Time is running out to fulfil the United Nations Sustainable Development Goals (SDGs) and ensure an equitable world for the next generation. Success will require an eye-watering amount of money – between US$5-US$7 trillion a year, according to a World Bank report.

In more positive news, there has been an increasing shift in mindset as investors adopt SDG-aligned impact investing strategies, which means more private capital is being allocated towards these 17 global targets. Encouragingly, 85% of 440 impact investors assessed by the Global Impact Investing Network (GIIN) in 2021 said their impact investment strategies focus on SDG-alignment.

But the next step is more difficult. How do investors measure the extent to which their capital is making a real-world difference?

Impact investing is when investors funnel capital into companies that are having a positive effect on the environment or society around them. To qualify as an impact investor, investments must have a measurement system in place, the International Finance Corporation (IFC) noted in a recent report. Worringly, the IFC highlighted that just a quarter of the US$2.3 trillion impact market in 2020 operated under a clear impact management system.

This is because understanding of how to quantify real-world outcomes of financial contributions to SDGs is still in its infancy.

“Investors want to stop guessing on impact,” says Lissa Glasgo, Senior Manager of impact measurement platform IRIS+ and Impact Measurement and Management at GIIN. “They want to be making impact-based decisions with the same rigour and quality of evidence as they do for risk and return-based decisions.”

Pressure is mounting for those tracking climate-related SDGs, as 2030 is also a significant milestone for investors, companies and governments that have set ambitious decarbonisation targets on the way to net zero greenhouse gas (GHG) emissions by 2050.

To accelerate action, policymakers are beginning to ask companies and investors to disclose their impact on society and the environment, adopting a double materiality lens.

Standardised, high-quality impact reporting is still a long way down the road, experts say. Getting there will require further collaboration between investors, standards-setters, data providers and policymakers to navigate the complexities surrounding impact measurement.

As reporting requirements yield the required data, investor demand will increase for comprehensive impact measurement methodologies, tools and frameworks. This is where organisations and initiatives such as GIIN, the Impact Taskforce (ITF) and Impact Management Platform (IMP) come into play.

Metrics and models

There are a number of barriers preventing impact investors from accurately measuring and modelling their contributions to the SDGs. Most obviously, these goals were not designed primarily with investors in mind and so aren’t easily quantifiable.

For example, SDG 13 (climate action) can be measured according to the number of investee companies that have made net zero commitments, but how do investors track their impact against SDG 16 (peace, justice and strong institutions)?

Even when metrics are straightforward, impact still isn’t so cut and dry. After all, how does the investor know an investee company set a net zero target as a direct result of its influence? If the company was under pressure from multiple investors, the public and its domestic government (as is most likely the case), who’s to say who had the biggest impact?

“Investors are currently trying to understand what kind of information they need, what relevant information is already being reported, and how impact-related information should inform decision-making,” says Peter Paul van der Wijs, Chief External Affairs Officer at the Global Reporting Initiative (GRI). “It’s definitely challenging.”

An unsurprising hurdle is the inconsistencies in third-party sustainability data, says Nick Parsons, Head of Research and ESG at specialist infrastructure investment firm ThomasLloyd. “A lot of asset owners and managers are trying to measure their impact at an arm’s length by relying on third-party vendors, which simply doesn’t work with this kind of strategy,” he says.

“Being a direct investor means we owns a stake in companies, so we can more easily get hold of proprietary data. As we have tracked SDG-related data since 2015, we know our impact over time.”

A number of asset owners and managers measure contributions to SDGs through investee companies’ revenues, according to a GIIN report. However, interviewees admitted that “the SDG revenue-alignment approach is […] insufficient in speaking to the outcomes or impact associated with the investments”. Instead, there is a demand to shift to more “standardised metrics”.

But a number of the impact measurement tools introducing standardised metrics are still in the “early stages of development” and therefore not yet useful to investors, according to a report by the World Wide Fund for Nature (WWF). In theory, investors can already compare their own portfolio impacts to benchmarks and other portfolios, WWF noted, adding that company laggards can be identified by comparing their SDG commitments and progress to competitors, i.e., identifying how many of the company’s direct competitors have publicly committed to the SDGs and outlined which goals are their priority.

Of course, this is assuming companies are providing investors with decision-useful information in the first place.

Standards-setter GRI recently published its findings following analysis of 200 companies’ approaches to SDGs. While four in five committed to the SDGs within their sustainability reports, less than half set measurable targets outlining how their actions are contributing to the goals, the report said.

