Measuring the net impact of investments

3 min read 11 May 21

Summary: 

The notion of delivering change is central to impact investing. After all, we are looking to achieve a positive impact for global society, as well as a long-term financial return, through our impact funds.

As impact investors, it can be tempting to focus purely on the positive outcomes that companies deliver through the goods or services they provide. It is critical, though, that we also look for any negative impacts that may lie somewhere in a business, perhaps hidden in supply chains. This is because no company is whiter than white, however good their intentions.

Let’s take the hypothetical example of a wind energy producer. By generating electricity renewably, the company displaces fossil fuels from the energy mix, saving millions of tonnes of carbon emissions. However, the process of manufacturing its wind turbines will have created emissions. This clearly has had a negative environmental impact, but one eclipsed by the much larger positive impact that it has enabled.

So long as we capture the negative impacts in our analysis of a company, we can weigh up whether the positive impact they deliver is greater – and therefore that their net impact is positive. This process takes time, as we need to look at each stock on a case-by-case basis.

To illustrate the reach of a company’s impact, a starting point can be to calculate what percentage of its primary activities relate to one of the United Nations Sustainable Development Goals (SDGs). This is a universally recognised framework for identifying sustainable solutions for the most pressing challenges facing people and the planet.

Please note that while M&G supports the UN SDGs, we are not associated with the UN and our funds are not endorsed by them.

By establishing key impact indicators that are pertinent to a given company delivering impact against an SDG, we can quantify their contribution towards achieving it. Importantly, we should look not only at the progress companies make against the SDGs, but also at how this evolves over time, by tracking the year-on-year change in these impact indicators.

Some companies are very transparent in publishing key performance indicators, such as the carbon emissions they mitigate. Others could improve the numbers they share. As impact investors, we must have relevant and timely data to analyse companies’ non-financial performance, and to gauge their progress over time. We therefore engage with companies to improve the quantity and quality of data they publish.

Measuring impact from investing in listed company shares isn’t an exact science. The ‘additionality’ of our investment – in other words, the difference we make – can largely be understood by considering the impact made by the companies whose shares we own.

To evidence additionality, we might ask how the world would be different if a particular company did not exist and consider if it has some technological know-how or impact footprint that would be hard for a new company to replicate.

However fund managers measure impact, I believe transparency with investors is all-important. By showing our working, and continually improving our metrics over time, we can demonstrate the net positive impact of investments and avoid accusations of greenwashing.

The views expressed here should not be taken as a recommendation, advice or forecast.

Find out more about upcoming episodes in our Creating Positive Futures series and catch up on any episodes you might have have missed.

By Véronique Chapplow

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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