Impact Investment Emerges as Priority
UK-based asset manager Schroders has been named as one of the ‘best-in-class’ for this type of investment strategy.
Investors’ management, measurement and monitoring of impact investing strategies has been steadily improving.
This is according to intelligence provider BlueMark’s fifth annual ‘Making the Mark’ report, which assessed the best practices and trends of impact investment strategies worth a total US$234 billion in combined assets – equivalent to 20% of the global impact investing market.
“What sets impact investing apart is its focus on intentionality,” Sarah Gelfand, President of BlueMark, told ESG Investor. “Impact must be rigorously measured and managed to ensure investors can accurately assess whether their actions are advancing sustainability-related goals, or inadvertently negatively contributing to social and environmental problems.”
One of the biggest positives observed this year was the rapid maturation of the impact investing market. BlueMark identified significant improvement in how impact investors approached due diligence, with 65% conducting pre-investment assessments of impact-related risks and 42% establishing impact targets at the time of investment.
Seventy-five percent of surveyed investors said they regularly assessed their potential contribution to impact before making an investment – up from 68% the previous year – showing a growing sophistication in impact screening and analysis early in the investment lifecycle.
Over half (55%) of investors had also adopted robust practices to measure and manage ESG risks, which BlueMark attributed to emerging regulations, such as the EU’s Sustainable Finance Disclosure Regulation.
As part of its evaluation, the platform considered whether investors were monitoring impact data against expectations or a target, and whether they solicited input from end-stakeholders to validate outcomes.
“There has been continuous year-over-year increases across both indicators, reaching respective highs of 58% and 35% this year,” said Gelfand.
The report noted a wide variety in terms of how investors have approached impacting monitoring, with 55% using the Global Impact Investing Network’s IRIS+ platform, while 19% chose the Harmonised Indicators for Private Sector Organisations, and 14% the Global Reporting Initiative. An additional 30% said they were using different, more customised frameworks for impact measurement.
In addition, the sample of assessed investors displayed good consideration of all 17 UN Sustainable Development Goals (SDGs). SDG 8 (economic growth) and SDG 13 (climate action) were the most represented, while SDG 16 (institutions) and SDG 17 (partnerships) were the least represented – likely due to a “relative lack of associated investable opportunities”, BlueMark suggested.
Maturing market
Alongside the report, BlueMark also updated its practice leaderboard, which annually highlights ‘best-in-class’ impact management systems and practices among investors. New entrants this year included UK-based asset manager Schroders.
“It’s encouraging to see the market continuing to mature, with practices that are critical to maintaining its integrity – such as impact due diligence, target-setting and investor contribution – gaining prominence,” Catherine Macaulay, Co-head of Impact Management at Schroders, told ESG Investor.
Schroders collaborated with BlueOrchard, which joined the wider group in 2019 to develop an impact framework across listed and private assets. The framework now applies to 20 impact funds across asset classes including listed equity and debt, infrastructure, real estate and fund- of-funds.
Last month, Schroders launched its European Impact Equity strategy to meet institutional investor demand, targeting EU-listed equities actively contributing to the SDGs. This followed the unveiling of a listed global equity impact fund earlier this year, designed to invest in products, services and operations focused on solving societal and environmental challenges globally.
Macaulay told ESG Investor that Schroders aims to continue to “scale impact with integrity”.
In its 2023 institutional investor survey, Schroders found that almost 60% of the 700 global investors included identified impact investment as their preferred approach to sustainable investing. A separate survey from BNP Paribas last year forecast that impact investing would soon overtake ESG integration as the most popular sustainability-related investment strategy.
The impact investing market grew from US$420.91 billion to US$495.82 billion from 2022 to 2023, with a projected compound annual growth rate of 17.8% (US$955.95 billion) by 2027.
Work in progress
On the downside, the data indicates that investors still have considerable work to do in several areas to fully align with industry best practices, Gelfand argued.
One of these areas is assessing the actual outcomes of impact-focused investments: as found in the report, just 35% of investors engage with stakeholders to solicit feedback on investment outcomes. Although this represents a considerable increase from the 11% recorded in 2021, it shows this is also an area that many find still challenging.
“As more investors adopt best practices for impact performance monitoring, we shall start to develop a clearer picture of what’s working in the market, and where there are gaps that still need to be filled,” said Gelfand.
To ensure market standardisation and transparency, BlueMark’s practice verification methodology is grounded in the Operating Principles for Impact Management – an industry standard for integrating impact throughout the investment lifecycle hosted by the Global Impact Investing Network (GIIN).
The principles cover areas such as strategic intent, origination and structuring, portfolio management, and impact at exit, with one of their pillars centred around disclosure and independent verification.
Schroders has been adhering to the principles since 2021, when it choose to engage BlueMark to undertake an independent verification of its impact management and measurement systems to demonstrate alignment.
Other bodies, such as the Impact Disclosure Taskforce, also aim to address ongoing disclosure and data challenges surrounding impact investing. In addition, the G7-backed Impact Taskforce was created to promote impact-driven economies and societies by designing principles and recommendations for financing vehicles.
“The impact investing market today is so large and diverse that there is a wide variety of approaches to implementing and managing impact investing strategies,” said Gelfand, arguing that investors should be more open-minded when it comes to experimenting with different tools and techniques.
“There are no shortage of frameworks and tools readily available for investors, but managing an impact strategy involves more than just picking a few KPIs and monitoring them,” she added. “It requires intention and dedication to integrating impact throughout the investment lifecycle.”
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