Impact investing is a concept that’s buzzing everywhere, from kitchen tables to academic circles to the corporate world. In 2017, the Pulse of Impact Management report was released to synthesize the process of impact management. The following summarizes topics from the report to provide examples that demonstrate the use of impact management in the field.
So what is impact management? According to the Impact Management Project (IMP), “managing the impact of an investment, or portfolio of investments, means taking into account the positive and negative impacts of the underlying enterprises/assets, as well as the investor’s own contribution.” Impact management in an investment context relies on an understanding of the investor’s motivation for managing impact over time, tracking metrics that measure investor goals on an ongoing basis, collecting the information about the changes that are most meaningful to stakeholders, and communicating to external audiences the impact of an investment. Impact management done well increases organizational knowledge and performance, providing practitioners with information to better meet their client’s needs. Since different investors’ and organizations' interests and goals vary, meaningful impact information enables the organization to tailor and refine its initiatives and resource allocation, eventually leading to greater levels of positive impact. A more detailed and in-depth explanation of the impact management process can be read in the Pulse of Impact Management report.
The GIIN’s 2016 report “The Business Value of Impact Measurement” details several examples of how investors are deriving value from knowing the social and environmental performance of their investments. The report includes profiles of a number of investment firms that have learned how to use this information to inform their investments. Align Impact (Align), whose mission is to “increase the effectiveness of their mission-related investments” while delivering “the same risk and return as best-in-class globally diversified asset management strategies.” Align is able to fulfill this mission using a unique due diligence process. The first step screens companies looking for ones that meet seven social and financial criteria. The next step is a comparison of impact profiles for each investment opportunity. The goal is for the investor to be able to decide what they would like to track. The final step is the legal and financial diligence. Research supports that measuring impact appeals to investors and donors, as it offers a way of providing post investment or donation feedback. As a result, the service is better delivered and the organization has a greater ability to compete in the market.
In addition, consider the advisory firm Incofin Investment Management (Incofin IM), which focuses on investing in microfinance institutions that serve rural and agricultural communities in developing countries. To ensure that Inconfin IM’s initial impact goals are maintained over time, the firm performs an annual analysis of their entire portfolio. During the initial investment process, impact performance is numerically rated. If at any point there is a decrease in performance, Incofin IM engages with the investee to determine if their investment position still fits Incofin IM’s portfolio goals. This ongoing monitoring process is part of the impact management and is valuable because it ensures that impact is maintained after the initial investment.
Impact management is also valuable because it serves as a communication tool between the investors and investees. Initially, it requires a discussion between each party about what is important to the other. This helps to clarify expectations and increases accountability while highlighting areas of need and showcasing progress through reporting. A fulfilling group of metrics for measurement is the necessary foundation for tracking impact progress and performance regularly over time. This is particularly valuable because it allows for comparison between and among investments across various volumes, geographies, and sectors, lightening the burden on all parties involved and freeing up valuable time and financial resources.
Collectively, this discussion has been around the value of impact management and provided examples of its use in practice. Impact management has immense potential to add instrumental knowledge. It is reliant on established impact goals between the investor and investee, the development of metrics to measure the impact over time, the ability to collect the necessary information from stakeholders, and communication of the impact of the investment via a report. The stronger the metrics, the more valuable the impact management will be. The value is reflected in its ability to reduce a firm's risk, the ability to serve the demands of client’s, and the ability for investors to make more informed strategic decisions.