GROWING IMPACT New Insights into the Practice of Impact Investing About IFC IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets and opportunities in developing countries. In fiscal year 2019, we invested more than $19 billion in private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org. © International Finance Corporation. First printing, June 2020. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. 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GROWING IMPACT New Insights into the Practice of Impact Investing ABOUT THE AUTHORS NEIL GREGORY, Chief Thought Leadership Officer, Economics and Private Sector Development, IFC (Introduction, Chapters 1, 2) ARIANE VOLK, Research Analyst, Thought Leadership, Economics and Private Sector Development, IFC (Chapters 1, 2) CONTENT ADVISORS Economics and Private Sector Development | Neil Gregory, Albena Melin, Ariane Volk, Thomas Rehermann, Hans Peter Lankes, Friedemann Roy Partnerships, Communication and Outreach | Tom Kerr, Elizabeth Medb Lewis, Bhattiprolu Balachandra Murti ACKNOWLEDGMENTS In addition, we include those individuals the case study authors wish to acknowledge for their support: Vijay Advani (Nuveen), Bertrand Badré (Blue like an Orange Sustainable Capital), Torbjorn Caesar (Actis), Ruth Horowitz (IFC Asset Management Company), Stephen Liberatore (Nuveen), James Magor (Actis), Ben Mikula (Cordiant Capital), Shami Nissan (Actis), Johanna Raynal (Swedfund), Tahmina Theis (BlueOrchard), Rekha Unnithan (Nuveen), Jennifer Urbain (Forestry and Climate Change Fund) PROJECT TEAM Project Manager | Albena Melin Editors | Matt Benjamin, Ann Bishop, David Lawrence Research Assistants | Aarti Reddy, Prajakta Diwan, Maud Schmitt, Hary Ralarosy, Ahmed Nauraiz Rana Composition and Design | Rikki Campbell Ogden CONTENTS xi FOREWORD xii INTRODUCTION CHAPTER 1 1 THE SIZE OF THE IMPACT INVESTING MARKET, 2019 15 SPOTLIGHT THE OPERATING PRINCIPLES FOR IMPACT MANAGEMENT 18 CHAPTER 2 WHAT WE KNOW ABOUT THE SIGNATORIES TO THE OPERATING PRINCIPLES FOR IMPACT MANAGEMENT—SURVEY RESULTS 23 CHAPTER 3 CASE STUDIES—EXPERIENCES OF SIGNATORIES TO THE OPERATING PRINCIPLES FOR IMPACT MANAGEMENT 88 METHODOLOGY 90 FURTHER READING CASE STUDY AUTHORS We would like to thank the authors of the case studies. Nabil Marc Abdul-Massih, CEO, INOKS Capital Matt Christensen, Global Head, Responsible (Case Study #22) Investment, AXA Impact Fund—Climate & Jenni Adamson, Research Analyst, Investment Biodiversity (Case Study #1) Team, Christian Super Fund (Case Study #2) Jonathan Dean, Head of Impact Investing, AXA Samira Aissi, Senior Manager, Social Impact, Impact Fund—Climate & Biodiversity (Case Study #1) Swedfund (Case Study #23) Augustin Degroote, Director, Finance and Risks, Runa Alam, co-founder and CEO, Development Blue like an Orange Sustainable Capital (Case Partners International (Case Study #11) Study #24) Robert Antablin, Co-Head of KKR Global Impact, Shade Duffy, Director, Impact Investment, AXA KKR (Case Study #31) Impact Fund—Climate & Biodiversity (Case Study #1) Roshni Bandesha, Senior Manager, Impact Labs, Stéphanie Émond, Head of Impact and Operations, LeapFrog (Case Study #4) FinDev Canada (Case Study #17) Suprotik Basu, Founding Partner and Head of Orlando Ferreira, Chief Strategy Officer and Chief Impact, Blue like an Orange Sustainable Capital Finance and Administration Officer, ad int., Strategy (Case Study #24) and Development Dept., IDB Invest (Case Study #18) Selena Baxa, Principal, Client Relations, IFC Asset Pierre Forestier, Director, Sustainability and Management Company (Case Study #3) Corporate Governance Dept., Proparco (Case Study #5) Milena Bertram, Director, Impact & Sustainability, Finance in Motion (Case Study #26) Dr. Julian Frede, Senior Manager, DEG (Case Study #25) Chongsi Bi, Associate, IFC Asset Management Company (Case Study #3) James Gifford, Head of Impact Advisory, IAF, Credit Suisse (Case Study #10) Benoît Blanc, E&S and Climate Officer, STOA Infra & Energy (Case Study #13) Aurélie Gupta, Vice President, IAF, Credit Suisse (Case Study #10) Christophe Bochatay, ESG and Impact Manager, Triple Jump (Case Study #8) Paul Hailey, Head of Impact, responsAbility Investments (Case Study #7) Danielle Brassel, Responsible Investment Analyst, Zurich Insurance Group (Case Study #28) Michael Hall, Sustainability Manager, Development Partners International (Case Study #11) Deepa Chakrapani, Manager, Corporate Results Measurement, Sector Economics & Development Valerie Harrington, Associate Fund Manager, Impact, Economics and Private Sector BlueOrchard (Case Study #20) Development, IFC (Case Study #30) Sarah Hessel, Senior Officer, Impact & Sabine Chalopin, ESG Manager, Denham Capital Sustainability, Finance in Motion (Case Study #26) (Case Study #29) Johanna Köb, Head of Responsible Investment, Victoria Y. Chang, Results Measurement Specialist, Zurich Insurance Group (Case Study #28) Manufacturing, Sector Economics & Development Karin Kronhöffer, Director, Strategy and Impact, Economics and Private Sector Communication, Swedfund (Case Study #23) Development, IFC (Case Study #30) iv Serge LeVert-Chiasson, Partner, MD Impact Matthew Saville, Managing Director, STOA