Alternative investments
Alternative investments
Podcast
15.2.2023
Since the explicit intention of impact investments is to achieve measurable impact, it is undisputed that this impact must also be measured. However, there is not - or not yet - THE ONE standard for impact measurement. Nevertheless, there are some frameworks that enjoy international recognition and ensure that impact management and measurement are carried out in a methodologically sound manner.
The Impact Management Project (IMP) is a central global framework that describes a systematic approach as the basis for managing and measuring impact. The system consists of examining and describing each impact project from 5 perspectives. It describes what type of impact is being pursued, e.g. on an SDG basis, which target group or target area is experiencing the positive impact, the scale of the impact achieved, how the impact is attributable to the investment and whether there are any unintended side effects when achieving the impact.
This approach can be applied to all types of impact - whether environmental or social - and is widely used by impact managers.
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The "Operating Principles for Impact Management", or OPIM for short, are a central framework for the methodology of impact measurement. They have been in place since 2019 and are now used by 158 impact managers and investors from 38 countries. It is important to note that the OPIM do not yet make any statement on the specific design in the form of metrics for impact measurement.
Instead, the OPIM define a guideline for examining different focal points or areas. A key criterion in the impact assessment is the extent to which a positive effect can actually be attributed to an investment. This criterion is also referred to as "additionality" and is a central component of the OPIM. The OPIM also stipulate that a specific impact target has been defined on the basis of a well-founded target-setting approach. Possible negative "side effects" on the way to achieving the impact target are also considered in this context. The audit guideline also stipulates that the progress of the impact target is monitored over the entire duration of the investment.
The 9 principles of OPIM focus on 5 key areas that can be used to map and evaluate the impact throughout the entire investment process (see figure):
The actual impact measurement begins with recording the current situation and setting an impact target. Let us therefore turn to point 4 of the Operating Principles, the impact target definition. The fundamental questions are: What is the intended impact? Who benefits from the intended impact? How significant is the intended impact?
To date, academically based target setting has been most developed in the area of ecology. In this context, for example, we should be aware of the SBTi (Science based Target initiative), to which 2,200 globally active companies such as Unilever, BMW, Nestle and Volkswagen are affiliated as of the end of 2021. This initiative is based on the Intergovernmental Panel on Climate Change(IPCC) and the stated need to halve global CO2 emissions by 2030 and reduce them to net zero by 2050.
The SBTi develops scientifically recognized methods for measuring greenhouse gas emissions. These methods are used to assess whether or not a company's greenhouse gas emission reduction targets are sufficient to achieve the 1.5 degree target of the Paris Climate Agreement. A company certified by the SBTi thus receives a seal of quality for its measures against climate change, which are deemed adequate.
So if the impact measurement of an impact project is concerned with the question of whether a greenhouse gas emissions target set by the company has been adequately defined in line with the Paris Climate Agreement and certified by SBTi, the certification fulfills the requirement of a scientifically sound impact target definition.
Another scientific method to support the target setting can be, for example, so-called "Life Cycle Assessments" ("LCAs"). Let's stick with the example of greenhouse gas emissions and the question of the extent to which a product emits fewer greenhouse gases by using a new technology than by using the conventional/previously used technology or method. LCAs calculate how many greenhouse gases are produced along the entire value chain of product manufacture - e.g. from the provision of raw materials by suppliers to production and delivery to the end customer. An actual LCA is carried out, which in a second step is compared with a future reduced target value for greenhouse gas emissions, which was calculated on the basis of an LCA assuming the use of a new technology.
How standardized and therefore reliable are these LCAs? Although there is an ISO LCA standard, there are several approaches that can lead to different assessments. Another shortcoming of this method is that LCAs can only be used sensibly for technologies and products for which data is already available across all phases of the life cycle. However, this is often only the case to a limited extent for technologies that are financed with venture capital.
Once the impact target has been quantified on a sound basis, the next step is to monitor the target achievement path of impact development (see Principle 6 of the OPIM). As in conventional business areas, this is done on the basis of key performance indicators (KPIs). Common KPIs in the environmental area are, for example
Examples of KPIs in the social sector (e.g. health or education sector) are
A calendar-year comparison of the KPI values provides orientation for measuring impact progress. This shows the extent to which improvements have been achieved and whether an impact investment is at a good level of target achievement.
Impact measurement is certainly one of the most debated topics in the impact world. Given the heterogeneity of impact fields, it is hard to imagine that there will ever be a standardized, quantified measurement method for all impact fields. It is therefore all the more interesting that US managers are developing methods to monetize impact efficiency and are already using them in the impact assessment of their funds. The result is an "impact yield" for each impact project based on very complex calculations. The impact is therefore expressed in a monetized unit, similar to a financial return. In this way, ecological and social impact projects can be compared with each other in terms of the results they achieve on the basis of a single figure, namely the impact yield. This approach is still very new and it remains to be seen whether this type of impact measurement will become widespread. Exciting prospects then ...
Alternative investments
15.2.2023
Barbara Wokurka
"You can't manage what you don't measure" - this mantra of the private equity industry also applies to impact investing. We recently dealt with the topic of impact investing in detail in this blog. One question remains: how can impact measurement actually work?
