Beyond ESG reporting: it’s time to integrate impact in decision-making

The following blog is a Guest Blog from EVPA

A staggering USD 2,5 trillion annual financing gap looms over the ambitions to meet the Sustainable Development Goals (SDGs) by 2030. This makes the question of effectiveness of the capital already deployed more important – and calls for an increased scrutiny of the performance gaps, impact needs, and the additionality of the impact created.

Thanks to the Beyond ESG month, Social Value International is highlighting the limitations of ESG reporting to improve effectiveness of capital allocation to meet the SDGs. EVPA, as the community of investors for impact, acknowledges this limitation as it has a 10-year track record of advancing impact measurement and management (IMM) as a key practice for the impact ecosystem.

IMM enables investors to safeguard impact integrity and avoid impact washing in a context where more and more actors self-identify as impact investors.

IMM is also a means for impact maximisation. It helps identify and address performance gaps and impact needs and therefore drives decision-making throughout the whole investment journey.

This is why EVPA recently launched its guide “Navigating Impact Measurement and Management”, which highlights key questions and considerations to measure, and most importantly manage impact, from the definition of the investment strategy to the exit. We put forward some key recommendations to integrate impact measurement and management throughout the investment journey below.

During the investment strategy, investors should decide how they will manage the three levels of impact. The investee level is about the impact of specific investments on people and the planet. The investor level is about how the investor for impact contributes to that impact by strengthening the organisations supported. The ecosystem level relates to the investor’s contribution to the development of the impact ecosystem at large, as well as to systemic change.

Another crucial step is to set impact objectives and integrate them into a Theory of Change to articulate how and why investors expect to achieve change through their activities. This Theory of Change is not set in stone but can be adapted as the underlying assumptions are constantly monitored and refined.

In the deal screening phase, investors for impact analyse current impact and performance, but also – and sometimes more importantly – the potential of the solution, the additionality of the impact, the market potential and the scalability of potential investees.

Before starting the investment, during the due diligence and deal structuring phases, investors for impact support their investees in developing their Theory of Change and work together to define the outputs, outcomes and impact targeted.

They also help investees identify and assess subsegments of their beneficiaries so they can better tailor products and services, which leads to higher impact (and in some cases even financial) performance. Such analysis also includes understanding what are the most relevant outcomes for each group of stakeholders.

Subsequently, investors and investees work together to identify the main impact risks – considering stakeholders’ risk tolerance and relevance given to outcomes – and set up risk mitigation strategies accordingly. Investors for impact consider not only the risks of the investees’ activities, but also risk at the investor level.

After analysing stakeholders, identifying relevant outcomes and impact risks, investors and investees select what indicators will capture progress towards the targeted impact. They prioritise selecting indicators that will drive future decision-making.

During the investment management phase, investors for impact put in place a process to verify, value and learn from the impact data generated, together with their investees. Impact verification should aim to optimise positive impact and manage risks. Investors and investees can also value the impact, i.e. weigh the benefits versus the costs for the stakeholders.

The regular involvement of stakeholders and final beneficiaries in valuing and verifying the results is essential to understand the relevance of the intended and unintended outcomes achieved, identify impact gaps and areas for improvement, but also to be accountable to relevant stakeholders.

Sharing successes, failures and practices helps an organisation be more transparent about its activities and its impact on people and the planet. To increase transparency all along the investment management, impact reports should also include decisions made, trade-offs identified and areas for improvement.

Finally, a key issue to consider when conducting an exit is whether the impact is likely to be preserved in the long term. In this regard, investors and investees work to mitigate the risk of mission-drift and ensure financial sustainability to guarantee impact will not be exposed after exit.

Integrating these considerations during the investment journey is essential to effectively measure and manage impact, learn from the data generated, maximise positive impacts and mitigate negative ones. Only with this shift can investors move from ESG reporting to impact management and effectively contribute to the achievement of the SDGs.