Infra & Investment Advisory & CCO, Sarona Asset Energy (Case Study #13) Management (Case Study #6) Hannah Schiff, Director of Impact, Responsible Tim Macready, Chief Investment Officer, Investing, Nuveen (Case Study #32) Investment Team, Christian Super Fund (Case Elizabeth Seeger, Director, Sustainable Investing, Study #2) KKR (Case Study #31) Alessandro Maffioli, Head of Development Norah Sullivan, Development Effectiveness Officer, Effectiveness, Strategy and Development Dept., Strategy and Development Dept., IDB Invest (Case IDB Invest (Case Study #18) Study #18) James Magor, Responsible Investment Manager, Kathryn Sutton, Head of Communications a.i., Actis (Case Study #9) BlueOrchard (Case Study #20) Elleke Maliepaard, Senior Manager, DEG (Case Marina Svistak, Senior Impact Officer, FinDev Study #25) Canada (Case Study #17) Obie McKenzie, Vice Chairman, Cordiant Capital Lorraine Talon, Development Effectiveness (Case Study #21) Officer, Impact Measurement Unit, Proparco Ken Mehlmann, Co-Head of KKR Global Impact, (Case Study #5) KKR (Case Study #31) Mona Tarpley, Principal Counsel, IFC Asset Carmela Mondino, Senior Operating Associate, ESG Management Company (Case Study #3) & Sustainability, Partners Group (Case Study #12) Romain Vélon, Investment Analyst, STOA Infra & Julie Montels, Impact Analyst, INOKS Capital (Case Energy (Case Study #13) Study #22) Virginie Vitiello, Environmental & Social Head, Leigh Moran, Director, Strategy, Calvert Impact STOA Infra & Energy (Case Study #13) Capital (Case Study #14) Apricot Wilson, Head of Impact and Deputy CEO, Shami Nissan, Head of Responsible Investment, Forestry and Climate Change Fund (Case Study #16) Actis (Case Study #9) Maria Teresa Zappia, Chief Investment Officer, Anna Oleksiak, Investments, Blue like an Orange BlueOrchard (Case Study #20) Sustainable Capital (Case Study #24) Safeya Zeitoun, Impact Measurement Specialist, Pascale Oligny, Head of ESG and Impact, Cordiant Symbiotics (Case Study #27) Capital (Case Study #21) Gwendolyn Zorn, Head of Impact, Phatisa (Case Projects Directorate, Legal Directorate, Study #19) Operations Directorate, EIB European Investment Bank (Case Study #15) Caitlin Rosser, Senior Officer, Impact and Communications, Calvert Impact Capital (Case Study #14) Christiane Rudolph, Head of Dept., DEG (Case Study #25) v LIST OF CASE STUDIES PRINCIPLE 1 PRINCIPLE 5 1) AXA Impact Fund—Climate & Biodiversity...............24 20) BlueOrchard.....................................................................62 2) Christian Super Fund.......................................................26 21) Cordiant Capital...............................................................64 3) IFC AMC Asset Management Company...................28 22) INOKS Capital...................................................................66 4) LeapFrog............................................................................. 30 23) Swedfund...........................................................................68 5) Proparco............................................................................... 32 PRINCIPLE 6 6) Sarona Asset Management...........................................34 24) Blue like an Orange Sustainable Capital............... 70 PRINCIPLE 2 25) DEG Deutsche Investitions- und 7) responsAbility.....................................................................36 Entwicklungsgesellschaft—German Development Finance Institution, a member 8) Triple Jump........................................................................... 38 of KfW Group........................................................................... 72 26) Finance in Motion...........................................................74 PRINCIPLE 3 27) Symbiotics..........................................................................76 9) Actis...................................................................................... 40 28) Zurich...................................................................................78 10) Credit Suisse......................................................................42 11) DPI Development Partners International................44 PRINCIPLE 7 12) Partners Group.................................................................46 29) Denham International Power Fund (DIPF).......... 80 13) STOA Infra & Energy.......................................................48 PRINCIPLE 8 PRINCIPLE 4 30) IFC........................................................................................82 14) Calvert Impact Capital.................................................. 50 15) EIB European Investment Bank................................. 52 PRINCIPLE 9 16) Investing for Development SICAV, 31) KKR........................................................................................84 Forestry and Climate Change Fund................................54 32) Nuveen................................................................................86 17) FinDev Canada..................................................................56 18) IDB Invest...........................................................................58 19) Phatisa................................................................................ 