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August 26, 2016

Impact Measurement Can Drive Business Value
    by Robert Kropp

The Global Impact Investing Network surveys impact investors and learns that in addition to environmental and social benefits, measuring their investments can improve financial performance.

In a report published in June, the US SIF Foundation acknowledged that while “the work of sustainable investors for the last 30 years—across asset classes—as investments meant to make impact, there is no doubt that the emergence of 'impact investing' has brought new interest and investors to the field.”

The report rightly focuses on the environmental, social and corporate governance (ESG) impacts of sustainable investment, listing a number of recent developments that illustrate the growing influence of sustainable investors; “the value of assets that take into account ESG factors in investment analysis or shareholder engagement grew 76 percent between 2012 and 2014 to reach $6.57 trillion,” the report states, “or one out of every six dollars under professional management.”

Yet, according to a recent survey of self-described impact investors, published by the
Global Impact Investing Network (GIIN), the financial benefits of sustainable and impact investment are of increasing importance; a distinct majority of respondents “believe (ESG) data has business value, i.e. can improve financial performance of portfolio companies and inform future investment decisions,” the report states.

“Social and environmental performance data are commonly applied to drive business value in pre-screening and due diligence, by improving investment management, and by informing portfolio allocation decisions,” the report continues.

The report identifies five primary drivers of value derived from impact measurement:
1. revenue growth;
2. operational effectiveness and efficiency;
3. investment decisions;
4. marketing and reputation building; and
5. strategic alignment and risk mitigation.

Among the many useful case studies included in GIIN's report is one that focuses on microfinance. The mission of microfinance—to provide banking services to the world's poor—can be traced back to the 1993 founding of the Grameen Bank in Bangladesh by Muhammad Yunus. In the decades since then, microfinance institutions (MFIs) have grown at a remarkable pace.

In its report, GIIN describes four principles of microfinance that “highlight the relationship between social performance and business value:”
1. Social performance data should directly influence management decisions;
2. Ethical client protection and good business practice are intertwined;
3. Strong social performance management can improve staff and client retention; and
4. Standardized reporting can facilitate comparison.

“Investors are most successful at deriving business value from impact measurement when the metrics and processes are defined in collaboration with investees and are directly relevant to investees’ core businesses,” the report concludes.

Despite the relatively small number of professionals interviewed for the report—of the 30 respondents, 23 were impact investors, six were investees, and one was a service provider—the amount of information provided in the 52 pages of the report is considerable. As the amount of assets under management considering ESG factors continues to grow, the financial rewards of sustainable investment should continue to increase as well.

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