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Measuring Social Values in ESG and Impact Investing

Luke Willoughby  Follow

There is a movement growing in the investment world around ideas that support both financial return and social values. Over the past 10 years, we have seen ideals-based investing transform into a widely accepted model labeled as ESG and Impact investing. It is a culmination of growing public awareness of social causes, financial marketers aiming to align with this public demand and investors realizing a maturing market that can produce a return. With the pieces now aligned, the market must now drive regulatory change and develop a standardized system of results if it's going to elevate and attract the substantial investments needed for widespread change. It must prove how badly it needs to exist. 

Policy makers must set the stage. The Department of Labor (DOL) and Treasury Department have all been active in this charge by changing relevant policies within just the last few months. As part of the 2016 Fiduciary Standard on pension and retirement investing, the DOL eased standards that require investors to pursue the maximum financial return on behalf of clients' retirement funds. They are expanding the definition of “return” by also including the produced impact on social values. As reported by Pensions and Investments last October, investors may now use social interests as a tiebreaker when deciding between investment opportunities. As reasoning for this increased confidence in valuing social interest, Labor Secretary Thomas Perez cited “improved metrics and tools allowing for better analysis of [social] investments.”

Last September, the IRS and Department of Treasury made investing in charities easier by changing regulations that required investments to be made strictly based on financial return, risk and liquidity. Similar to the above, the intention is to make it easier for endowments, foundations and family offices to invest in “prudent” mission-related social interests - both for financial gain and social growth. 

While understanding the financial gains go without saying, several organizations have emerged to measure this “prudence” in the new social-investing landscape. The Global Impact Investing Network (GIIN) was developed in late 2007 by the Rockefeller Foundation and 40 other investors and is now one of the preeminent organizations providing resources and leadership for social investing. In May, GIIN released The Sixth Annual Impact Investor Survey as a collection of input from 158 impact investor groups of all types. Key highlights include:

  • Investors plan to commit $17.7 billion to impact investing in 2016, across 11,722 deals. While dollar value growth is flat from 2015, this reflects a 55 percent increase in deal flow.
  • Respondents said 19 percent of investments exceeded expectations of performance, 70 percent were in line, and 11 percent were under expectations.

But did the investment in clean water, for example, beat the market? To help respondents to measure and understand the performance of their investments, GIIN has created a free to use ‘catalogue of generally accepted metrics’ called the Impact Reporting and Investing Standards, or (IRIS). These 599 specific metrics apply to common goals in social investing, broken down by business sectors like healthcare, energy and agriculture. For example, goals for providing safe drinking water can be tracked simply by the metric “Population with New Access” (to water), which is calculated through community research over time. Investments in air quality can be tracked as “Greenhouse Gas Reductions due to New Products Sold.” IRIS continuously collects data from existing investments to build benchmarks for success that can be used by new investors.

As ESG and impact-based philosophies spread further across the investment landscape, this foundation of social interest measurement will undoubtedly evolve into a colorful myriad of facts and interpretation – even compared to the derived values of today's markets. Given the rapid ascent of this young, cause-based market and the comparative risks in traditional markets and investments, investors may no longer be so hesitant to understand and pursue the interesting new possibilities. 

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