Measurement and Responsible Investing

Ensuring investments drive out real impact requires not only recognition and commitment from the companies to the development cause but also that there are appropriate structures in place to trace the money and understand where difference is being made. And for most companies this is the hardest part – because it requires expertise, resources, time and credible processes different than the traditional ones in the financial sector that bridge ideas into action. 

While governments, multilateral institutions and the development market, more broadly, have created attractive and innovative financing mechanisms that allow investment firms to still thrive with profits in the impact-space, these mechanisms become a mere marketing tool if they are not used to genuinely deliver positive contributions. Then, the whole purpose is defeated from the outset. This is where impact-washing and green-washing come into place. Mechanisms need to be met with the commitment from the private sector to use them for their intended benefit. 

In my last blog post I mentioned the three critical R’s, which are behaviors investment firms need to take when assessing investment options intended to deliver impact. They need to be Reliant, Resilient and Responsible. Being responsible in this context means ‘walking the talk’, and more specifically making sure that the capital deployed is managed in a way that will in its lowest threshold ‘do-not-harm’ but in its minimum relevant threshold deliver the expected change, whatever it is defined to be – let it be for community development, climate mitigation, poverty reduction, job creation or promotion of innovation, among others. 

But how can investment firms be responsible in delivering impact? After taking the serious commitment to invest in impact-generation sectors, they need to implement robust and credible impact measurement and monitoring (IMM) frameworks. The framework is the bridge that connects capital to impact. There are different ways in which such frameworks can be built, but at a minimum they need to count with clear objectives for impact, underpinned by indicators, targets, baseline, stakeholder mapping and risk assessment. 

Building such IMM frameworks may seem daunting, particularly for firms that have not done this before. However, the best place to start is being honest about the objectives the investment intends to deliver. A single firm cannot provide all the necessary capital for all development needs and be the one to deliver the Sustainable Development Goals. This is a global community effort. However, a single firm can commit to ensuring its investment made in a wind-power plant will generate access to energy at reasonable cost to a remote community and that the construction of the plant will minimize or prevent environmental impacts such as hazard to bird species in the location. Furthermore, from a portfolio balance perspective, some investments may have stronger positive contributions than others, but the important starting point is being honest about them from the outset. 

After this step is overcome, the development finance market has provided important tools to define the credible indicators, baselines and targets that will deliver change. International standards such as the IRIS+ are excellent tools because they provide rigorous indicators which have some level comparability and are directed to investments. 

Comparability and streamlining of indicators with international standards have been one of the main challenges in the impact-investing market, and while companies should work towards aligning with them to the extent possible, this is not something that will be resolved soon. Even so, this should also not be an issue that prevents the necessary capital flowing from investments to where it is needed. And while technicalities of the structures are improved and dealt with by the development experts, a lot can be done in the financial sector if investment deals are constructed to deliver impact with the aim of being honest, and therefore, responsible.