Impact Investments Held Back by Issues Around Measurement

Supported by Impax Asset Management


A couple years ago, Zurich Insurance had a problem.

Since 2017, the insurance giant had put well over a billion dollars of its reserves into so-called impact investments, hoping to see positive social or environmental effects as well as good investment returns by putting money to work in areas like carbon emissions reductions, health care or education.

The insurer understandably needed to know the impact of those investments — to report to its stakeholders and, perhaps, to allow for even more impact investing.

The problem was, there was no good way to measure the impact. There was no industry standard in terms of what data points to collect, nor how to interpret that data. How many people were benefiting from the education-focused bonds that Zurich was buying? How many metric tons of greenhouse gases were not being emitted thanks to where Zurich was putting its money to work? No one could say for sure.

So Zurich decided it would build its own measurement methodology, in partnership with BlackRock, its asset manager on most of its impact investments. They came up with their own methods, which the two companies introduced to the industry last year, making it freely available for any other investors or managers to use.

It was a creative solution to the problem that has vexed the impact investment community for years. Experts say more such innovations are needed if impact investing is to reach a broader audience.

Like so many terms in the expanding universe of ESG or socially responsible investing, there’s no clear definition for “impact investing.” Traditionally the term has generally been understood to mean investments that back projects aiming for a positive social impact, such as improved housing, or microloans to disadvantaged communities. Some investors includes environmental issues in their impact bucket, such as investments that help companies avoid or reduce carbon emissions. (One could easily argue, of course, that reducing carbon emissions has a positive impact not just on the environment but across all of society — which helps illustrate why definitions can be so malleable.)

The wide-ranging definition of “impact” has also made it tough for the industry to come up with one method to measure that impact. Adding to the complications is the fact that impact investing can include both equities and fixed income, in either the public or private markets.

But proponents of impact investing have forged ahead, like Zurich did, developing their own methodologies to measure their own portfolio impact. The more such methods are developed, the closer the industry moves toward having a standard method of measurement. That will lead to greater adoption of impact investing overall, as pensions and other investors can easily see — and explain to stakeholders — the good their investments are having, and can also more easily compare one impact investment to another when deciding where to place their money.

It’s not easy. “There is no standardised way yet in the market how to count impact, so there’s no data input that could easily be  taken from a Bloomberg terminal, for example,” says Danielle Brassel, responsible investment analyst at Zurich. “Currently, it is still all manual work, looking into every single impact report from every single green bond issuer or other impact manager.”

That’s a lot of work for Zurich, which as of the end of 2018 had $3.8 billion in impact investments, out of a goal of $5 billion. “As an insurer, we have a direct interest in promoting sustainable global economic growth and supporting communities in becoming more resilient to environmental and social challenges,” the company says in the methodology report it released to the public. “Impact investments can help address these issues in a targeted way, and also offer a financial return commensurate with risks.”

Its impact portfolio includes use-of-proceed bonds encompassing green, social and sustainability bonds; infrastructure private debt in areas like solar or wind farms and “social institutions”; emissions-reduction targets in its Swiss real estate portfolio; and private equity investments with an impact focus.

Working with BlackRock, Zurich “developed a standardized approach to aggregate use-of-proceed impact data across various bond issuers along the metrics of ‘CO2 emissions avoided’ and ‘people benefited,’ ensuring we only account for the impact we effectively finance,” the company says.

The method has the firm gathering data on carbon emissions or the programs that get funding via its social impact investments, then running those figures through a series of formulas that calculate either the greenhouse gas emissions avoided, or the number of people benefitting from the programs. The calculations include a number of adjustments to make sure the impact isn’t overstated, and that it’s as precise as can be. Zurich lays out the many steps of its measurement methodology in a white paper (PDF available here), in hopes that other impact investors will find it useful.

Impact Investing On the Rise

Though Zurich and other investors have made multi-billion-dollar allocations to impact investing, it remains a small sliver of the overall investment landscape. The exact size will depend on how you define the term, but the Global Impact Investing Network, or GINN, reports the market stood at $502 billion as of the end of 2018, with asset managers and foundations the most common impact investor.

