Norms | Investor ContributionManaging the impact of an investment, or portfolio of investments, means taking into account the positive and negative impacts of the underlying enterprises/assets, as well as the investor’s own contribution.
Investor Contribution Strategies
Investors commonly describe four strategies – or actions – by which they can contribute to the impact of the assets they invest in. These strategies can be used individually or in combination. They represent roles that investors may choose to play in the market, depending on their financial and impact goals, opportunities, and constraints.
These strategies are the most common forms of investor contribution observable in the market, but not all investors will be able to implement all of them and it is not normative that all investors should try to do so. Not all investor contribution is positive. Investors themselves – separately from the enterprises they finance – may engage in practices that result in social and/or environmental harm and amplify systemic risks.
Signal that impact matters: Investors employ this strategy when they proactively and systematically consider measurable positive and negative impacts of assets as part of their investment decision-making process, and communicate this consideration to investees and the market at large. These considerations should affect the investment decision, meaning that impact considerations could lead to a different investment decision.
If all investors implemented ‘signaling’ strategies, it would ultimately lead to a ‘pricing in’ of social and environmental effects by the capital markets. Often referred to as values alignment, this strategy expresses investors’ values and is an important baseline. But alone, it is not likely to advance progress on societal issues when compared to other forms of contribution.
Engage actively: Investors may go beyond Signaling that impact matters to proactively support or advocate for assets to reduce negative and increase positive impacts. This might involve, for example, filing a shareholder resolution, joining the board, providing consulting or mentoring, or participating in industry-level or regulatory efforts to promote considerations of sustainability in financial markets.
Investors that are engaging actively typically have a systematic process for selecting assets with which to engage, a well thought-through engagement strategy, and a rationale for why the chosen strategy is expected to affect the impact of the asset.
Grow new or undersupplied capital markets: Investors can anchor or participate in new or previously overlooked opportunities. This may involve more complex or less liquid investments, or investments in which some perceive risk to be disproportionate to return. Investments directly cause or are expected to cause:
- a change in the amount, cost, or terms of capital available to an asset that enables it to deliver impact that would likely not otherwise occur; or
- a change in the price of the asset’s securities, which in turn pressures the enterprise to improve its impact and/or rewards it for doing so.
Provide flexibility on risk adjusted financial return: A sub-set of investors who are Growing a new or undersupplied capital markets will be able to accept a lower financial return than they could obtain in investments with similar risk, liquidity, subordination, size, and other financial characteristics (or, equivalently, accepting the same financial return but with more risk, less liquidity, etc.) in order to generate certain kinds of impact (e.g., a cross-subsidization business model that enables access to a critical product or service to an underserved portion of the population).
Why do investors manage their impact?
Investors have a range of values and motivations, and therefore various impact intentions. All these intentions, however different, call for high quality impact management based on shared norms.
Some investors are motivated to manage impact because the creation of positive change for people and planet is why they exist. Some are driven by a concern about regulatory and reputational risk. Some see it as a way to unlock commercial value — for example, backing enterprises that are cost-cutting through energy savings or increasing customer loyalty. And some simply believe that use of their capital should align with their personal values.
Depending on their motivation, investors’ intentions therefore range from broad commitments, such as “to mitigate risk”, “to achieve sustainable long-term financial performance”, or “to leave a positive mark on the world”, to more detailed objectives such as “to support a speciﬁc group of people, place, outcome” or “to address a specific social or environmental challenge”. Each of these intentions relates to one of three types of enterprise impact: A, B or C. (Review the “ABCs of Enterprise Impact.”)
How do investors manage their impact?
Investors set goals and manage performance with regards to the impacts they do, or don’t, want underlying enterprises/assets to have on people and the planet, as well as their own investor contribution to that impact.
Investors’ intentions for the impacts of enterprises in which they invest map to specific impact goals across the five dimensions: What, Who, How Much, Contribution and Risk. (Review the “Five Dimensions of Impact.” By being clear about their impact goals, investors can review their portfolio to assess whether the enterprises/assets they are invested are – or are not – achieving those goals.
Investors also set goals about the contribution they want to make to enable enterprises they invest in to have an impact.
One approach for managing and communicating both the impacts of the enterprises in an investor’s portfolio as well as their investor contribution is impact classification.
What data is needed to understand the impact of an investment?
For a portfolio of investments in enterprises, a complete ‘impact report’ or ‘impact statement’ would include data about the enterprises’ total impacts on people and the planet, with data about each effect of each enterprise arranged across the impact data categories, as well as data on the investor’s contribution. Since this may often result in too much data for an investor to review (especially in cases where investment products have hundreds of underlying assets), the intermediary managing the portfolio of enterprises may choose to create a consolidated ‘impact statement’ that highlights the impacts that are relevant to the investor’s goals, while still providing an appendix of all other positive and negative impacts of the portfolio.
For example, if the goal of a specific portfolio were to contribute to solutions to climate change, the investor would pull out the effects classified as ‘C’ from the underlying enterprises, where they relate to significant change in important outcomes for the planet that would likely not otherwise occur (as identified through the five dimensions). This can then be shared with the asset owners to provide a summary of impact performance relative to their specific goals.
For some investors (e.g., a passive retail investor), impact classification based solely on intermediaries’ measurement and analysis of enterprise-level data is a more appropriate level of detail.