a guide to mapping the impact of an investment€¦ · the matrix is designed to help investors...

IMPACT MANAGEMENT PROJECT

A Guide to Mapping the Impact of an Investment


Introduction

02

This paper provides guidance on how to map the impact of an investment product using the Investor’s Impact Matrix.The Investor’s Impact Matrix broadly classifies the different kinds of impact of a growing array of investment products, so that asset owners and their advisors can more efficiently match their intentions to suitable products and vice versa. The logic of the Matrix is based on over 1000 organisations - including many leading investors and businesses - coming together to agree on norms for how we understand the impact of an investment. It has been important that these norms are grounded in robust theory, but the Matrix is also designed to be practical today, when there are real limitations to the quality and availability of data on all of the impacts of underlying assets. As a result, the attached guide recommends that a product is classified using whatever data is available about the impact of the underlying assets. In some cases, this might be the use of ESG policies as proxies for mitigating a whole range of negative impacts on stakeholders. In other cases, especially those products that, in addition to acting to avoid negative impact, are positioning themselves as helping to tackle a pressing social challenge for a specific population, one could expect a more complete set of impact performance data. Likewise, some impacts, such as CO2 emissions, just lend themselves much more readily to impact-based data. Rather than setting an impractically high impact measurement bar for investment products to be able to classify themselves, the Matrix encourages all products to map their position based on whatever performance data they have available - and simply to be transparent about the data they are relying on to make that judgement.

ContentsThe Investor’s Impact Matrix............The impact of underlying assets / enterprises............................................The investor’s contribution...............Mapping a portfolio’s impact............Appendix..............................................

03 06091112

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The Investor’s Impact Matrix

03

Asset owners are increasingly interested in the impact of their investments on society and the environment. For example, a survey of 1,000 defined contribution pension scheme members aged 22-65 by Ignition House found that the vast majority (81%) believe businesses have a wider social responsibility than simply making a profit, 74% want to protect society’s vulnerable people, and 73% felt strongly about the environment.


Against this backdrop of growing interest from asset owners, asset managers are increasingly looking to assess and communicate the effects of investments on people and planet. One study suggests that over a quarter of the world’s professionally managed assets now factor their social and environmental impact into investment decisions – and the trend is growing fast. Asset owners’ interest in understanding impact can stem from a number of different intentions, including: • To mitigate reputational risk or prevent

use of their capital conflicting with personal values

• To enhance their long-term financial performance

• To help tackle a specific social or environmental challenge that they care about.

To be able to invest in alignment with their particular intention(s), asset owners and/or their advisors need to be able to understand the impact of products within their current portfolio and then make investment/divestment decisions accordingly to transition their portfolio over time.

Most asset owners’ portfolios include diverse assets (from publicly-listed companies to private businesses to infrastructure projects). To understand whether the impact of their overall portfolio is in line with their intentions, asset owners therefore need an approach to understanding impact that suits a wide array of investment products and enables a ‘total portfolio’ view of impact performance. Asset managers regularly contribute to reducing negative effects and increasing positive

effects for people and the planet through what is commonly termed ‘responsible’ and ‘sustainable’ investing. If we can illustrate more clearly how asset managers - through their investment products - deliver different types of impact for people and planet through various different asset choices as well as through the particular contribution they make as investors, this will help ensure the asset management industry supports the transition to a more sustainable economy.

With this in mind, a classification system that groups investment products with similar impact characteristics can help to differentiate and communicate the impact of a particular portfolio or product and, as such, support more efficient matching of supply of capital with demand - much like asset classes act as a useful heuristic for connecting suitable investment products with asset owner’s financial goals.

The Investor’s Impact Matrix has been designed to provide this connection between asset owners and investment products. Such a Matrix both: • Improves visibility of investment

products for asset owners, increasing their confidence that their intention can be matched to suitable product and thereby stimulating greater and more efficient capital flows;

• Allows asset managers / product providers to present their investment products in a clear and authentic way, preventing inappropriate comparisons and enabling them to be efficiently matched to asset owners’ intentions.


04


The Matrix is the result of over a thousand organisations globally working together - from enterprises of all kinds, to investors, to civil society organisations, to evaluators. It recognises that for any high-level impact classification system to be successful it must be driven by the kind of data that underlying assets find useful to understand and improve their total impact on people and the planet. In turn, this means that asset owners can look through to see detailed data on impact performance (or goals, in the case of new products), should they wish.

In this guide, we describe how to use data on the impact performance of underlying assets in a portfolio (whether actual or forecast) to determine which ‘class’ on the Investor’s Impact Matrix an investment product belongs to. This approach does not prescribe metrics, but instead asks investors to classify performance based on whatever quantitative or qualitative data is available from the underlying asset/ enterprise, and be transparent about how they came to their conclusions.

