16th February 2022
It feels like you can’t open a newspaper or go through a day of meetings without the word ‘ESG’ being mentioned. It is certainly a hot topic, which has gained unprecedented momentum throughout 2020 and 2021, spurred on by Covid. As societal and corporate focus continues to grow, funds flowing into ‘ESG badged’ assets globally has followed suit. Today more than $40 trillion of assets are classified as ESG and the number of active impact funds globally has risen by 1,000 in the last 5 years to over 3,100.
This dramatic increase in responsible investing has exacerbated the demand for a more standardised and quantitative measurement system, that will enable investors to direct capital to make the most change. In a world of increasing transparency, it is essential for fund managers to remain accountable and disclose credible data that support their investment theses; we need to be able to know if the label is an accurate representation of what is inside the tin.
Difficulty of impact measurement
At present, it is hard to answer this question as the broader sector is severely lacking in credible quantitative and qualitative data, as well as lacking a clear definition of what constitutes “good” impact data from which performance can be ascertained. From our conversations with experts in the impact space, a couple of recurring themes emerged. These being:
- Difficulty of measurement, particularly in measuring the “s”
- Impact funds focus on the upstream part of impact measurement
These two themes are inextricably linked, as whilst the market recognises the need for drawing comparability between impact projects, reporting often comes up short as it is a very hard thing to do. In particular, it is very difficult to measure the “S” and benchmark performance of social impact projects. “S” is seen as much more multi-faceted and less quantifiable than “E”, which is more tangible in nature and thus easier to measure. Therefore, more progress has been made in agreeing and crystallising key metrics and reporting frameworks for environmental factors, with agreement on social factors lagging quite far behind.
This difficulty in measuring impact has resulted in funds largely focusing on the upstream (strategy) part of impact measurement rather than the downstream (measurement) element. Each fund has their own bespoke methodology for measuring impact, which is guided by their investment strategy and sectors which they operate. There is consensus that it is important for each fund to have an overarching impact framework and Theory of Change, designing KPIs that success can be measured against.
However, this macro level analysis doesn’t test outcomes with beneficiaries of impact investments; a factory worker in Bangladesh is not being asked if they are any better or worse off from a new social initiative implemented at their factory. Sasha Dichter, CEO of 60 Decibels, believes that what they are arguing for is “blindingly simple: if the well-being of human beings is part of your social impact thesis, you can’t know if you’re having social impact without hearing it directly from those human beings. This may seem obvious, but it is far from standard practice”.
Sasha, and the rest of the 60 Decibels team, also argue for continuous impact performance data, as having a fixed impact mindset can be limiting and not paint a true picture. In reality, each social initiative has a different impact to every person, depending on the moment in time and where they are located. Understanding these variances in performance, is a prerequisite for improvement.
Expectation to report
On top of the difficulty in measuring the “S”, there isn’t much pressure on funds to externally report on social impact, with most funds who do it using it primarily as a marketing or fundraising tool. Measurement of social impact is discussed and actioned at the GP level rather than the LP level. However, this is likely to change over the coming months and years, as the spotlight focused on environmental reporting expands to capture all the factors in “ESG”, weaving “S” and “G” into the “E”.
The macro-economic climate may be an accelerant to this, as countries all around the world are experiencing inflation, high energy costs and tightening monetary policy. This rise in the cost of living will have a significant impact on those living on or below the poverty line. S&P Global have predicted that these shifts will challenge the climate agenda and sharpen the attention on managing the social implications of the transition.
Irreversible direction of travel
Time will tell if this specific prediction mimics reality, but what is clear is that the focus on ESG criteria and outcomes is substantial and growing, driven by broader societal consensus of the need to deliver better outcomes than historical systems have done. To enable proper assessment of the impact of businesses on their wider stakeholders, and allow greater comparability between those businesses, it is widely acknowledged through the UN’s Sustainable Development Goals and similar frameworks that we need better measurement systems. Particularly within the realm of social impact we need a universal system that measures impact performance and focuses on transparent outcomes data.
We have recently invested in 60 Decibels, a technology enabled business that measures and benchmarks social impact from the bottom up, by speaking to statistically relevant populations of end beneficiaries across the world. Against a background of qualitative, top down, methodology and processes led tools, we believe that 60 Decibels addresses a gap in the market by its provision of cost effective and speedy, data-led quantitative insights. We are excited to be backing the vision of the team that this new kind of social impact measurement can transform the power of capital for good and help enable that change.