In response, the GRI has outlined a series of recommendations for companies making commitments to the SDGs, including meeting stakeholder demands for transparency on negative impacts, making SDG performance data accessible by using recognised frameworks, and disclosing targets outlining how they plan to support the SDGs.

Asset managers are continuing to struggle to analyse data from investee companies using different disclosure frameworks, meaning they cannot accurately work out the overall impact of the fund, Cliff Prior, CEO of the Global Steering Group for Impact Investment (GSG), tells ESG Investor.

“Likewise, an asset owner using multiple asset managers across its impact investments – who are likely all providing differing data – has the same problem,” he adds.

Too many options?

Nonetheless, there are a number of platforms and initiatives offering guidance to help investors get started on their journey towards aligning their impact strategies with the SDGs.

“Investors are coming to us every day, saying that they want to drive impact and they need XYZ data to be able to understand what their impact even looks like and what targets they need to set moving forward,” says GIIN’s Glasgo.

The network’s COMPASS methodology gives practical examples of how investors can measure their impact across the SDGs. For instance, investors tracking SDG 6 (clean water and sanitation) can measure the percentage increase (or decrease) in the number of people accessing clean drinking water compared to the previous year. This can then be compared to the rate of increase in access to clean drinking water that is required to achieve SDG 6.1: universal access to clean water.

IRIS+, also run by GIIN, was originally set up as a “dictionary of impact metrics”, explains Glasgo. However, recognising investors’ growing need for a single source of information and guidance on assessing impact, the platform evolved and began aligning with multiple frameworks, generating over 700 metrics covering a variety of standards – including the SDGs.

“If an investor is tracking the SDGs, they can select the specific goals they are focused on and then IRIS+ outlines the recommended metric approach for them,” she says.

For private equity funds, bonds and enterprises, the UN also offers the SDGs Impact Standards framework, which provides best practice guidance and self-assessment tools to align internal processes and practices with contributions to the SDGs.

With funding from the Swedish International Development Cooperation Agency (SIDA), the GRI also updated its disclosure standards, outlining how corporates can align their GRI disclosures with the SDGs.

Building on the work of the Impact Management Project, in 2021 the 2° Investing Initiative (2DII) consulted on and created an impact investment framework. Finalised in November, its Climate Impact Management System provides investors with guidelines on how to devise, refine and communicate about impactful climate strategies.

Further, advisors and consultants are working with impact investors on SDG alignment. Pensions for Purpose, an impact-focused advisor to pension funds uses SDGs as a framework for discussion with clients on their sustainable investment beliefs and priorities.

Despite impact data remaining unstandardised, investors are proving they can partially measure SDG contributions for themselves.

The Sustainable Development Investments (SDI) platform is run by asset owners and supported by index provider Qontigo. Powered by AI-driven technology, SDI has so far analysed over 8,000 companies globally on their existing contributions to the SDGs. It identifies which SDGs companies within an asset owner’s portfolio have committed to, mapping the portfolio’s overall exposure to the 17 goals according to companies’ reported areas of focus. Asset owners involved include PGGM, AustralianSuper and APG.

Bespoke approaches proliferate among asset managers, too. Morgan Stanley Investment Management (MSIM) identifies one or two relevant SDGs it believes are relevant to an investee company’s business model, according to Vikram Raju, Head of Impact Investing for MSIM AIP Private Markets. From there, the firm creates a contractual obligation for this data to be reported by the company in question at a reasonable periodic interval so MSIM can capture any meaningful changes.

“The key is avoiding overcomplicating the reporting ask, bearing in mind that smaller companies with limited resources will struggle to comply with onerous data tracking and reporting requirements,” he notes.

Having financed and developed five utility scale solar plants in Negros, in the Philippines, as well as three biomass energy plants, ThomasLloyd measures the impact of its investments independently, says Parsons. For example, the investment firm measures its contributions to SDG 7 (affordable and clean energy) by annually recording the number of houses in the local area that have access to electricity provided by the plants.

The firm also reports on the indirect contributions its investments are making to other SDGs. “In the Philippines, we contribute to SDG 11 (sustainable cities and communities) when paying local taxes,” says Parsons. “We look at how much tax we pay in the region every year and compare that to how total tax revenue is being generated and spent locally.”

