- Some of the biggest signatories to the Operating Principles for Impact Management use the UN Sustainable Development Goals to categorise their impact assets.
- Signatories provide varying levels of detail on how they both assess impact and incentivise staff to achieve it.
- The five firms Capital Monitor assessed diverge most in how they assess the contributions of their investments or managers to achieving impact.
Impact investing – allocating capital with the aim of creating a positive environmental or social impact, as well as a financial return – is a niche but fast-growing segment of the asset management industry.
Some $2.3trn worth of investments in 2020 could be broadly considered as impact investments, estimated a July 2021 report by the International Finance Corporation (IFC), the World Bank’s private sector arm. Of those, $636bn went into ‘measured’ impact assets – investments for which there is a measurement system in place – up 25.9% from $505bn in 2019.
Indeed that is one of the key challenges: agreeing on how to assess and measure impact. There is not one widely agreed or regulated approach or standard, but calls are getting louder for more clarity and convergence on principles and reporting standards. A growing number of organisations are seeking to address the issue.
Capital Monitor has taken a closer look at one of the credible and well-established initiatives – the Operating Principles for Impact Management – and its signatories. The IFC led the development of the framework, but it is now overseen and run by a separate and independent Secretariat that is hosted by the IFC.
The set of nine Impact Principles was launched in April 2019 with the aim of helping investors design robust internal systems to manage their impact investing activity (see table below). It is one of 23 reporting frameworks cited by the Impact Management Platform – a collaboration started in November by the IFC, OECD and several United Nations programmes that is trying to coordinate efforts on impact management.
Signatories pay a one-off registration fee of between $2,500 and $10,000, based on a signatory’s total assets under management (AUM). They commit to annual public disclosure of the proportion of their total AUM that are ‘impact assets’ and how they implement them, with independent verification.
The IFC sees this transparency requirement as a “distinctive feature” of the framework and one that avoids concerns about “impact-washing”, a spokesman says. It also meant Capital Monitor could compare disclosures of the five biggest impact investors by assets among the private sector fund managers on the list: RockCreek, Credit Suisse, UBS, Nuveen and Zurich (see chart below).
The principles have 152 signatories covering 37 countries and $428.7bn in impact assets. They include asset managers such as BlackRock and KKR, and emerging markets specialist players; development finance institutions (DFIs), including the European Investment Bank and, of course, the IFC; and financial groups such as Credit Suisse and UBS.
The US has the highest number of signatories at 40, followed by Switzerland at 15 and the UK at 13. Continent-wise, Europe (73) and the Americas (55) are home to the bulk of organisations (see chart below).
The 40 biggest managers of impact assets on the list (of which the top 39 have $1bn or more in such investments) account for the vast bulk of the total, with $405bn. Under broad categorisations, 22 are asset managers and 18 are DFIs.
Categorising and incentivising impact
Most of the five investors looked at by Capital Monitor use the UN Sustainable Development Goals (SDGs) to categorise their impact assets and illustrate their adherence to Principle 1.
RockCreek’s investment universe covers eight SDGs and UBS covers nine, while Zurich’s investment contributes predominantly to four SDGs. Credit Suisse says its process to assess the strategic impact objectives of relevant products includes determining how they address key SDGs. Nuveen’s impact assets were defined prior to the SDGs officially launching on 1 January 2016, but it has since aligned with them.
With regard to incentivising impact investing, several of the five companies focus on dedicated impact investment staff, though it is clearly an evolving area.
Nuveen says that since last year it has explicitly included ESG and impact management management into individual-level performance goals.
Nuveen says its investment staff are incentivised to achieve both impact and financial performance as both are “inextricably linked in our investment strategies”. Since last year, it adds, the private markets impact investment team has explicitly included ESG and impact management into individual-level performance goals.
Credit Suisse, meanwhile, says incentives for key senior members of its team dedicated to sustainability and impact investing are directly aligned with the achievement of impact overall, but not directly connected to the granular impact metrics of individual fund products.
UBS's CEO and other executive board members have specific ESG-aligned goals, and some investment analysts and portfolio managers have key performance indicators (KPIs) focused on sustainability integration. The group adds that it is considering “further alignment of incentives to sustainability and impact across various areas of the firm”.
Measuring contribution to impact
In order to establish a manager’s contribution to the achievement of impact, the five firms’ approaches – or at least what they disclose about them – appear to vary widely, perhaps reflecting the challenges they face here.
To verify how their impact management systems align with the impact principles, Credit Suisse uses KPMG, Nuveen and UBS employ impact investment consultancy BlueMark, while Zurich relies on PwC.
RockCreek compares the performance and alpha of its impact investments against a peer group of investments.
Nuveen says its private market impact investments deploy capital in undersupplied markets and that it is among the largest buyers of bonds with explicit social and environmental objectives. In the past year, the US company adds, its investment team has begun to track engagement with issuers to encourage high-quality reporting on outcomes and educate on innovative new structures.
Like Nuveen, Zurich points to its fixed income investments as contributing to impact. In respect of its private equity assets, the group says its investment professionals regularly participate in meetings and in some cases it obtains board seats.
When it comes to assessing impact, RockCreek sets and tracks KPIs, while Credit Suisse, UBS and Nuveen use the Impact Management Platform framework. Nuveen and Zurich also use Iris+ (the Global Impact Investing Network’s system for measuring, managing and optimising impact), the Green Bond Principles and the EU Taxonomy.
The five companies also provide details of how they assess and manage the potential negative impact of investments. UBS, for instance, has established a monitoring process for fund managers, where they debate progress towards impact outcomes on a quarterly basis and reconvene on an ad hoc basis when a new investment is made.
Ensuring post-exit impact
Principle 7 requires signatories to explain how they seek to conduct a responsible exit as part of their measurement and monitoring of impact.
Nuveen lists substantial detail here, saying that the team has formalised its approach to considering the effect of exits on the sustainability of impact and now considers this issue earlier on in the investment process. It has also incorporated an “impact at exit” section in the “exit memo template” to ensure the team assesses the likelihood of preserving impact post-exit.
In order to ensure regular independent verification of how their impact management systems align with the principles, the five companies employ a mix of traditional auditors and impact investment-focused organisations.
Credit Suisse uses KPMG, Nuveen and UBS employ impact investment consultancy BlueMark, and PwC is the verifying organisation for Zurich. RockCreek is still to publish its first verification report.
The companies may vary in their approaches to impact investment and measurement, but common themes and processes are clearly developing. And the more investors make such disclosures, the easier it will be for the market to establish appropriate and effective strategies.