Here are some noteworthy recent impact-oriented mandates and other investment activity, as tracked by CleantechIQ:

  • A leading private equity fund in the impact space is TPG Capital’s Rise Fund, which has collected large allocations from institutional investors in recent years. Those include the New York State Common Retirement Fund, the Washington State Investment Board (at least $250 million), the New Jersey Division of Investment, the University of California, the San Francisco City & County Employees’ Retirement System ($100 million) and Sweden’s AP2. The fund’s areas of investing are keyed off the UN Sustainable Development Goals and include financial inclusion, education, healthcare, sustainable agriculture, clean tech and sustainable infrastructure.
  • Last year, the Brunel Pension Partnership, based in Bristol, England, made a $60 million commitment to the Neuberger Berman Private Equity Impact Fund. The fund is seeking returns via investment themes tied to 15 of the 17 SDGs, with direct co-investments into companies as well as investments in specialist impact funds.
  • Also in 2019, the California State Teachers Retirement System committed $200 million to Impax Asset Management for a global listed equity strategy focused on addressing environmental challenges. The same pension committed $250 million to HarbourVest Partners in 2018 for private equity investments in U.S. inner cities and other underserved markets.
  • Another Swedish pension, AP7, in 2018 awarded two “green impact investment” mandates worth SEK 3 billion combined — about $313 million — to Impax and KBI Global Investors. The Impax mandate was for climate and environment-related investments tied to the SDGs, while KBI’s mandate was SDG-linked water investments, the pension pension said. The mandates included requirements that the managers develop metrics to measure the impact of those investments, which officials at the time noted could be a difficult endeavor.
  • That same year, Luxembourg’s Fonds de Compensation launched three sustainable investment searches; eventual investments included a €200 million ($222 million) “global equity sustainable impact” mandate with BNP Paribas. As of last September, the fund had more than $8 billion worth of assets managed “according to sustainable or socially responsible investment criteria,” the pension says on its website.
  • Denmark’s PKA pension system has a total of DKK 17.5 billion (about $2.6 billion) allocated to investments that could be categorized as impact investing, and has been looking for impact investments modelled around the UN SDGs, such as microfinance or African agriculture.


Like Zurich, all of these investors may find it challenging to track the precise impact of their investments. In the absence of industry-wide standards, investors can choose from a patchwork of options. Some will use one of the small number of publicly available methodologies, like the IRIS method developed by the GINN. Managers, and some investors, may collect data directly from companies, or gather numbers from third-party data providers such as ISS Analytics, Sustainalytics or MSCI, and crunch those numbers via their own formulas.

In many cases, investors will lean on their asset managers or consultants, who will gather the data and calculate the impact, then report the results to the investor.

Not surprisingly, there are about as many methods of measurement as there are consultants or managers making such calculations.

How Impax, TPG Measure their Impacts

To take just one example, Impax Asset Management’s methodology grew out of client requests The firm had been reporting environmental metrics for some 20 years, says managing director and head of sustainability & ESG Lisa Beauvilain, but six years ago, some long-standing investors asked the firm for “more detailed analysis and reporting.”

The firm itself, for its part, has grown frustrated with the use of carbon footprinting as a metric. “We always felt it’s a good thing for investors to focus on carbon and risks,” she says. “But the way it was traditionally done, looking only at CO2 emissions didn’t take into account the positive side, the CO2 avoidance that can happen in some companies.”

Impax collects data on a wide range of environmental metrics for its impact reporting, Beauvilian says. The specific numbers the firm collects will depend on the company being looked at but may include criteria like renewable energy generation, CO2 emissions avoided from use of a company’s products, or materials recovery and recycling.

Impax also uses an “external assurance partner” — a company that takes a hard look at Impax’s methodology, data and calculations. “We felt it was important to have that sounding board, to make sure we’re taking a reasonable, conservative and correct approach,” she says.

For its Rise Fund, TPG works with Y Analytics — a standalone company that spun out of TPG last year — to measure the fund’s impact, using what TPG calls the “impact multiple of money.” Steps in the process include identifying an environmental or social outcome as a goal; estimating the economic value of such an outcome; adjusting for risks; estimating an investment’s terminal value; and finally calculating the social value, which can mean taking the estimated value of an environmental or social benefit, and dividing it by the total investment.

This methodology is applicable to any investment in the fund, TPG says. For instance, fund managers can calculate the true value of an investment in solar panels, which deliver returns — via renewable energy and via avoided carbon emissions — long after they are installed. Another example is how much TPG’s investment in an Indian dairy company boosted the income of the small farmers that supply milk to the dairy. (The dairy can increase farmers’ income by more than 70%, the “impact multiple” found.)

Investors Pressing for More Data

Similarly, investors like the W.K. Kellogg Foundation are pushing the boundaries and demanding more impact data from the program providers that the foundation invests in, according to director of mission investments Cynthia Muller. That allows them to better track the impact, and help decide future funding decisions.

