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July 14, 2022updated 26 Jul 2022 1:16pm

Investors adopt impact principles amid ESG backlash

Interest in impact investing is growing, but so are concerns over false claims being made by institutions in this area. Increasing adoption and verification of best practice around impact measurement and management can only help.

By Vibeka Mair

impact investing
Christina Leijonhufvud, chief executive of BlueMark, says it’s early days for embedding impact into staff performance management. (Photo courtesy of BlueMark)
  • Impact investing is on the rise but is also facing more scrutiny and, increasingly, scepticism amid a backlash against ESG investing more broadly.
  • Growing investor adoption and verification of impact management practices will help the market, says a new report by impact consultancy and assurance firm BlueMark.
  • The research shows it is still early days for incorporating impact performance into staff incentives.

Impact investing – long a relatively niche allocation strategy – is seeing strong growth in interest and activity alongside the much-increased focus on sustainability more broadly. Nearly half (48%) of asset owners said impact was a preferred approach to implementing sustainability, up from 38% last year and 34% in 2020, found a survey published last week by fund house Schroders, covering 770 institutions managing a total of $27.5trn.

The latest estimates from 2020 put the size of the impact investment market at $715bn (not including development finance institutions), up from $502bn at the end of 2018, according to the Global Impact Investing Network (GIIN). It is a small portion of the ESG investment market, which may hit $41trn this year, Bloomberg reports.

But as it gains momentum, impact investing – which seeks to achieve real-world social or environmental impact in addition to financial returns – is also gaining more scrutiny, and in some cases support, amid the recent backlash against ESG, most notably in the US.

Utah state treasurer Marlo Oaks criticised ESG as a concept in a position paper on 8 April, but said impact investing and socially responsible investing were “legitimate strategies that operate within our capitalist system”.

California-based electric vehicle giant Tesla has also come out in favour of impact over ESG this year. Tesla’s latest impact report, released in May, said current ESG evaluation methodologies are “fundamentally flawed” and “to achieve acutely needed change, ESG needs to evolve to measure real-world impact”.  

‘Exaggerated claims’

The points raised by Oaks and Tesla reflect concerns that true impact investing is increasingly being conflated with more traditional forms of ESG investing and potentially false claims of impact, also known as ‘impact washing’.

Impact consultancy BlueMark warned in a late June report, called ‘Making the Mark‘, that “the market is rife with false promises and exaggerated claims”. 

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ESG is, after all, focused on risk management and does not consider the real-world impact of the services or products of a company, says Daniela Barone Soares, chief executive of UK-based Snowball, an impact fund of funds manager, speaking at the Future of Climate Finance conference hosted by Capital Monitor and New Statesman on 8 June.

It does not help that – as is often the case in the sustainability space – there are no universally agreed definitions and standards for impact. Still, Soares said they were useful impact investment frameworks, such as those from GIIN, the Impact Management Platform (IMP) and the Operating Principles for Impact Management (Opim).

And a growing number of institutions appear to be adopting established practice in this area. For example, the Opim principles, initially developed by the World Bank’s International Finance Corporation and launched in April 2019, now have 162 signatories.

Rising assurance

Of the 162 signatories, 100 had completed an independent verification as of May this year, 15 of which were internal verifications, BlueMark told Capital Monitor. BlueMark verified the impact management practices for 35 of those Opim signatories. Verification is also carried out by auditors such as EY and KPMG and sustainability consultancies like Steward Redqueen.

BlueMark’s June report is based on a sample of 48 impact investor, managing $160bn of impact assets, of which 35 are signatories to Opim. That is double the 30 from the previous year.

This increase may have contributed to some seemingly more negative results this year, says BlueMark chief executive Christina Leijonhufvud. “Some of the most recent entrants to the impact investing market still have a long way to go to figure out how to explicitly embed impact into staff performance management, particularly if it’s a first-time fund,” she tells Capital Monitor.

A key concern BlueMark flags is inconsistency in impact management practice – also illustrated by Capital Monitor in February 2022 – which makes it difficult to identify, assess and compare investment approaches or performance.

Around six in ten (63%) impact investors monitor impact performance against a benchmark, such as a baseline key performance indicator or qualitative impact rating. But the quality of the monitoring varies, with only 22% of the survey sample having a clear protocol in place for impact underperformance.

That is a key issue, for example, in biodiversity-focused investing, where impact measurement tends to be focused on assessing biodiversity loss rather than on ‘nature-positive’ contributions, as pricing natural assets remains tricky.

Impact investing incentives

Some impact investors are seeking to incentivise performance, such as by linking pay to outcomes. Employed by 25% of respondents, the most common method for integrating impact into staff incentives is through staff performance development and review processes. Less popular are direct financial accountability mechanisms, such as annual bonus links to impact achievement and impact-linked carry – they are used by 17% and 3%, respectively.

Similarly, there is a relatively low proportion of conventional asset managers that link pay to ESG more broadly, according to Capital Monitor research published earlier this year. Only 11 of the largest 100 asset managers by assets under management (AUM) linked their CEOs’ bonuses to environmental factors, compared with just 25 of the top 100 banks.

Other key findings include that two-thirds (67%) of investors say they assess their contribution to impact for each investment, compared to 63% last year, with non-financial types of contribution more commonly analysed.

Moreover, 28% of impact investors say they engage with and actively solicit input from key stakeholders, up from 11% last year.

In the meantime, the more widely best practice and standards around impact measurement and management are adopted, the harder it will be for investors to make false claims.

Read more: How democratising access to ESG expertise can turn intent into action

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