The importance of collaboration in harmonising impact measurement
- Published4 jun 2024
Thought Leaders in Action: Yvonne Bakkum Founder of YmpactBoost, a consultancy which aims to boost positive impact of capital
Harmonization through collaboration, seeing each other as partners not just competitors, and the risk of being accused of green washing. These are some of the aspects Yvonne Bakkum mentioned when we had the pleasure of sitting down with her to discuss impact measurement. Yvonne has built an impressive career in the impact world. She spent 22 years at Dutch development bank FMO, since 2012 as the founding managing director of FMO Investment Management, serves as Chair of the Netherlands Advisory Board on Impact Investing, and recently founded YmpactBoost, a consultancy which aims to boost positive impact of capital. We talked about what she has observed over the years in impact measurement, the trade-off between customisation versus harmonization, and how impact is measured across asset classes.
Yvonne started off acknowledging that even for someone who has spent so many years in the space, impact measurement can feel a bit daunting at times. ’I have seen that you can quickly fall into the trap of wanting too much, too quickly. There is a lot of pressure on ensuring good quality and relevance of the data. To do it right you have to take it step by step and implement a very thorough process.’
‘When I was at FMO we developed our own impact framework which started with a bottom-up process. Initially, 43 indicators came out of this process. The next step was to arrive at more workable subset which were relevant to the entire portfolio and could be measured objectively.’
‘I think every impact framework is a combination of KPIs that are company-specific to measure progress as well as a few ‘leading’ indicators that you can also use as a management instrument. Because impact measurement is not only done to provide accountability, but also to manage impact. You cannot manage on 43 indicators, better to pick a few that really matter most to you. You can still track more. But you have to consider whether it is worth it. Because any indicator you are tracking, you will have to track properly and you will have to guarantee the integrity of the data. This can be time-consuming if it is a large data set. That said, a broad set of indicators can be a nice addition to use in your reporting and storytelling. As every impact framework is a combination of hard data and storytelling around it.’
You cannot achieve harmonization without collaboration
‘The framework FMO worked on has been further developed in collaboration with other international finance institutions and the consultancy Steward Redqueen: the Joint Impact Model (JIM). The JIM came out of a growing need for impact investors to contribute towards convergence around a globally accepted system for impact reporting. Prior to 2019, approaches to measure and report on the impact of investments varied from one organisation to the next. Measuring impact is fundamental to understanding the development effects of investments, but measuring them is complex, and even more so for a full portfolio of investments. The JIM was set up as a publicly accessible model, open source, and is specifically intended to enable financial institutions with operation in emerging economies. The JIM is an example that you cannot achieve harmonization without collaboration. Fun fact: the JIM still also measures the indicators that emerged from the initial 43.’
In the impact sector it is super important that you see each other as partners, not just as competitors
‘For data to become comparable it is now becoming apparent that some level of standardisation is needed. There are maybe close to 400 different frameworks but some leading frameworks are coming out on top such as the IMP, IRIS+ and the SDGs which have proven themselves as a framework that are being widely adopted and communicated. You also have the SFDR and the EU taxonomy, which many people are now, out of necessity, jumping on. SFDR is not intended as a label, but it is used as such, with all the negative consequences that entails. But it shows, there is a need for a label or standardization as you can call it. Investors want clarity and they want a method of verification whether an impact fund really is an impact fund.
Platforms like IRIS+, JIM, IMP which are open source and free are stimulating adoption. A higher adoption rate in its turn is stimulating harmonisation. That is also why I think that in the impact sector it is super important that you see each other as partners, not just as competitors. The great thing about the SDGs is the rock-solid absoluteness of the targets. The flipside is also that this makes them less feasible for the target date which is set at 2030. The ISSB is another example of a framework with a high adoption rate. What is good about the ISSB is that it has authority. Many companies already use the IFRS framework for their financial accounting. However, it is good to bear in mind that the ISSB’s IFRS S1 and S2 standards are based on single materiality rather than double materiality. It measures what the risks are for your company or portfolio, and not what the sustainability effects are of the actions or product & services of the company or portfolio.’
We operate in an investment world where you cannot build a portfolio only with private equity
‘Another aspect of impact measurement is attribution: who claims what impact. In the private markets it is common practice that you claim the impact pro-rata according to your ownership. In listed equities it is harder to make that attribution calculation, which makes it harder to claim impact in an absolute sense, and means impact can only be seen in context for that one fund or investment in a relative sense.
The GIIN has written a good paper on this focussing on the intentionality and the theory of change at the level of the investor when wanting to make impact by investing in listed equity. I used to be very critical of that and thought it was ‘just’ ESG. But now I think you can create an impact strategy based on outcomes-targeted engagement that will help you achieve an impact with listed equity. The risk of green washing is greater, but it is possible. We operate in an investment world where you cannot build a portfolio only with private equity. Private equity is only a small part of the portfolio and you are missing a big flywheel if you don’t utilise the liquid part of the investment portfolio as well. Additionality and impact per euro are definitely the highest for private assets, but because institutional investors can allocate so much more in listed equity and bonds, total impact achieved may be just as high.’
Measurement of outcomes based on evaluations is now developing rapidly
‘Impact is more difficult to accurately measure when investing in listed equities. A new development there is that when looking at impact measurement in listed equities, measurement of outcomes based on evaluations is now developing rapidly. A link between output and outcome can be built with that methodology. Nobel prize winner Esther Duflo and her fellow researchers have developed a working method to evaluate real impact on the ground. They test their models in practice instead of devising arithmetic schemes at their desk.’ [Esther Duflo was awarded the Nobel prize in Economic Sciences for her innovative approach to alleviating global poverty which made her the youngest person to do so as well as the second female to ever win that prize].
The challenge lies in the inability to add up data across a portfolio
‘The challenge lies in the inability to add up data across a portfolio with listed and private markets investments. For example private markets impact is measured using the pro-rata attribution approach whilst with listed equity no pro-rata is used. Which means you cannot add it up. Another challenge is that the ESG methodology is already well established in the listed space which is not focused on change, whereas in private markets you do have that focus on change. One way to overcome these challenges is to use a Theory of Change for all your portfolio investments and linking your data to that framework. The premise of impact investing in listed equity is therefore that you must have a Theory of Change for every company as well as good engagement. This will lead in most instances to concentrated portfolios with the added benefit that the workload becomes manageable.’
The risk of being accused of impact washing is a reason for some not to make impact investments
‘Difficulty around impact measurements can also have a backfiring effect. I have heard pension funds say several times recently that they do not want to be accused of impact washing which is a reason for them to not make impact investments. You also have these kinds of counterproductive effects with European regulations. In order to call your fund Article 9, you need very detailed information on negative impacts, the so-called PAIs. This is difficult to get for example in emerging markets investments and you now see that investors are becoming even more reluctant to invest in emerging markets. So you have a sustainability framework that is intended to get more support for the impact investing space but as a result, less sustainability-earmarked money goes to the emerging markets where it is most needed and can potentially have the most impact.’
📷 Yvette Wolterinck