What is the Investor’s Impact Matrix?The Matrix is designed to help investors describe the impact performance (or, if a new product, the impact goals) of an investment, or portfolio of investments (see Figure 1).

An investment’s impact is a function of:

1. The impact of the underlying asset(s)/ enterprise(s) that the investment supports; (the x-axis), plus

2. The contribution that the investor makes to enable the enterprise(s) (or intermediary investment manager) to achieve that impact. (the y-axis).

By plotting the impact of different investments on the matrix, we can map the different investment options currently available to investors. On the following pages, we describe how to classify an investment product on the Investor’s Impact Matrix.

“This approach does not prescribe metrics, but instead asks investors to classify performance based on whatever quantitative or qualitative data is available from the underlying asset/enterprise, and be transparent about how they came to their conclusions.”



05


Figure 1 | The Investor’s Impact Matrix

IMPACT OF UNDERLYING ASSETS / ENTERPRISES

INV

ESTO

R’S

CO

NTR

IBU

TIO

N

Act to avoid harm

Signal that impact matters+ Engage actively+ Grow new/undersupplied capital markets+ Provide flexible capital

E.g. Ethical bond fund






Benefit stakeholders Contribute to solutions

E.g. Positively-screened / best-in-class ESG fund

E.g. Sovereign-backed bonds (secondary market) funding vaccine delivery to understand people or renewable energy projects

E.g. Shareholder activist fund

E.g. Positively-screened / best-in-class ESG fund using deep shareholder engagement to improve performance

E.g. Public or private equity fund selecting and engaging with busi-nesses that have a significant effect on education and health for underserved people

E.g. Anchor investment in a negatively-screened real estate fund in a frontier market

E.g. Positively-screened infrastructure fund in a frontier market

E.g. Bond fund anchoring primary issuances by businesses that have a significant effect on environmental sustainability, access to clean water and sanitation

Investment archetypes not yet defined

E.g. Positvely-screened private equity fund making anchor investments in frontier markets

E.g. Private equity fund making an-chor investments in businesses that have a significant effect on income and employment for underserved people



E.g. Below-market charity bonds, or an unsecured debt fund focused on businesses that have a significant effect on employment for underserved people



E.g. Patient VC fund providing anchor investment and active engagement to businesses that have a significant effect on energy access for underserved people

A B C

1

2

3

4

5

6

Only relevant for investors whose intentions and constraints are such that they are willing and able to provide flexible capital.

Impact of underlying assets

06


The impact of underlying assets/enterprises (x-axis)1. Look at what data each underlying asset has across the five dimensions of impact for each of its

effects on people or the planet: intended and unintended, positive and negative.

For each effect, assess the level of performance achieved across all five dimensions. If you are creating a new investment product, assess your goals across the five dimensions using performance data from the underlying assets in your investment pipeline. Although we ultimately seek a data-driven approach to assessing impact, we also recognise the practical limitations of this approach where data might currently be scarce.

See Appendix 1 for an illustration of how an enterprise’s effects can be assessed with this approach using whatever data is available, including using proxies and/or third party impact ratings. Appendix 2 provides a detailed illustration of how a single effect is assessed. The accompanying excel includes a template which may help organise existing data along the dimensions so as to make the ‘assessment’ for classification purposes. The use of this template is optional, it may well be that the assessment can be made directly from looking at how data is presented in existing proprietary frameworks/impact data management systems.

ENTE

RPRI

SE

CO

NTR

IBU

TIO

N

IMPACT DIMENSION

CATEGORIES OF IMPACT DATA ASSESSMENT

What outcome(s) does the effect relate to, positively or negatively? Is it an important outcome to the person or planet?

How much of the effect occurs? Is the effect a deep driver of the outcome? Does it occur for many people and/or last for a long time?

Who experiences the effect, and how underserved are they in relation to the outcome?

How does the effect compare and contribute to what is likely to occur anyway?

What is the risk to people and planet that the impact does not occur as expected?

Outcome in periodCapital typeSDGSDG target and indicatorImportance of <outcome> to stakeholder

StakeholderGeographyBoundaryDemographic status in relation to <outcome> prior to <effect>

[SCALE] Number of <stakeholder> experiencing outcome

[DEPTH] Degree of change experienced by <stakeholder> as a result of <effect>

[DURATION] Time period for which <stakeholder> experiences <outcome>

[DEPTH] Estimated degree of change that would occur anyway for <stakeholder>

[DURATION] Estimated time period that <outcome> would last for anyway

WH

ATW

HO

HO

W M

UC

HRI

SK

What level of evidence risk are you taking?What level of external risk are you taking?What level of stakeholder participation risk are you taking?What level of drop-off risk are you taking?What level of efficiency risk are you taking?What level of execution risk are you taking?What level of alignment risk are you taking?What level of unexpected impact risk are you taking?

