What to measure when investing for ESG impact

The answer lies in your objective — and this may change depending on where you are in the investment cycle

With so many startups and organisations entering the sustainability space, impact investors are bombarded with overwhelming amounts of information, statistics and reports. Analysts are faced with several challenges, such as what information is relevant, how credible the sources of information are, how to process information received and categorise it for different purposes, and how to predict outcomes and impacts so that they can mitigate risks.

The measurement dilemma

We have heard the clichés: ‘what gets measured, gets done’, ‘if you can measure it, you can manage it’, ‘if you can’t measure it, you can’t reward it’, etc. But what is it that we should be measuring?

The answer is not obvious and there is much confusion about what should be measured, how it should be measured, and when it should be measured.

A Harvard Business School study a few years ago found that the answers to these questions depend on where one is in the investment cycle, as there are different measurement objectives at each stage. How impact is assessed at the pre-investment due diligence phase is different from the post-investment analysis or when reporting to stakeholders on an ongoing basis.

Pre-investment due-diligence

A due diligence is typically conducted at the pre-investment stage. This is arguably the most important time of the investment cycle for analysis and measurement.

From an ESG perspective, the due diligence entails systematically identifying, quantifying and assessing the environmental, social and governance risks associated with the proposed investment. This process also serves to identify the mitigation measures that are necessary to reduce any risks that are identified.

A proper understanding of the environmental, social and governance risks is critical to estimating the price of the investment. Furthermore, analysts or auditors consider likely risks in order to make an assessment of what impact and return the investment will deliver.

At this stage, much of the data is provided by the target investment company. One of the challenges is therefore how to obtain objective information. An ESG data scientist should be able to find information from other sources, like newspapers reports, filings and submissions to regulatory and governance organisations, and even social media posts and comments.

A thorough due diligence has long term benefits for predicting the value and performance of a company.

Designing a strategy for impact measurement

Once the investment decision has been made, it is essential to design a strategy for impact measurement. This entails deriving metrics and data collection methods that will be used. The target investment may already have systems and processes in place for impact data and metrics, or a new system may need to be devised and implemented.

How do you choose the right impact or risk assessment tool? With so many tools, checklists and management systems in the market, ESG professionals often complain that they do not know how to select the best one for their business. Make sure the tool you use is customised for your business or organisation, helps you to identify risks that need to be mitigated or provided for, and enables you to achieve the goals or impacts which your organisation has set out to achieve.

Reporting to stakeholders and ongoing monitoring

Impact needs to be continuously monitored in order to ensure mission alignment and performance. This requires measurement and analysis on an ongoing basis, using the metrics and data collection methods that were decided upon, and making improvements as required.

Communicating with stakeholders throughout the process requires reporting impact using metrics and in a manner that is appropriate to the audience. There are numerous regulatory, reporting and governance bodies that require ESG data and analysis to be submitted. The company’s enterprise risk management system should be set up to collect, analyse and report in accordance with all of its obligations. In addition, the system should also be adaptable as this is an area of regulation and reporting that is constantly evolving.

Post-investment evaluation — did we deliver output, outcomes or impact?

The post-investment evaluation aims to prove the environmental, social or governance value of the investment or intervention. A critical distinction must be made as to whether what was delivered was an output, outcome or impact. A common mistake is to measure outputs instead of outcomes and impact.

Example:
An organisation chooses SDG4 as its impact goal (SDG4: Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all)
Inputs: Money allocated from government and donations; labour (instructors)
Output: Financial skills courses delivered weekly over a three year period to a total of 300 people between the ages of 18 and 23
Outcome: An increase in the number of people with relevant skills for financial success
Impact: The extent to which this intervention has contributed to achieving the outcome

To evaluate impact, look at outcomes that contribute to long-term goals (like the SDGs) and not just output.

Conclusion

What to measure when investing for ESG impact? The short answer is that the purpose for which we are measuring ESG risks and impact influences what we measure.

The objective determines what should be measured