One size does not fit all. Missions and objectives first.
By Patricia Chu | 14 October 2020
ESG vs Impact Investing: What is the difference?
There is increasingly more interest in the subject of ESG Investing and Impact Investing, but many people use these terms interchangeably. This has rendered the topic very confusing for many readers and for this reason, we at Mana, have decided to create an easily digestible presentation to shed light on this fascinating topic and provide guidance to readers to differentiate ESG and impact investments. While the two subjects share some similar properties, the difference is mainly: intentionality and purpose. In our view, ESG is driven by business risk management purposes and looks at a company’s internal policies. Impact investment, on the other hand, is driven by the intention to address a specific environmental or social challenge outside the given organization.
The table below maps the different types of principles, frameworks, standards and certification designed to measure and manage the impact stemmed from the two different approaches mentioned above; as well as the respective networks fostering the growth of the ecosystem via knowledge sharing, practices and community building.
Is there a universal impact score or benchmark to compare and value impact?
Our interest and focus at Mana are in the subject of impact investment and a frequently-asked question that we get from investors endeavoring into this field is whether there is a universal impact score or benchmark to compare and value impact, akin to a Moody’s rating, for the purpose of assessing the impact of a company. Unfortunately, impact is still very subjective and the sector does not have a recognized accounting standard to value impact. Having said that, there are some movements advocating for improved alignment in the sector, along with a movement to include social and environmental impact in the financial accounting reporting system, and for the creation of a methodology that can provide a monetary value to impact and enable comparisons. Some of these include:
An initiative called the Impact Management Project (IMP) provides a forum for organizations to build consensus on how to measure, assess and report impact on environmental and social issues. IMP has created a set of shared language about impact management and has developed a set of practical tools and guidelines to promote best practices.
Sir Ronald Cohen, Chairman of the Global Steering Committee for Impact Investment -- a renowned and well-respected figure in the impact investment space -- is pushing for an impact-weighted accounting methodology[1] that explicitly and empirically tallies the cost of the social and environmental externalities of a corporation’s assets and activities in the financial statements
The Bridgespan group and the Rise Fund have worked on a new methodology called Impact Multiple of Money (IMM) to bring rigor to the assessment of social and environmental impact. The methodology estimates the financial value of the given benefit to society or the environment likely to result from each dollar invested, thereby enabling the comparison of investment opportunities, as well as the impact return for every dollar invested. Rather than measure impact after the fact, IMM uses social science research to estimate a company’s potential for impact before making an investment. Their formula proposed is as follows:
Impact = Breadth x Depth x Value x Risk Adjustment. [2]
Breadth, Depth and Risk Adjustment are relatively easy to determine, but the value is where it gets tricky. Y Analytics, the impact arm of TPG Rise derives the fair value from evidence, research and data available.
Lastly, IRIS+ provides a good platform for investors to select the list of possible impact metrics according to the type of Social Development Goal (SDG) that the investor is supporting. It has quite a comprehensive list and it is a very easy to use platform. It will not however provide any benchmarks of how much impact value the different investments deliver.
In spite of these various initiatives, the reality is that the sector is far from reaching general consensus and agreement on a grading system for impact, which is why at Mana we believe that the lack of a benchmark should not deter those interested in impact investment from getting started. In our view, the most important factor is to have clarity in the mission and the objectives of what the impact investments will be achieving; which is why developing an impact framework is the best starting place.
Mana Impact's Perspective
At Mana, we are supporting family offices and financial institutions to create their impact framework, which helps to clarify their theory of change, to screen projects according to their respective impact priorities and to identify what needs to be measured. Understanding what needs to be measured will in turn enable us to manage and question what needs to be improved in order to achieve the desired outcomes. While many get bogged down with deriving the perfect way to measure and manage impact, it is in our opinion -- a journey that each organization must experience to develop its own targets and impact according to its strategy and expectations. This will be a dynamic process and the best way to get started with the framework is by testing it, validating it with actual cases and improving the framework as the journey continues.
If you are interested in obtaining a copy of our full presentation or share some of your experience investing with an impact lens, please get in touch with us.