Impact performance benchmarks are new technology, but some expect them to start gaining traction among investors looking to level up their impact strategies.
The Global Impact Investing Network, an organisation that seeks to develop the impact investing universe, released its prototype IRIS+ impact performance benchmarks for financial inclusion in March. The benchmarks, which were developed using the performance data from 13 asset managers, enable investors to compare impact outcomes from their investments to those of their peers.
The impact field has long been plagued by insufficient data. That’s why Sophia Sunderji, associate director, research at GIIN, tells New Private Markets that a benchmarking tool such as GIIN’s represents a long-awaited “holy grail of impact investing”.
GIIN has been an influential player in the impact investing space for over a decade, with the association having played a central role in impact measurement and management. Sunderji says GIIN’s decision to launch its first impact benchmarking tool responds to the significant gap in market impact infrastructure, as well as the high level of demand from investors keen to compare investments with their peers on the basis of impact.
“In financial markets you have all this infrastructure built out around benchmarks and ratings, which allows investors to make decisions about their investments in a way that is rigorous and backed by data,” says Sunderji. “On the impact investing side, we really don’t have that same infrastructure”.
The reality is that impact is inherently subjective, so reducing it into quantitative metrics does not reflect the real impact of the industry. However, GIIN’s benchmarks allow investors to “contextualise their investments by factoring in crucial standardised data and filters to segment that data”, Sunderji says. These filters, including investment level, investment time horizon and geography, create subsets that make for a meaningful comparison.
“One of the key performance indicators that features in GIIN’s benchmark is around clients actively using responsible financing services,” says Sunderji. “Here, we offer insight, not only into number of clients served, but the number of clients active and how many of them are served with responsible financial services, such as repayment capacity analysis and client protection principles.”
Fund services firm Apex Group helps GPs and LPs collect and analyse ESG and impact data through its online ESG platform. It currently provides ESG sector benchmarking for private companies and will be extending this to its impact data sets. Andrew Pitts-Tucker, managing director, ESG at Apex Group, says he is seeing a huge increase in investors wanting to “get ahead” in the impact game.
“Barely a day goes by without a fund approaching us, asking for advice on how best to do assessments and approach impact monitoring. We are not just seeing this from new managers kicking off in the world of impact, but from very traditional managers wanting to establish new impact strategies.”
Pitts-Tucker notes that the comparability element of impact benchmarks will be particularly useful in giving funds a competitive edge: “No doubt, it will push peers to compete to be leader of the impact pack.”
Putting it to the test
While the demand for a ‘holy grail’ solution to impact’s lack of comparable data is clear, just how useable are these early benchmarks?
Impact firm Developing World Markets put this to the test. In August, the firm, which pursues an array of impact outcomes through its investments, deployed GIIN’s benchmarks to evaluate its portfolio’s financial inclusion impact performance in its 2022 impact report. As far as New Private Markets is aware, DWM is the first firm to do so.
Hannah Schiff, director of impact at Developing World Markets, tells New Private Markets that GIIN’s impact benchmarks have revealed several interesting insights. “It has told us a lot about the efficiency of capital – the impact bang for your buck so to speak. The data has allowed us to think about scaling more effectively in the relevant markets, showing us when to push the pedal and hit the break.”
The firm reported that it had exceeded all three of GIIN’s benchmarks: DWM’s financial inclusion portfolio companies reached a median of 1,835 clients, compared with GIIN’s benchmark of 1,724 clients. Fifty-five percent of clients in DWM’s financial inclusion are women, compared with GIIN’s 52 percent. DWM’s female clients increased by 8 percent between 2020 and 2021, against GIIN’s benchmark of 2 percent for private equity investments and 0.8 percent for private debt investments.
When asked how DWM’s LPs view GIIN’s impact benchmarks, Schiff says it is “early days”.
“I don’t think LPs have completely grasped it yet, but as adoption grows, it will become a bigger part of LP conversations in a more sophisticated way,” she says.
GIIN’s benchmarks are a “major milestone” for the impact industry, Schiff adds. “I strongly expect we’ll start to see more funds deploy these in the coming months.”
More to learn
But where do the benchmarks fall short? Both Schiff and Pitts-Tucker note that the impact benchmarking trend is still in its nascency, pointing out that a greater level of awareness around how to calculate and implement impact data is still needed before benchmarks can really take off.
“When it comes to data collection and management, the industry is still developing its capabilities,” Schiff says. “The extent to which the industry is able to verify data at field level is still not where it needs to be.” GIIN’s benchmarks have tried to account for this by reporting on data quality. “There are different levels you can pull out, depending on if your data confidence levels are high medium or low.”
The usefulness of impact benchmarks is further limited by performance data availability, which restricts data analysis. The GIIN’s own benchmarks represent around 500 investments, which Sunderji admits is small, but represents “significant industry strides”.
The next step will be collecting more data around different benchmarks. Sunderji tells New Private Markets that GIIN is in the process of expanding its benchmarking tool, with an agriculture performance benchmark launching early next year.
“The reality is that benchmarks are only as good as the data in them; the more impact data that investors share, the more representative of the market they can be,” she says.