60 vi FIGURES, BOXES, AND TABLES FIGURE A Size of Potential Market Segments in the Private Impact Investing Market..............................................xiv FIGURE 1.1 Total Assets of Potential Private Impact Investors in 2019 (US$ billions)....................................................... 2 FIGURE 1.2 Total Assets of Potential Public Impact Investors in 2019 (US$ billions)........................................................ 3 FIGURE 1.3 Overview of Private Investment Funds...................................................................................................................... 4 FIGURE 1.4 Impact Intent and Measurement Funds Fall Short of Target Fund Size........................................................ 5 FIGURE 1.5 Regional Focus of Fund Volume................................................................................................................................... 5 FIGURE 1.6 Target Asset Class of Private Investment Funds with Verifiable Impact Intent and Measurement......................................................................................................................................................................... 6 FIGURE 1.7 New Green Bond Issuances by Type, 2014–19 (US$ billions).............................................................................. 9 FIGURE 1.8 Annual Bond Issuances, 2010–19 (US$ billions)..................................................................................................... 10 FIGURE 1.9 Assets in Corporate Engagement and Shareholder Action, 2014–18 (US$ billions)...................................11 FIGURE 2.1 Share Invested in Emerging Markets vs Developed Countries.........................................................................19 FIGURE 2.2 In Which Regions Do Impact Investors Invest?.....................................................................................................19 FIGURE 2.3 Share Invested in Public or Private Investments................................................................................................. 20 FIGURE 2.4 Thematic Preferences as Reported by Signatories............................................................................................ 20 FIGURE 2.5 Investors Prefer Different Themes, Depending On Where They Invest.......................................................21 FIGURE 2.6 SDGs Most Targeted....................................................................................................................................................... 22 FIGURE 3.4.1 The Emerging Consumer Opportunity.................................................................................................................. 31 FIGURE 3.5.1 Our Strategy for Action.............................................................................................................................................. 33 FIGURE 3.14.1 Impact Scorecard....................................................................................................................................................... 50 FIGURE 3.14.2 Borrower Performance Against Portfolio Metrics..........................................................................................51 FIGURE 3.17.1 FinDev Canada’s Impact Goals...............................................................................................................................56 FIGURE 3.17.2 Examples of Impact Tools at Origination........................................................................................................... 57 FIGURE 3.25.1 Development Effectiveness Rating...................................................................................................................... 72 FIGURE 3.28.1 Shaping a More Resilient Tomorrow..................................................................................................................79 BOX 2.1 Signatories to the Operating Principles for Impact Management: Creating a Community................................ 22 TABLE 3.1.1 KPIs, Target Outcomes, and Performance Indicators.........................................................................................24 vii ABBREVIATIONS AND ACRONYMS AFD Agence Française de Développement ESG Environmental, Social, and Corporate AGM Annual General Meeting Governance AIMM Anticipated Impact Measurement and ESMF Environmental and Social Management Monitoring (of IFC) Framework Manual AIS Actis Impact Score ESMS Environmental and Social Management System AUM Assets Under Management EU European Union CDFI Community Development Financial Institution GBP The Green Bond Principles CHF Swiss Franc GIIN Global Impact Investing Network CITES Convention on International Trade in GIP Global Impact Platform Endangered Species GRESB Global Real Estate Sustainability CMA Climate Change Mitigation & Adaptation Benchmark CO2 Carbon Dioxide GSIA Global Sustainable Investment Alliance CS Credit Suisse GSS Green, Social, and Sustainable CSAM Credit Suisse Asset Management HIPSO Harmonized Indicators for Private Sector Operations DEG Deutsche Investitions- und Entwicklungsgesellschaft