Muller explains: “We started requiring our investees to report things like how many kids they serve are low-income kids, or how many jobs are being created,” both directly and indirectly, by the programs that the foundation is funding, even for programs that aren’t explicitly about job creation. The goal, Muller says, is to look “not only at the end-benefits of our programs, but what benefits are coming out in the middle.”

The foundation’s analysts pair that data with census data and other demographic metrics. This allows for a much broader “big picture” look at the foundation’s programs. The level of insight that this deeper look allows, Muller says, “is kind of like going from black and white to color.”

“We really want our data to help us better target where we need to be investing,” she adds.

Consulting firm Mercer has a big presence in the impact space, and like many managers and investors, Mercer often struggles with quantifying the precise impact of those investments.

“There are tons of methodologies out there,” says Mercer’s U.S. responsible investment leader Alex Bernhardt, citing the IRIS methodology offered by GINN as well as proprietary methods that managers have developed in-house. On the bright side, he says, “We’re starting to see a few methodologies and funds taking the next step to financialize the impact that their funds are creating.”

Mercer’s approach starts with collecting basic data. “In public markets, we use third-party data providers to assess the ESG merits or characteristics of the investment,” Bernhardt says. Private market investments usually lack third-party data, so for those, “We pre-identify the impact measures that we think are most material to the asset class they invest in, using our own approach, to determine the materiality of these measures. Then we ask the managers to report on those metrics over time, and then aggregate those reports.”

For impact investors to gather data directly from the companies and asset managers they invest in, the process is labor intensive but generally sees good participation. “Most fund managers we’re investing with have already bought into the idea of impact investing,” Bernhardt says. “I can’t say that every manager is willing or able to report, but certainly the managers we invest in are.”

As managers and investors take deeper dives into impact investing, they sometimes discover deeper problems. For instance, Impax has been working to get more robust insights into water metrics.

“What is quite surprising is that there is so little data out there on water withdrawals or water consumption by companies,” Beauvilain says. “Part of this is because investors have been asking for carbon emissions data, and water has been overlooked. But also, water is so cheap that in many areas the price doesn’t really reflect its true importance or its scarcity. So it’s overlooked in that sense as well.”

That relative lack of data availability has been changing, perhaps partially in response to demand from investors like Impax. The nonprofit CDP has been tracking water data from public companies for a couple years now, with its latest report, released last March, analyzing water data from almost 800 publicly traded companies.

Continued growth of data sets like CDP’s water data will of course help impact investors better measure their effects.

Looking Ahead: Standards are Needed

Experts agree it would be good for the various methodologies to start to coalesce into a set of impact reporting and measurement standards industry-wide. As it stands now, two investors could put money into very similar vehicles and get very similar financial returns, but wind up with different numbers on their impact reports, simply because of the different ways that each collects, calculates and reports those data points. That can make it hard for impact investing overall to grow.

There’s been some movement along those lines; GIIN’s IRIS metrics are fairly well-established as a standard way to look at impact investing. Still, overall, such standards are “still being developed,” Beauvilain says. “But it’s very important to try to report in a more standardized way. Then you can compare data from one practitioner to the next, and compare reporting from different impact investors.”

Standardization would also help insure that managers and investors are conservative when they’re reporting on their impact investments, and that they don’t overstate or overpromise, she adds.

“You hear talk about greenwashing,” Beauvilain says. “Without standards, you run the risk that a market participant could come in and say they have a positive impact, without being able to really prove it.”

It’s clear that interest in impact investing is growing — and that means the need for improved impact measurement is growing too. “There’s a growing recognition among investors that all investments have an impact,” Bernhardt says. “There’s also a growing recognition that those impacts can be material to financial outcomes, as well as to ESG outcomes.” That makes proper impact measurement all the more crucial.

“When talking to our colleagues in the space, we all face the same difficulties,” Zurich’s Brassel says. “To have market standardization, to finally have the impact data in a standardized way available in the databases, on the Bloomberg, and so forth, would facilitate everyone’s work.” She adds that she thinks “the odds are very high” that this will happen sooner or later.

That will be welcome news to investors and managers alike, and will surely lead to more investment dollars flowing into impact strategies. “We are encouraged to see our industry looking for improved ESG data disclosures and for consolidated standards with an emphasis on investment materiality rather than product proliferation,” says Allyson Tucker, chief investment officer of the Washington State Investment Board. “Consolidation around agreed and effective standards will help investors, companies and investment managers.”

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