Selecting impact managers – questions every investor should ask

Impact is the outcome achieved when you materially and measurably make the world a better place as a result of the investment process. As impact investing becomes increasingly important for asset owners with net-zero ambitions and wider sustainability objectives, investors need to look beyond managers’ claims and assess whether their processes can deliver meaningful real-world change.

Most managers describe their approach by using a recognised framework: the ABC(D), the five dimensions of impact (What, Who, How Much, Contribution, Risk) or the OPIM principles. These provide a useful starting point, but to ensure impact is being assessed rigorously, we recommend asking some deeper questions:

• What are the weaknesses in your impact approach?
• How do you compare the impact of different investments?
• When you report on impact, is it clear what’s gone well – and what’s gone wrong?

What are the weaknesses in your approach?

At its best, responses to this question show a manager who’s thought seriously about where their approach falls short; it therefore shows that they deeply understand their impact. A good answer will show honesty, self-awareness and evidence of reflection. Moreover, it’ll help you understand their approach to impact better. If the manager is unable to articulate any weaknesses, or if the answers align slightly too conveniently with a marketing message, that’s usually a sign to engage further with the manager to elicit a clearer response.

How do you compare the impact of different investments?

Two investments may satisfy standard impact frameworks, but one may deliver far greater impact than the other. Assessing this requires managers to address additionality – the difference between what happened and what would have happened anyway (the counterfactual).

Although counterfactuals can’t be observed, proved or quantified, investors routinely form views about alternative outcomes – eg through scenario testing, forecasting and asset modelling. Quantifying impact matters because, in the absence of an ‘efficient impact market hypothesis’, one legitimate impact investment might achieve 10x, or even 100x more impact than another. And if you can achieve 100x more impact without finding 100x more capital, that’s a win.

When you report on impact, is it clear what’s gone well – and what’s gone wrong?

Impact reports often contain pages of data without any sense of whether those numbers are good or bad. It’s more useful to ask for forecasts or expected outcomes, similar to how investors monitor returns against a return target. You look at the actual, compare it with what was expected and get some indication of whether you’re satisfied.

Interpreting these comparisons requires analytical care, but it’s worth it. Because until impact reporting helps you decide whether something has gone well, it remains closer to marketing than measurement of real-world outcomes.

Summing up

Effective impact manager selection isn’t about catching managers out. It’s about asking questions that reveal the extent to which their process is robust – how clearly they measure impact and how willing they are to learn from mistakes. This gives investors greater confidence that their capital isn’t just labelled as impactful, but is actually helping to create meaningful change.

To find out more about how to make impact more meaningful in your portfolio, please get in touch.

This article was originally published in Net Zero Investor.

 

Important information

This communication has been compiled by Hymans Robertson LLP® (HR) as a general information summary and is based on its understanding of events as at the date of publication, which may be subject to change. It is not to be relied upon for investment or financial decisions and is not a substitute for professional advice (including for legal, investment or tax advice) on specific circumstances.

HR accepts no liability for errors or omissions or reliance on any statement or opinion. Where we have relied upon data provided by third parties, reasonable care has been taken to assess its accuracy. However, we provide no guarantee and accept no liability in respect of any errors made by any third party.

General Investment Risk Warning

Please note the value of investments, and income from them, may fall as well as rise. This includes but is not limited to equities, government or corporate bonds, derivatives and property, whether held directly or in a pooled or collective investment vehicle. Further, investments in developing or emerging markets may be more volatile and less marketable than in mature markets. Exchange rates may also affect the value of investments. As a result, an investor may not get back the full amount of the original investment. Past performance is not necessarily a guide to future performance.

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.