IAF Impact Advisory and Finance DEI Diversity, Equity, and Inclusion ICMA International Capital Market Association DELTA Development Effectiveness Learning, IDB Inter-American Development Bank Tracking, and Assessment tool (of IDB IFC International Finance Corporation Invest) IFC AMC IFC Asset Management Company DERA Development Effectiveness Rating IMM Impact Measurement and Management (of DEG) IMP Impact Management Project DFI Development Finance Institution IPP Independent Power Producer DIPF Denham International Power Fund IRIS Impact Reporting and Investment DM Developed Market Standards (IRIS). Refers to the generally DPI Development Partners International accepted catalog of impact metrics, part E&S Environmental and Social of the IRIS+ system EDGE Economic Dividends for Gender Equality IRIS + Generally accepted system for measuring, managing, and optimizing impact* EFTA European Free Trade Association JICA Japan International Cooperation Agency EGM Extraordinary General Meeting JSIF Japan Sustainable Investment Forum EHS Environmental, Health & Safety KPI Key Performance Indicator EIB European Investment Bank LP Limited Partner EM Emerging Market LRP Livelihood Restoration Plan EMPEA Emerging Market Private Equity Association MCPP Managed Co-Lending Portfolio Platform (of IFC) viii MD Market Development MDB Multilateral Development Bank MEDA Mennonite Economic Development Associates MSME Micro, Small, and Medium Enterprise MW Megawatts OECD Organisation for Economic Co-operation and Development PAPS Project Affected People PRI Principles for Responsible Investment SAR Special Administrative Region SASB Sustainable Accounting Standards Board SBP Social Bond Principles SDGs Sustainable Development Goals SEC Securities and Exchange Commission SME Small and Medium Enterprise SPIRIT Social Performance Impact Reporting and Intelligence Tool (of BlueOrchard) SPM Social Performance Measurement and Management TIAA Teachers Insurance and Annuity Association of America UN United Nations US$ United States Dollar WBG World Bank Group WEE Women’s Economic Empowerment WEOF Women Entrepreneurs Opportunity Facility Note: All dollar amounts are U.S. dollars unless otherwise indicated * IRIS+ is home to the IRIS Catalog of Metrics as well as Core Metrics Sets (short lists of agreed-upon metrics by investment theme, such as financial inclusion, housing, education, etc.), a built-in evidence base, practical how-to guidance to help advance IMM practice, and best-in- class third-party resources. IRIS+ is aligned to 50+ standards, metrics sets, frameworks, and initiatives, including the SDGs, the five dimensions of impact, HIPSO, 2X challenge, and many others. IRIS+ is a public good managed by the GIIN. ix FOREWORD One year ago, IFC and other impact investors unveiled the Operating Principles for Impact Management, a set of clear market standards for how to manage investments aiming to achieve positive impact alongside financial returns. With the global economy now enmeshed in a deep recession, the impact investment field is facing a crucial stress test as companies scale up their response to COVID-19 and look towards shaping a greener, more resilient and inclusive recovery. At the time of writing, emerging economies were facing a dramatic drop in international and domestic private investment. In spite of that, initial indicators from this report show the impact investing market has been growing and maturing. We estimate the market size for total assets of potential private impact investors to be slightly above $2 trillion in 2019. The market uptake of the Operating Principles is also growing strongly. The 58 investors who gathered in Washington, D.C. one year ago have evolved into a community of almost 100 signatories managing an estimated $300 billion for impact and stemming from 26 different countries across 5 continents. Together, they now form a self-organized community of practice that is deepening its work to align impact measurement systems into a common core of metrics that will further improve comparability across funds and institutions. For example, signatories are working together with the GIIN and IMP to agree on common impact metrics for key themes such as climate, gender, and direct jobs. This critical agenda will help public market investors finance companies that contribute to solutions to social or environmental challenges. It will help commercial banks start to build portfolios of impact-based loans. And it will promote further alignment between the impact measurement and reporting of firms and that of the investors within those firms. This report, Growing Impact, follows IFC’s first assessment of the global market for impact investing and investor practices, Creating Impact, published in April 2019. In this new report we explore more deeply the size and makeup of the impact investing market and analyze the practices of impact investors, drawing on data from a survey of the signatories to the Operating Principles and a set of 32 signatory case studies. The case studies illustrate how we are creating a powerful market force by embracing a shared vision and approach. There has never been a more opportune time