Five building blocks for impact management

But how should pensions schemes go about pursuing impact with their allocations? As impact investing gathers pace, investors are refining their approach from an early emphasis on impact measurement – the practice of quantifying impact outputs and outcomes – to focus on impact management, a forward-looking approach that integrates impact considerations into each stage of the investment process.

This focus on managing impact aims to understand an investment’s impact more fully and improve social and environmental performance throughout the lifetime of an asset. 

There is now a range of tools that enables investors to manage for social and environmental impact with increasing rigour and confidence, but the absence of a unified best practice has led to proliferation of methodologies and metrics and introduced an element of confusion. Simply navigating through all the resources available to impact investors can be a challenge.

Drawing on a suite of tools and frameworks – ranging from broad objectives to precise impact metrics – investors are increasingly empowered to understand, manage, and improve the social and environmental outcomes of their investments

However, there are key building blocks to help investors build impact management systems that are both tailored to their strategic focus and aligned with best practices. These can be classified into five broad categories: objectives, standards, certifications, methodologies and metrics. Using these building blocks, investors can maximise the potential for dual returns in asset classes including social infrastructure.

Objective

Social infrastructure is a natural fit for most impact investors. It can deliver a positive impact together with financial benefits such as predictable, steady returns as well as a lower exposure to market and systemic risks.

However, impact management requires a clear objective, in this case linked to six of the UN Sustainable Development Goals: Good Health and Wellbeing, Quality Education, Decent Work and Economic Growth, Sustainable Cities and Communities, Climate Action, and Life on Land.

The SDGs should inform the entire impact management system and process. For example, in screening and due diligence, the alignment of an asset’s impact with the targeted SDGs is specifically evaluated.

Metrics can be identified that would demonstrate the degree of progress against the SDGs, which are also used later in reporting. Finally, where possible, we prioritise opportunities to manage the assets in ways that will enhance this impact in line with the SDGs.

Standards

It is also crucial to identify the additive value an investor brings to the impact of an investment, and the International Finance Corporation’s Operating Principles for Impact Management can help clarify the contribution investors can make from the very start.

However, IFC principles do not prescribe specific contributions and a taxonomy is not available, hence customisation is required at this stage in the process.

One way to assess this contribution is to create a tracking tool that documents the current versus projected (or realised) impact of each asset.

Certifications

Though Franklin Real Asset Advisors does not pursue third-party certifications for the assets in its social infrastructure strategy, we do use frameworks like the Building Research Establishment Environmental Assessment Method for discrete purposes in our impact management system.

In lieu of formal certifications, managers can also selectively commission bespoke “impact due diligence” reports using leading environmental and engineering firms.

These reports provide valuable data on the current state of each asset and identify potential environmental improvements, and can be benchmarked against BREEAM and other certifications.

Methodologies

The Impact Management Project outlines five dimensions of impact: what, who, how much, contribution, and risk. 

In practice, this means that an annual impact assessment for each asset in a portfolio should be designed to address directly these five dimensions.

Metrics

Picking the right metrics is equally important. The Global Impact Investing Network’s IRIS catalogue of metrics is the most widely used framework, so aligning with this makes outputs more comparable and readily understood.

The ultimate benefit of doing so is increased accountability and transparency in impact performance and reporting.

However, there is also value in creating custom metrics and asset class-specific metric standards, like those used for real estate ESG reporting by the Global Real Estate Sustainability Benchmark.

Whether standard or custom, metrics should be identified for each asset, aggregated to the portfolio level, and, to stay aligned with the stated objectives for the strategy, mapped back to an SDG.

Future Directions

Robust systems for impact management that are embedded end-to-end in the investment process have come to play a central role in the maturing impact investing market.

Drawing on a suite of tools and frameworks – ranging from broad objectives to precise impact metrics – investors are increasingly empowered to understand, manage, and improve the social and environmental outcomes of their investments.

John Levy is director of impact at Franklin Real Asset Advisors