Macro Forum: The Street View
How (much?): Actis Impact Score™ – measuring the impact of investments
Launched in 2019, the Actis Impact Score™ (AIS™) is a proprietary framework measuring the positive social and environmental impacts of our investments and enabling comparisons across sectors and geographies. As one of the first open-source impact measurement frameworks in the private equity industry, how has the initiative been received? And what’s next?
With over 70 years of experience investing in emerging markets, targeting financial returns alongside positive social and environmental impact, Actis has a long and rich history of investing responsibly to create highly resilient and valuable businesses that benefit society. Yet finding a way of systematically measuring the impact we have on communities and stakeholders has, until recently, been decidedly challenging.
Nevertheless, advancements such as the United Nations’ Sustainability Development Goals (SDGs), which are a blueprint to a more sustainable future, and the Impact Management Project (IMP), which established global consensus for how we talk about impact, created fertile conditions for Actis to produce the AIS™.
Developed in 2018 and launched the following year, the AIS™ applies established principles, such as the five dimensions of impact developed by IMP, to calculate scores and multiples that quantify positive impacts as well as increases in impact, to sit alongside financial performance measures such as IRR and MOIC.
We caught up with James Magor, Director, Responsible Investment at Actis, and Tom Beagent, impact measurement specialist and Director at PwC, to discuss progress on implementing the AIS™ and what comes next for the impact investment industry. PwC is also responsible for verification of Actis’ disclosures in relation to the IFC’s Operating Principles for Impact Management.
James, how has the Actis Impact Score™ been received by your stakeholders and more generally in the market?
James: “We’ve had a great response both internally, among our deal teams and company management, as well as externally. There is a much higher degree of scrutiny around impact intentionality and measurement in today’s market, particularly among institutional investors, so this has resonated well with them.
Our investors are interested to see the correlation between financial returns and positive impact, and AIS™ is a clear way of helping demonstrate this. We’ve applied the impact score to every investment we made in 2019 and, during 2020, we will have the first verification of our approach as we review how our companies are performing. We look forward to proving our long held philosophy that values drive value.
“We’ve also had a really positive response from other private equity firms – including large- and mid-cap asset managers, and competitors of ours. We made the scoring framework open source as we’d like to encourage greater transparency around impact measurement. This has led to others reaching out to us asking about applying the AIS™ to their investments and development of scoring methodologies – that’s highly encouraging.”
What have you learned from the development and implementation of the Actis Impact Score™?
James: “We’ve learned a lot over the past year or so, but there are three main areas I’d highlight. The first is that a quantitative scoring system does not replace the role of narrative. Our investments generate emotive human stories and these have to accompany the score to produce a holistic picture. The second is that, despite the rigour of the scoring methodology and the governance we have put in place around this, it’s hard to entirely remove subjectivity – you can’t always benchmark profound social outcomes with a statistic. And the third is that, in many instances, you have to make evidence-based assumptions about impact outcomes particularly when empirical data is not obtainable.
“For instance, if your investment provides people with well-paid employment, there is evidence to suggest that this will improve their livelihoods, but it’s hard to measure this change over a typical investment timeframe. Another example is healthcare. There is credible research to support our assumption that access to medical diagnostics improves the medical outcome for patients, but it’s hard for Actis as a private equity investor to quantify this impact on the patients of the doctors that access these services.”
Tom, how familiar are the issues that James just outlined when it comes to impact scoring?
Tom: “These are the sort of challenges that our clients grapple with too. To build trust the industry ultimately needs to be able to compare the impact of different investments, track changes in impact over time, and demonstrate to investors alignment with impact objectives. It is good to see the AIS™ tackling this challenge. Tracking impact performance over time allows you to tell the story of how you have enhanced the impact of a business which may help enhance the multiple a buyer is willing to pay.
“Another challenge I see is understanding the overall impact of an investment on peoples’ wellbeing. We spend a lot of time researching evidence of changes in wellbeing. Given that perfect information doesn’t always exist, there is a need for judgement and healthy scepticism. One of the biggest risks faced by the impact investment is impact-washing and I think the AIS™ provides a way to guard against this by monitoring impact progress over time.”
So what are the critical success factors for an impact investment strategy?
Tom: “Firstly, when focusing on impact, there needs to be transparency around the impact objectives. Impact means different things to different people and so there really needs to be clarity up-front. Secondly, asset managers need to be able to show they can deliver on these objectives using hard facts. This is where measuring, managing and reporting impact comes in as the way to build trust.
When it comes to measurement, there needs to be a shift from outputs to outcomes – rather than just focusing on the outcome for the company, investors need to understand what has changed for the stakeholders . Sometimes this can be a real challenge, as shown by the medical diagnosis example James touched on earlier.
And finally, there has to be intentionality – you need to be able to demonstrate that the outcomes you achieve are different from what would have happened if another investor had been involved.”
To what extent should investors hone in on sectors that are intrinsically impactful?
Tom: “Making an impact doesn’t necessarily mean picking the cleanest businesses; they may be the ones that least need help. In fact, more impact can often be achieved by investing in businesses with challenges, in which investors can play a role in helping the company better meet the needs of society whilst not detrimentally affecting the environment.
It’s critical to recognise that all businesses have an impact and that investors can help shift this significantly towards the positive – what we refer to as impact turnaround.”
James: “Precisely. At Actis, our platforms construct a lot of renewable power plants, yet we recognise that solely backing the development of renewable energy isn’t enough in many of our markets, where there is a deficit in baseload power supply.
We are actively supporting the transition from, for example, oil to gas, and we believe that the conversion of existing thermal power plants to cleaner fuels is just as important as building new renewable ones. We are also working to minimise any negative social consequences of the low carbon transition for workers and communities living near our power plants by investing in skills development to catalyse direct and indirect employment opportunities.
Managing the social consequences and creating opportunities is a crucial part of the Just Transition”.
How do you see impact investing evolving over time?
Tom: “I believe there is a lot of capital looking for return and impact. Impact investing is still young and one of the challenges is a shortage of players with a track record that can show both. Initiatives like the Impact Management Project and the IFC’s Operating Principles are helping drive consensus around impact measurement and management. By drawing on these Actis shows how thinking can be put into practice.
Further out, the Impact-Weighted Accounts Initiative, driven by Harvard Business School and supported by the Impact Management Project, aims to shift impact measurement towards the quantification of a monetised value of impact, and eventually we’ll see these measures reach a par with IRR.”
James: “In the short-term, we’re looking forward to our first verification audit by PwC. We believe verification is crucial to mitigate against the potential in the industry for impact-washing and fosters trust among investors.
“Over the next few years, I think we’ll see a broader acceptance that all investments have impact and there will be a drive towards ensuring it is intentionally positive. I can see a time when impact investing ceases to be viewed as a niche strategy and simply becomes an essential part of investing. Even today, it is becoming increasingly difficult for investors to ignore the link between financial value and sustainability.”