Global standardisation

Of course, the most certain way to ensure companies are all providing the accurate and comparable impact-related data in the future is to mandate standardised reporting requirements and, ideally, a common methodology for impact assessment.

“Investors do have a role to play in asking for SDG impact-related information from corporates, but governments can have a lot of influence here – more are going to be asking for companies and investors to disclose their social and environmental impact,” says GRI’s van der Wijs.

The shift to double materiality-based sustainability reporting in the EU and the UK will increase the need for an alignment in existing impact and SDG standards, he notes.

The ITF – an independent, industry-led body of more than 100 businesses, investors and public policy institutions – recently called for the Group of Seven (G7) nations to mandate impacting accounting. The report outlined the importance of policymakers leading multilateral efforts to improve the transparency and integrity of disclosures around impact investment outcomes.

“The Taskforce has found that companies and investors are really interested in aligning standards around impact reporting,” says GSG’s Prior. “Ultimately, they recognise that there are investment opportunities in impact investing, and standardised reporting will help to unearth them.”

ITF further outlined proposals to stimulate the development of policies that would channel more capital into the SDGs, including increasing the supply of investment vehicles suitable for institutional investors and promoting the use of just transition principles to better integrate social and environmental objectives.

The WWF report also called on regulators and policymakers to mandate sustainability disclosures, and called for impact disclosures for financial products to better encourage financial institutions to adopt “robust and credible impact assessments”.

Other initiatives are working to improve interoperability. Launched in November 2021, the Impact Management Platform was developed to improve cohesion between existing standards as well as support industry impact-related dialogue with policymakers.

“IMP is ensuring that everybody – investors, standards-setters, regulators – are using the same language around impact, which is pivotal to driving improvement and growth,” says van der Wijs.

Coordinated by the Impact Management Project, a five-year consensus-building forum that ended in 2021, the platform hosts impact measurement and reporting resources provided by standards-setters and frameworks, such as the SDGs. Currently, the Organisation View for companies is now live, with the Investment View for asset owners and managers expected later this year.

“As the world moves towards greater cohesion on how to deeply and thoughtfully measure impact, we will see an emergence and strengthening in the impact-related data sources we need for investors to be able to make smarter SDG-oriented decisions,” says Glasgo.

By Emmy Hawker

Verdane, the European specialist growth equity investor, has announced that it has held a final close on Verdane Idun I (“Idun” or “the Fund”), an impact focused fund investing in technology-enabled businesses based out of Europe. The Fund is classified as “Article 9” under the European Union’s Finance Disclosure Regulation and closed at its hard cap of €300 million, over its target fund size of €225 million. With Idun, Verdane continues to demonstrate its commitment to driving positive impact through investments in ambitious companies whose impact scales with business growth.

The Fund has already made three investments: in Auntie, a digital provider of workplace wellbeing services; in Spond, a digital enabler of grassroot sports and physical health; and in a third business that contributes to a low-carbon society, to be announced in the next few weeks.

Bjarne Kveim Lie, Co-Founder and Managing Partner at Verdane commented: “We are delighted and humbled by the strong support from existing and new investors for Idun and would like to thank them for putting their trust in us. Today more than ever, there is a growing pool of opportunities to combine technology and sustainability, and we believe that investors like Verdane can take a leading role by supporting founders and management teams who can truly integrate sustainability into their business models and create value through impact. The success of the Idun fundraise reflects the continued development of the firm, and we are excited by the unique opportunities available to us on this journey to drive positive impact with our investments.”

The Fund counts leading institutions among its investors, including Nysnø Climate Investments, Norway’s state climate investment fund, AP3, one of Sweden’s main national pension funds, Adams Street Partners, a private markets investment management firm, and clients advised by Mercer.

Building on Verdane’s proven track record of investing in European tech-enabled sustainable businesses, Idun will make investments focused on driving impact in three clusters: energy transition; sustainable consumption; and resilient communities. The Fund will leverage technology to significantly scale portfolio companies’ impact, and Verdane’s background as a growth investor means the firm is uniquely positioned as a leader in this space.

Every investment that Idun makes will have to meet both financial and elevated impact criteria, with impact defined as addressing at least one of the Sustainable Development Goals (SDGs) and qualifying inside Verdane’s proprietary impact framework, built on the Impact Management Project. At the portfolio level, each Idun portfolio company will regularly report on bespoke sustainability KPIs and both the Fund’s ‘carried interest’ and credit facility are linked to goal attainment. The credit facility is issued by Nordea.

