Impact reporting ‘not realistic’ for every stage of company lifecycle

Though impact participants have devoted much time to developing better ways of measuring and reporting the effectiveness of their investments, doing so may not be feasible in every segment, a conference has heard.

Speaking at the Asian Financial Forum in Hong Kong on Thursday, Tao Zhang, founder and managing director at cross-border impact consortium Dao Ventures said it is unrealistic for start-up companies to allocate human resources to do impact reporting because “that shouldn’t be their focus”.

“Their focus should be getting their products right, do business development and hopefully get to the point where they can scale up their businesses,” he added.

Headquartered in Virginia, Dao Ventures is a Sino-US impact-oriented group of companies encompassing ACBridge Global Advisors, China Impact Fund and New Ventures Global, among others, according to its website. The group invests in small to medium-sized sustainability-related companies in China including sustainable foods and recycling enterprises. Zhang previously co-founded plant-based and alternative protein-focused investment firm Dao Foods International.

According to its website, Dao Ventures has supported over 1,000 small to medium-sized enterprises and made or facilitated over $200 million of investments.

“The companies we are supporting are very early-stage, so we don’t even encourage them to rush into assessing their impact yet,” Zhang said. “Most of them are kind of in a survival mode I would say… they don’t have the capacity to do quantitative assessment. The only thing we assess from the very beginning is the impact DNA of the founders, if they do have the impact DNA, we don’t worry about there will be a potential that they could be deviating from what they do.”

Larger firms, such as TPG, take a more structured approach to impact reporting.

“For us, every investment has to go through two approvals, the investment amount and on the investment results,” said Chang Sun, fellow panellist and partner and chairman of China at TPG. “It’s very simple – IRR and money multiple… but at the same time, there is an impact committee assessed by a separate non-profit organisation to measure impact.”

TPG’s debut impact vehicle, The Rise Fund, was launched in 2017 alongside Y Analytics, a non-profit organisation analysing and measuring the effectiveness of impact investments. According to Sun, impact returns are measured annually, and the firm has seen an increasing demand for impact reports from TPG Rise’s investors.

Measuring impact and the wider universe of ESG is challenging given the wide variety of information requested by LPs; the often complex nature of what is being assessed; and different regulations about its reporting. Elsewhere, a group of LPs and GPs have launched an ESG Data Convergence Initiative to better measure and report considerations such as board diversity, work-related injuries and renewable energy, among other things, New Private Markets reported.

At the same time, some market participants have warned that meeting reporting obligations may keep private equity sponsors from engaging with portfolio companies to deliver improvements.

Joining Zhang and Sun on the panel, Shuyin Tang, partner at San Francisco-headquartered venture capital firm Patamar Capital, also noted that quantitative measurements may not capture all impact made by portfolio investments.

“If we try too much to boil things down to maybe a single number or IRR for financial returns, I think sometimes that can lose a little bit of the richness and the intentionality of what impact investing is about,” she said. “Unfortunately, no matter how many metrics you measure, I think some of the lasting impact may not be there… what’s really key is that kind of alignment and the intentionality of the management team.”