.6337.

4.57. Standard Life Aberdeen

Table 7. Standard Life: Global Equity Fund Vs. Global Equities Fund

Abbildung in dieser Leseprobe nicht enthalten

Figure 19. Geographical distribution: Standard Life ‘Regular’ vs ‘Impact’

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Figure 20. Sectoral distribution: Standard Life ‘Regular’ vs ‘Impact’

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Analysis

Both the funds are managed by Aberdeen Standard Investments Luxembourg S.A. The impact fund has an ESG mandate while the regular fund doesn’t have any. The impact fund is more diverse regionally while the retail fund has a better sectoral diversification. Both funds are invested in a mix of large and mid-cap stocks. The impact fund is invested in unique pharmaceutical access38 and privately financed public infrastructure39 businesses among others. The performance of the funds cannot be compared as the impact fund is only a year old. The impact fund has a high Morningstar sustainability score of 55.3240 while the regular fund has 49.2841.

4.58. BlackRock Strategic Funds

Table 8. BSF Systematic Global Equity Fund Vs. BSF Impact World Equity Fund

Abbildung in dieser Leseprobe nicht enthalten

(Source: KIID & Factsheet; Morningstar; Financial Times; Trustnet)

Abbildung in dieser Leseprobe nicht enthalten

Figure 21. Geographical distribution: Blackrock ‘Regular’ vs ‘Impact’

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Figure 22. Sectoral distribution: Blackrock ‘Regular’ vs ‘Impact’

Analysis

The two funds are very similar structurally. Both the funds are heavily invested in European and American stocks. The top 10 holdings are popular large cap blue chip stocks for both the funds. But, a deep dive into the total portfolios of the funds show a slightly different picture. It is also a difficult to compare the full portfolios as both have a large no. of holdings, Impact Fund (486) and Regular Fund (780). The impact fund has different assets while maintaining a similar sectoral distribution. One example is the regular fund is invested in Carlsberg while the impact fund is not, staying in line with social focus. On the performance front, the impact fund is a better bet as it has higher returns as well as lower ongoing charges than the regular fund. The Morningstar Sustainability score is only slightly higher for the impact fund at 49.35 while for the regular fund is 48.88.

CHAPTER V: CONCLUSION

Measurement practices related to impact investments garners ideas from diverse fields, and not just assessment of impacts and venture philanthropy. This leads to the development of a conceptual arena which is highly contested. A system of measurement which is functioning in an appropriate manner builds from past achievements and at the same time tends to make compromises that are reasonable to stakeholders. However, measuring impact investing is not yet in that space. It only exists in situations where there are appropriate market mechanisms that are operational (something like measuring reduction in greenhouse gases or probation payment by results contract), the incentives are comparatively weak for enterprises and investors in order to work in tandem to build standards for measurements and appropriate mediums to execute, track and enforce it. While markets for ‘empowerment’ or ‘social justice’ do not exist, there are quasi-markets in existence for enhanced educational attainment and lowered reoffending. A robust engagement on the part of impact investors with the eventual beneficiaries of their social impact after an investment has happened would be required to tackle the inequity of assessment. Infrastructure, in terms of knowledge could be a viable tool to aid the procedure of the development of an agreement on the basis of which techniques as well as indicators can be utilized.

However, practitioners of measurement might not be very open to transition from their divergent set of approaches and indicators and would be driven by varied mind-sets with regards to the restrictions related to impact measurement. Realizing an agreement and ensuring a continuous progress could prove to be a huge challenge for institutions like R. I. and B. O. that intend to stimulate higher standardization in terms of measurement. In addition, any attempt towards ‘system building’ would most probably have some restrictions. A larger emphasis is being accorded upon building appropriate scorecards that would most likely capture the components that investors feel to be of utmost significance and value within any given investment that is being considered.

The measurements and their reporting are always left to the mercy of the investee and asset manager. A microfinance fund that provides loan for income generating activities in climate change vulnerable countries claims to be creating resilience. Such practices show the extent to which misinformation is spread by impact reports.

Further, the comparison between retail funds and impact funds portray that a majority have incorporated clear ESG mandates. This could be observed from the higher allocation of assets to emerging economies. But, what is more important is how do we distinguish between impact funds that directly invest in unlisted companies and other impact funds that just apply an ESG mandate. The former one takes a higher risk at the same time also creates a higher impact. Also, there were impact funds that just had similar portfolios to their regular funds. The sustainability rating methodology for funds largely rely on the ESG impact data gathered from self-disclosure of the companies in the portfolio.

5.1. Limitations of the present thesis

The present thesis is based on the information that were publicly available from the impact investment organisations such as the GIIN. Most of the data are rapidly evolving and sometimes the figures and statistics presented may look a bit outdated. Also, due to the limited no. of interviewees used it is very difficult to garner any decisive conclusion. Nevertheless, their inputs enabled to have a deeper insight to the industry.

5.2. Recommendation

Future research could further elaborate on sustainability rating methodologies especially focusing on the reason why some regular funds and are able to have a higher sustainability score than their impact peers. Also, ‘Impact Washing’ is a trending term and studies could be conducted to prove the existence of such practices with significant evidence.

