Selecting impact managers – questions every investor should ask

Asking about impact matters. For asset owners with net zero ambitions and wider sustainability objectives, impact investing is no longer a niche allocation or a ‘nice to have’. We need to be comfortable, not just with the stories we’re told about impact, but with how well they stand up to scrutiny.

Another looming issue adds pressure to this. If the world falls short of net zero by 2050, net zero investors may face an uncomfortable choice between moving away from benchmarks or missing their net zero targets. Either way, there are difficult conversations with stakeholders.

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Impact investments can help bridge that gap – an investor with a net zero target might not have a portfolio which is aligned, but at least they contributed to getting the world closer to the net zero goal. Of course, that only works if the impact is real and robust.

This is not just about net zero targets. The importance of impact being real and robust applies whether for any climate impact investing – or even for any impact investing at all.

This article sets out a small number of practical questions you can use to deepen those conversations with managers. Here’s an initial starter question:

How do you assess impact?

Most managers will start by pointing to a recognised framework. The ABC (or ABCD) framework. The five dimensions of impact (What, Who, How Much, Contribution, Risk). The OPIM principles. None of these are wrong. In fact, the widespread adoption of common frameworks has been a positive. They’ve given the industry a shared language and helped move conversations far beyond vague claims about ‘doing good’.

But frameworks are only a starting point. Different managers can approach the same framework in very different ways. And some of those approaches are more impactful than others.

To help you have a more insightful conversation, here are some follow-up questions you can ask:

• 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?

We find this question really illuminating.

At its best, responses to this question show a manager who has thought seriously about where their approach falls short and therefore shows that they deeply understand their impact. A good answer will show honesty, self‑awareness, and evidence of reflection. Moreover, it will 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, usually, is a worrying sign.

How do you compare the impact of different investments?

Imagine two impact investment opportunities. Both tick all the boxes under standard impact frameworks. Both align with your objectives. But one delivers 10 times more impact per £1m invested than the other. Can the manager’s methodology tell the difference?

Most frameworks can’t. Unlike financial markets, there is no ‘efficient market hypothesis’ for impact, so it’s actually common for one impact investment to have lots more impact than another. But assessing this properly requires managers to quantitively address a tricky topic: additionality. Or, for those who prefer more philosophy-flavoured jargon: the counterfactual.

Impact, when properly defined, is not just about what happened. It is about what happened compared with what would have happened otherwise. That ‘otherwise’ is the counterfactual. And the impact you achieve above and beyond what would have happened otherwise is additional. Without it, you are measuring activity, not impact.

Most managers are happy to talk about their additionality in qualitative terms. But if you ask them to quantify their impact, net of additionality, many managers explain (in some ways reasonably) why this is hard. Several will tell you that counterfactuals are impossible to observe, prove or quantify. In a narrow sense, they’re right. But in practice, investors form views about alternative outcomes all the time – think about scenario testing, forecasting, 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?

Reporting can be a source of weary frustration for asset owners. Impact reports often contain pages of data – carbon avoided, jobs supported, households reached – without any sense of whether those numbers are good or bad. You are left asking the most basic question: should I be satisfied with this, or not?

There’s a simple way to resolve this: if you explicitly ask upfront for forecasts or expected outcomes, most managers can provide them. This mirrors what frequently happens when monitoring investment returns against a return target – you look at the actual, you compare it to what was expected, and get some indication of whether you’re satisfied. Interpreting those comparisons requires analytical care, and a naïve comparison can sometimes be misleading, so effort is needed, both to get the comparison in the first place, and to interpret it.

That effort is 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.

This is the first article in a series which will explore impact investing for net zero investors.

To find out more about how to make impact more meaningful in your portfolio, reach out to Sanjay Joshi, a consultant and impact specialist at Hymans Robertson.

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