Negative outcome

Positive outcome

Well-served Under-served

Small scale Large scale

Low degree High degree

Short-term Long-term

Much worse than what is

likely to occur

Much better than what is

likely to occur

High risk Low risk

Unimportant outcome

Important outcome



07


2. By assessing impact performance data (or expected impact performance data) across the five dimensions, we can classify the impact of each effect.

WHAT

HOW MUCH

WHO

CONTRIBUTION

RISK

Does cause harm

Benefit stakeholders

Contribute to solutions

Important negative outcomes

Various

Various

Various

Various

Important negative outcome(s)

High degree of positive change

Underserved

Likely same or better

Various

Important positive outcome(s)

Various

Various

Likely same or better

Various

Important positive outcome(s)

High degree of positive change and/or

Underserved

Likely better

Various

- DEPTH

Various Various Various For many and/or

Various Various Various Long-term

CLASSIFICATION OF IMPACT

3. An enterprise’s impact is the combination of its effects on people and the planet. By assessing an enterprise’s individual effects as A, B or C (or ‘does/may cause harm’), we can classify the impact of the overall enterprise, as shown below.

Is the enterprise acting to avoid harm to its stakeholders?

Are some of the enterprise’s effects generating positive effects for stakeholders?

Yes

Does/may cause harm

Are any of the enterprise’s effects contributing to solutions to social or environmental challenges?

Act to avoid harmNo

YesBenefit stakeholders

No


Unknown

Unknown

Unknown

Unknown

Unknown

Unknown

Unknown

May cause harm

Act to avoid harm

ASSESSMENT TO LOOK FOR...

No

Yes

- SCALE

- DURATION


08


For example, this healthcare enterprise uses the five dimensions to assess data about each of its effects on people and the planet.

The analysis suggests the company is making a significant contribution to positive employment outcomes for underserved people. Alongside these positive effects on employment, this healthcare service enterprise has other important positive effects on its customers and is mitigating negative effects on the environment. Each of these effects can be classified across the A, B or C, as illustrated below:

WHAT

HOW MUCH

WHO

CONTRIBUTION

DIMENSIONEFFECT #1:

CO2 emissions

Assessment

What outcome(s) does the effect relate to, and how important are they to the people (or planet) experiencing it?

How significant is the effect that occurs in the time period?

Who experiences the effect and how underserved are they in relation to the outcome?

How does the effect compare and contribute to what is likely to occur anyway?

Which risk factors are material and how likely is the effect different from the expectation?

Important positive outcome: Decent income

Deep change, at scale, long-term

RISK

EFFECT #2:Customer of service

EFFECT #3: Care worker wages

Employees, underserved

Likely better

Low risk

Important negative outcome: CO2 emissions

Marginal depth

The planet, underserved

Likely the same

Low risk

Important positive outcome: Access to healthcare services

At scale; marginal change

Customers, not underserved

Likely better

Medium risk

Because this enterprise not only seeks to avoid harm and benefit its stakeholders, but also contributes to a solution to a societal challenge, its overall enterprise impact is: Contribute to solutions.

Act to avoid harm

Benefit stakeholders



The investor’s contribution

09


The investor’s contribution (y-axis)1. Consider which of four strategies you use, or plan to use, as an investor to ensure you

contribute to the impact of the enterprise that would not have happened in your absence. They are not mutually exclusive, and are often used in combination:• Signal that impact matters: choose not to invest in or to favour certain investments -

such that, if all investors did the same, it would ultimately lead to a ‘pricing-in’ of effects on people and planet by the capital markets.

• Engage actively: use expertise and networks to improve the environmental/societal performance of businesses. Engagement can include a wide spectrum of approaches - from dialogue with companies to investors taking board seats and using their own team or consultants to provide hands-on management support (as often seen in private equity). While a significant dialogue with companies, including about environmental, social and governance factors, is a normal part of the fund management process, the phrase ‘engage actively’ reflects a strategy that involves, at a minimum, significant proactive efforts to improve businesses’ effects on people and the planet.

• Grow new or undersupplied capital markets: anchor or participate in new or previously overlooked opportunities that offer an attractive impact and financial opportunity. This may involve taking on additional complexity, illiquidity or perceived higher risk. In public equities, bonds or infrastructure, an investor might move from holding mainly well-subscribed issuances (which is just a signalling strategy) to participating in a higher proportion of undersubscribed issuances.