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Zappia, M. T., & Stodiek, N. (2018). Impact report. Energypedia. Retrieved from

Appendices

Survey Questionnaires

1A. Asset Manager Questionnaire

Abbildung in dieser Leseprobe nicht enthalten

Q-1. How do you source and screen the investment opportunities?

Q-2. How does your organization evaluate impact investment opportunities?

Q-3. Where do you incur the highest costs in managing an 'Impact' fund?

Q-4. Please give an overview of the distribution of your investors. (Institutional, Retail, Family -office etc.)

Q-5. Considering most of the investments being illiquid, how do you manage large redemptions?

Q-6. What strategic role do you play in the companies you invest in? (Advisory, Board member, checks and balance you have etc.)

Q-7. What kind of impact data do you measure and report?

Q-8. What are the different themes you invest in apart from microfinance, microinsurance and climate?

Q-9. What regulatory amendments would make 'Impact' investing more attractive or efficient?

1B. Investor Questionnaire

Abbildung in dieser Leseprobe nicht enthalten

Q-1. What is your general perception regarding Impact investing? Do you believe in the concept?

Q-2. What are your criteria for making an Impact Investment?

Q-3. Are you more inclined towards any specific theme? If so, the reason for that.

Q-4. How do you compare impact funds and regular funds while making an investment?

Q-5. Do you understand the difference between ESG and Impact? If not, have you ever been confused by these terms?

Q-6. How do you see the regulatory landscape regarding these investments?

Q-7. Are you satisfied with the returns of these investments?

Q-8. In your opinion, what are the downsides of such investments?

Q-9. How do you see the future of such investments?

[...]


1 https://www.hslu.ch/-/media/campus/common/fıles/dokumente/h/l-medienmitteilungen-und-news/2018/w/20181122-ifz-sustainable-investments-studie-2018.pdf?la=de-ch

2 http://www.morningstar.ch/ch/

3 https://www.tmstnetoffshore.com/

4 https://markets.ft.com/data/funds/uk

6 https://iris.thegi in.org/tfabuut

7 https://www.ifc.org/wps/wcm/connect/Topics Ext Content/IFC External Corporate Site/lmpact-Investing

8 https://\vww.thermofısher.com/ch/en/home.html

9 http://sse.com/

10 https://matthey.com/

11 http://\vw\v.morningstar.nl/nl/tunds/snapshot/snapshot.aspx?id=F0000022PC&tab=6

12 http://\vw\v.morningstar.nl/nl/ftinds/snapshot/snapshot.aspx?id=F0GBR06Q21&tab=6

13 https://www.ravonier.com/about-us/companv-snapshot/

14 https://www.lenzing.com/

15 https://www.edpr.com/en/node/46375

16 https://www.trimble.com/

17 http://www.morningstar.co.uk/uk/iunds/snapshot/snapshot.asDX?id=F0000000RM&tab=6

18 http://www.morningstar.ch/ch/funds/snapshot/snapshot.aspx?id=F0Q000PXGZ&tab=6

19 hltps://web. archive.org/web/20091231050128/http://gsmworld.com/newsroom/press-releases/1992.htm

20 https://www.csrhub.com/CSR_and_sustainability_information/Safaricom-Limited

21 https://investor.firstsolar.com/news/default.aspx

22 http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000Y4U6&tab=6

23 http://www.morningstar.is/is/funds/snapshot/snapshot.aspx?id=F00000TVEF&tab=6

24 https://www.ferrovial.com/en

25 https://www.acciona.com/

26 https://www.veolia.com/cn

27 https://www.thcrmofishcr.com/ch/cn/homc.html

28 https://sse.com/

29 https://matthev.com/

30 http://www.morningstar.nl/nl/lunds/snapshot/snapshot.aspx?id=F0000022PC&tab=6

31 http://www.morningstar.nl/nl/lunds/snapshot/snaDshot.aspx?id=FQ(}BR06Q21&tab=6

32 https://conagrabrands.com/

33 http://www.westir.co.ip/global/en/

34 https://www.takeda.com/

35 http://www.neworiental.org/english/who/201507/8213540.html

36 http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000ZN0L&tab=6

37 http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000WCKE&tab=6

38 https://www.clinigengroup.com/

39 https://www.laing.com/

40 http://www.morningstar.de/de/funds/snapshot/snapshot.aspx?id=F00000ZMDG«S:tab=6

41 http://www.momingstar.de/dc/funds/snapshot/snapshot.aspx?id=F0GBR0S2CO&tab=6

72 of 72 pages

Details

Title
Impact Investing. How is the impact measured?
College
Lucerne University of Applied Sciences and Arts
Author
Year
2019
Pages
72
Catalog Number
V495816
ISBN (Book)
9783346025555
Language
English
Tags
Impact Investing, Impact Measurement
Quote paper
Arasan M J (Author), 2019, Impact Investing. How is the impact measured?, Munich, GRIN Verlag, https://www.grin.com/document/495816

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