Idun received strong investor support from Verdane’s existing pool of LPs and is made up by a majority of institutional capital, including endowments, family offices and pensions funds.

Idun’s dedicated team combines entrepreneurial and impact investment experience and will be integrated with Verdane’s wider platform of over 90 investment professionals and its team of operational experts, Verdane Elevate, to create value and drive impact in the portfolio. The Fund is headed by partners Christian Jebsen and Erik Osmundsen, who will work alongside directors Reed Snyder and Karin Kans, and Sustainability Lead Axel Elmqvist.

Christian Jebsen, Partner at Verdane commented: “As we enter 2022 and announce the final close of Idun, we are seeing a very strong pipeline of potential investment opportunities across Northwestern Europe, as demonstrated by the Fund’s early deployments into three compelling and ambitious new portfolio companies. We believe that sustainability is an increasingly competitive strategy, especially as the growth and private equity industry is steadily moving towards a more impact-driven mindset. As both a technology and sustainability growth partner, Verdane is strongly positioned to add value and scale its partner businesses, and we look forward to working alongside management teams to drive positive impact.”

Verdane is one of the most active growth equity investors in Northwestern Europe, having completed 17 investments, of which four were portfolio deals, in 2021. Idun will sit alongside Verdane’s existing strategies, Capital and Edda, and represents an important initiative for the firm. The Fund will develop leading-edge, best practice frameworks and toolkits within the impact space that will help Verdane’s teams drive value across all of its strategies.

You’ve come up with a great business idea, and after plenty of due diligence and sleepless nights, you’re ready to turn it into something big. Naturally, your first order of business is money. There are a number of ways to raise early capital for your business, and understanding your options will set you up for the best chance of success.

Currently, foundations and DFIs are playing the leading roles financing the region’s development, and as they shift their approach to more innovative financing models that delivers both financial returns as well as social and/or environment impacts, there is a need and growing demand by key actors for more private sector investors especially High-Net-Worth Individuals, Ultra High-Net-Worth Individuals (HNWIs & UHNWIs) and Institutional Investors to be more committed to impact investing.

Inside the minds of investors attracted to the region’s high growth opportunities and the concept of doing well by doing good, are concerns about accessing sustainable investment opportunities, how to exit their investments and finding reliable asset managers especially financial advisors with the relevant skills, experience and proven track record to advise and guide them in investing for impact.

On the demand-side, a growing number of African and non-African entrepreneurs and project owners with sustainable and innovative businesses that solves the region’s local challenges need growth capital from investors, co-investors and new partners to scale their projects.

Among the issues each stakeholder encounter and would like addressed: whether it is the lack of familiarity on the side of HNWIs & UHNWIs, or lack of awareness by entrepreneurs about the indicators investors require for measuring their impact; or the challenges faced by financial advisors in understanding the complexities; or foundations and family offices concerns about identifying and choosing the right specialists, the Africa Impact Investing Leaders Forum aim to simplify all these difficulties by bringing together the key stakeholders to discuss their challenges, share experiences, case-studies and best practices, then discover new opportunities, new partnerships in new regions.

Register your interest now and join key decision makers with the various industry players to update your knowledge, gain insights and identify opportunities. Download the agenda now: http://aiilf.com/brochure/

Then, join the growing number of your peers and key stakeholders in the new Africa Impact Investing forum here on Linkedin: https://www.linkedin.com/groups/8459007

Have an innovative and sustainable solution for Africa’s challenges and need investors or co-investors to scale? Submit your business project free at: http://aiilf.com/invitation-to-high-impact-entrepreneurs/

If you have a fund and you are looking for investors or co-investors as well, kindly get in touch here http://aiilf.com/contact/

As we commit to helping in mainstreaming impact investing, which focuses on finding effective ways to utilise market-based solutions to address or eradicate extreme poverty, we enjoin you to kindly support this initiative, share this post to your networks, colleagues and organisations that it might be of interest to.

NB: 200+ participants including institutional and private investors, financial advisors, entrepreneurs, government officials, MFIs, NGOs attended the launch event which was held at Google campus London, view some photos here:  http://aiilf.com/photos/

For more information, please visit: http://aiilf.com/

Thank you for taking the time to read this post. Please kindly share and retweet.

By Ernest Okwudike, CEO, Alliance 54

Connect with him on Linkedin: https://uk.linkedin.com/pub/ernest-okwudike/2b/645/5a7