• Provide flexible capital: recognise that certain types of enterprises will require acceptance of lower risk-adjusted return in order to generate certain kinds of impact. For example, creating a new market for previously marginalised populations can require very patient capital that cannot offer a commercial return.

See Appendix 3 for examples of different approaches that fall under each strategy.

http://www.impactmanagementproject.com/latest/investor-guidance/

10


The example below illustrates that Investor A does not expect to make any contribution other than to ‘Signal to the market that impact matters’, as she chooses not to ‘Engage actively’ with the underlying enterprises.

Alternatively, Investor B has a strategy to ‘Engage actively’ with the underlying enterprises to provide impact management support.

INVESTOR’S CONTRIBUTION







“I want to influence the capital markets as a whole to incorporate impact into analysis and pricing”

“I want to generate competitive financial performance”

“I want to invest in well-established markets”

“I will use active shareholder engagement to ensure enterprises deliver and improve impact”

“I am unable to engage actively to help enterprises deliver and improve impact”

Investor A

Investor B

1

2

3

4

5

6

Y

N

N

Y

N

‘Signal’?

‘Engage’?

‘Engage’?

‘Flexible capital’?

‘Grow newmarkets’?

The investor’s contribution


Mapping a portfolio

11


Mapping a portfolio’s impactClassify the impact of a portfolio of assets by looking at the classification of the underlying assets (A, B or C) in the portfolio, as well as the strategies that an investor uses to make a contribution to impact (1-6).

If there is a range of impact in a portfolio (e.g. some B and some C enterprises), or the investor contribution strategy varies per investment, indicate what percentage of AUM is invested in which impact class.

For example, see below for an illustration of how a product, ‘Health Fund I’ has been plotted based on performance (in grey). If the product is new, and there is insufficient performance data, the goals of the product can be plotted instead (in pink).

IMPACT OF UNDERLYING ASSETS / ENTERPRISES

INV

ESTO

R’S

CO

NTR

IBU

TIO

N

Act to avoid harm







Benefit stakeholders Contribute to solutions

Health Fund I (10%)

A B C

1

2

3

4

5

6

Health Fund I (15%) Health Fund I (75%)

Health Fund I

Please note: Given that many portfolios will be mapped by their goals, until there is sufficient performance data available to map actual performance, it is possible that the placement of a product could shift over time compared to what was initially expected. In this way, the matrix can help inform asset owners’ decision-making on whether to re-allocate to a specific portfolio, or invest elsewhere.

Only relevant for investors whose intentions and constraints are such that they are willing and able to provide flexible capital.

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f em

ploy

ees

Aver

age

tenu

re o

f em

ploy

ees

(mon

ths)

Dom

icili

ary

care

indu

stry

be

nchm

ark:

ave

rage

wag

e pe

r hou

r

Dom

icili

ary

care

indu

stry

be

nchm

ark:

ave

rage

tenu

re

of e

mpl

oyee

s (m

onth

s)

£9.5

0

£8.7

5

Hum

an

Dec

ent

inco

me

8.5.

1

Empl

oyee

s

UK

Nor

th W

est

£7.5

0

746

38 £8.2

8

14

Evid

ence

risk

AN

ALY

SIS

(A/B

) = 10

9%

Mea

n =

5

(C/B

) = 8

6%

(A/C

) = 12

7%

(A/H

) = 11

5%

(F/I)

= 2

71%

Dat

a is

dire

ctly

m

easu

rabl

e an

d ve

rifiab

le

ASS

ESSM

ENT

Posi

tive

Impo

rtant

Und

erse

rved

Hig

h de

gree

Like

ly b

ette

r

Like

ly b

ette

r

Low

Com

pany

dat

a

Com

pany

dat

a

Com

pany

dat

a

Com

pany

dat

a

Com

pany

dat

a

Com

pany

dat

a

Com

pany

dat

a

n/a

Indu

stry

st

atis

tics

Indu

stry

st

atis

tics

UK

LWF

IIRC

UN

UN

Ann

ual s

urve

y

CLA

SSIF

ICAT

ION

CO

NTR

IBU

TE T

O S

OLU

TIO

NS

Dat

a so

urce

CO

MM

ENTA

RY

The

wag

e re

ceiv

ed is

109%

of t

he a

mou

nt re

cogn

ised

to b

e a

‘goo

d’ w

age,

so

this

out

com

e is

pos

itive

.Th

e th

resh

old

for a

‘goo

d’ w

age

is a

mou

nt re

quire

d fo

r a d

ecen

t le

vel o

f inc

ome,

cal

cula

ted

by th

e U

K Li

ving

Wag

e Fo

unda

tion.