Since the explicit intention of impact investments is to achieve measurable impact, it is undisputed that this impact must also be measured. However, there is not - or not yet - THE ONE standard for impact measurement. Nevertheless, there are some frameworks that enjoy international recognition and ensure that impact management and measurement are carried out in a methodologically sound manner.
The Impact Management Project (IMP) is a central global framework that describes a systematic approach as the basis for managing and measuring impact. The system consists of examining and describing each impact project from 5 perspectives. It describes what type of impact is being pursued, e.g. on an SDG basis, which target group or target area is experiencing the positive impact, the scale of the impact achieved, how the impact is attributable to the investment and whether there are any unintended side effects when achieving the impact.
This approach can be applied to all types of impact - whether environmental or social - and is widely used by impact managers.
The "Operating Principles for Impact Management", or OPIM for short, are a central framework for the methodology of impact measurement. They have been in place since 2019 and are now used by 158 impact managers and investors from 38 countries. It is important to note that the OPIM do not yet make any statement on the specific design in the form of metrics for impact measurement.
Instead, the OPIM define a guideline for examining different focal points or areas. A key criterion in the impact assessment is the extent to which a positive effect can actually be attributed to an investment. This criterion is also referred to as "additionality" and is a central component of the OPIM. The OPIM also stipulate that a specific impact target has been defined on the basis of a well-founded target-setting approach. Possible negative "side effects" on the way to achieving the impact target are also considered in this context. The audit guideline also stipulates that the progress of the impact target is monitored over the entire duration of the investment.
The 9 principles of OPIM focus on 5 key areas that can be used to map and evaluate the impact throughout the entire investment process (see figure):
The actual impact measurement begins with recording the current situation and setting an impact target. Let us therefore turn to point 4 of the Operating Principles, the impact target definition. The fundamental questions are: What is the intended impact? Who benefits from the intended impact? How significant is the intended impact?
To date, academically based target setting has been most developed in the area of ecology. In this context, for example, we should be aware of the SBTi (Science based Target initiative), to which 2,200 globally active companies such as Unilever, BMW, Nestle and Volkswagen are affiliated as of the end of 2021. This initiative is based on the Intergovernmental Panel on Climate Change(IPCC) and the stated need to halve global CO2 emissions by 2030 and reduce them to net zero by 2050.
The SBTi develops scientifically recognized methods for measuring greenhouse gas emissions. These methods are used to assess whether or not a company's greenhouse gas emission reduction targets are sufficient to achieve the 1.5 degree target of the Paris Climate Agreement. A company certified by the SBTi thus receives a seal of quality for its measures against climate change, which are deemed adequate.
So if the impact measurement of an impact project is concerned with the question of whether a greenhouse gas emissions target set by the company has been adequately defined in line with the Paris Climate Agreement and certified by SBTi, the certification fulfills the requirement of a scientifically sound impact target definition.
Another scientific method to support the target setting can be, for example, so-called "Life Cycle Assessments" ("LCAs"). Let's stick with the example of greenhouse gas emissions and the question of the extent to which a product emits fewer greenhouse gases by using a new technology than by using the conventional/previously used technology or method. LCAs calculate how many greenhouse gases are produced along the entire value chain of product manufacture - e.g. from the provision of raw materials by suppliers to production and delivery to the end customer. An actual LCA is carried out, which in a second step is compared with a future reduced target value for greenhouse gas emissions, which was calculated on the basis of an LCA assuming the use of a new technology.
How standardized and therefore reliable are these LCAs? Although there is an ISO LCA standard, there are several approaches that can lead to different assessments. Another shortcoming of this method is that LCAs can only be used sensibly for technologies and products for which data is already available across all phases of the life cycle. However, this is often only the case to a limited extent for technologies that are financed with venture capital.
Once the impact target has been quantified on a sound basis, the next step is to monitor the target achievement path of impact development (see Principle 6 of the OPIM). As in conventional business areas, this is done on the basis of key performance indicators (KPIs). Common KPIs in the environmental area are, for example
Examples of KPIs in the social sector (e.g. health or education sector) are
A calendar-year comparison of the KPI values provides orientation for measuring impact progress. This shows the extent to which improvements have been achieved and whether an impact investment is at a good level of target achievement.
Impact measurement is certainly one of the most debated topics in the impact world. Given the heterogeneity of impact fields, it is hard to imagine that there will ever be a standardized, quantified measurement method for all impact fields. It is therefore all the more interesting that US managers are developing methods to monetize impact efficiency and are already using them in the impact assessment of their funds. The result is an "impact yield" for each impact project based on very complex calculations. The impact is therefore expressed in a monetized unit, similar to a financial return. In this way, ecological and social impact projects can be compared with each other in terms of the results they achieve on the basis of a single figure, namely the impact yield. This approach is still very new and it remains to be seen whether this type of impact measurement will become widespread. Exciting prospects then ...
About the author
Barbara Wokurka
Barbara Wokurka is responsible for impact investing at FINVIA. She can look back on 30 years of professional experience working for financial service providers and in the real economy in the areas of corporate finance and asset management.
She laid the foundations of her career at Deutsche Bank in Frankfurt and London in the Corporate Finance division before joining Porsche AG in 1999 to set up and head up asset management for the Group. In 2007, she moved to Quoniam Asset Management GmbH, where she initially looked after German Tier 1 clients and then took over sales management for the international market as a partner, including the establishment and management of the Quoniam branch in London.