The

IIRC

fram

ewor

k ca

tego

rises

this

out

com

e as

an

effec

t re

late

d to

hum

an e

xper

ienc

e..

The

SDG

this

out

com

e re

late

s to

is D

ecen

t Wor

k (S

DG

8).

The

spec

ific

SDG

targ

et th

is e

ffect

driv

es is

8.5

.1, w

hich

is

mea

sure

d by

ave

rage

hou

rly e

arni

ngs.

The

aver

age

resp

onse

to th

e jo

b sa

tisfa

ctio

n su

rvey

was

that

>9

0% e

mpl

oyee

s vi

ew th

eir e

mpl

oym

ent a

s ‘v

ery

impo

rtant

’.Th

e eff

ect o

ccur

s fo

r dom

icili

ary

care

pro

vide

rs, w

ho a

re

empl

oyee

s of

the

ente

rpris

e..

The

ente

rpris

e is

loca

ted

in th

e U

K.

The

ente

rpris

e is

loca

ted

in th

e N

orth

Wes

t reg

ion

of th

e U

K.

Prio

r to

empl

oym

ent a

t the

ent

erpr

ise,

the

empl

oyee

s w

ere

earn

ing

86%

of t

he ‘g

ood’

wag

e am

ount

. The

em

ploy

ees

wer

e no

t exp

erie

ncin

g a

posi

tive

outc

ome

and

so w

ere

unde

rser

ved.

The

ente

rpris

e is

del

iver

ing

this

effe

ct fo

r 746

em

ploy

ees.

The

degr

ee o

f cha

nge

tow

ards

the

outc

ome

is 12

7% re

lativ

e to

th

e ou

tcom

e in

prio

r per

iod.

The

aver

age

tenu

re o

f em

ploy

ees

is 3

8 m

onth

s, a

ccor

ding

to

ente

rpris

e em

ploy

men

t dat

a.

The

aver

age

tenu

re o

f em

ploy

ees

(38

mon

ths)

is lo

nger

than

the

indu

stry

ave

rage

(14

mon

ths)

mak

ing

it lik

ely

that

the

dura

tion

of

this

out

com

e is

bet

ter t

han

the

mar

ket.

The

wag

e pe

r hou

r of t

his

ente

rpris

e is

155%

of t

he a

vera

ge

wag

e pe

r hou

r in

the

dom

icili

ary

care

indu

stry

, mak

ing

it lik

ely

that

this

out

com

e is

bet

ter t

han

wha

t the

<st

akeh

olde

r> w

ould

ot

herw

ise

expe

rienc

e.

The

ente

rpris

e ha

s su

ffici

ent d

ata

to u

nder

stan

d th

e eff

ect

acro

ss a

ll ot

her f

our d

imen

sion

s. T

he ri

sk to

the

peop

le a

ffect

ed

of im

pact

diff

erin

g fro

m e

xpec

tatio

ns is

ther

efor

e lo

w.

Effec

t 1: a

sub

-gro

up o

f wor

kers

ear

n in

crea

sed

wag

es

Appendix 3

14


Illustrative approaches within each investor contribution strategy.

Investor’s strategy to make a contribution to the underlying enterprise (or intermediary manager) that would not otherwise occur:

Signal that impact matters

E.g. an investor might seek to ensure enterprises are at least trying to do no harm (‘Avoid’) by:

• putting policies in place for investment selection and management

• requiring a company to share data on impact through diligence and the investment period

Engage actively

E.g. an investor might:

• be able to provide specialist sector expertise to improve performance

• help with impact data analysis to drive impact management decision-making

• have networks of experts to help with management team capacity building or strategy

• use their voting rights to influence decision-making on a particular social or environmental issue

Grow new / undersupplied capital markets

E.g. in pursuit of a market-return rate:

• a fund-of-funds might make a cornerstone investment in a first-time fund manager

• an investor might decide that there is a misperception of risk in a certain geographical location and set up a fund there, seeking to attract institutional investment to the region

• an investor might invest in illiquid products, with the expectation that this will enable a higher than average risk-adjusted return for that asset class

• an investor might take on additional complexity in order to structure a new type of financial product, e.g. a social impact bond

Flexible capital

E.g. in pursuit of more or better impact an investor might:

• provide capital where only a full or partial return of principal is expected

• provide capital where a lower-than-market-rate return is expected

• offer first-loss capital

14



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The Impact Management Project, April 2018


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