to adopt and implement the principles, which offer a transparent and disciplined framework for investors and open up new opportunities for collaboration. Working together, we will double efforts to scale up financing to achieve the Sustainable Development Goals. We count on you to join us in this crucial mission. Philippe Le Houérou Chief Executive Officer, IFC xi INTRODUCTION One year ago, 58 investors gathered in Washington DC to adopt the Operating Principles for Impact Management. This was a major step forward in bringing transparency and discipline to the practice of impact investing. For this diverse range of public and private institutions pursuing impact across different asset classes and geographies, the Operating Principles provide a basis for comparability and convergence toward best practices. As background to this milestone, we published the Creating Impact1 report, which projected significant growth for the impact investing market in coming years. The report also summarized what we knew about the emerging practices of impact investors in managing and measuring impact. A year later, the coalition of investors committed to the Operating Principles has grown to almost 100 and our understanding of the impact investing market has grown with it. Yet impact investing, like other parts of financial markets, faces a new obstacle in the form of the COVID-19 pandemic. As most impact investing is in private markets, we expect total assets managed for impact to be less affected in 2020 by COVID-19-related financial market turbulence than other parts of financial markets. At the same time, we do expect COVID-19 to have an effect on this segment too. Much of the institutional impact investing industry has grown up since the 2008 Global Financial Crisis, and has thus benefitted from the tailwinds of liquid markets, low interest rates, and widespread, steady economic growth as the global economy made its long, slow recovery. Suddenly the winds have shifted, and in the year ahead impact investing will face strong headwinds in terms of tighter liquidity conditions, risk averse investors, portfolio rebalancing, and widespread economic disruption, all of which will threaten the viability of many impactful firms. This is the time when impact investing can demonstrate its full potential—by focusing on impact as well as financial returns, impact investors can make decisions that not only benefit their portfolios, but benefit their investee companies and enable them to continue providing needed goods and services, creating jobs, and generating impact. This report brings together new insights and data that extend our understanding beyond the Creating Impact report: It updates our assessment of the size of the global market one year on—accounting for continued growth in the market and refining our estimates with fresh data sources; it describes the activities of the Signatories to the Operating Principles, which include many of the leaders in the field; and perhaps most significant, it brings together case studies from 32 Signatories explaining how they apply different aspects of the Principles in their operations. This is significant for three reasons. First, it shows that impact investors are moving beyond the ‘what’ to the ‘how.’ Now that the Operating Principles provide clarity on what it means to be an impact investor, we can move beyond debates about definitions and can delve deeper to learn how to actually execute an impact strategy in the context of specific institutions. Second, it shows that the Signatories are developing into a practitioner knowledge community that is self-organized by active investors. Most of the Signatories were already engaged in other convening organizations like the United Nations-supported Principles for Responsible Investment, the Global Impact Investing Network (GIIN), or the Global Steering Group for Impact Investment (GSGII), and knowledge platforms like the Impact Management Project (IMP). It has not been our intention to duplicate these organizations’ work, but instead to complement 1 IFC. 2019. “Creating Impact – The Promise of Impact Investing.” See also www.ifc.org/creatingimpact xii and partner with them. However, the group of committed impact investors that have signed the Operating Principles has naturally coalesced into a community of practice, having regular discussions and workshops on detailed implementation issues. There is an encouraging openness among these investors to share information and experiences, which allows Signatories to agree on best practices. Signatories are showing that they want to compete on the best impact and financial performance, not on the best impact management process or data standard. For example, Signatories are working together with the GIIN and IMP to agree on common impact metrics for key themes such as climate, gender, and direct jobs. Third, it shows how the Operating Principles can be applied across a range of different types of institutions and investment strategies. The case studies include examples from large asset managers, large and small development finance institutions, and small specialist impact fund managers. They include investors in venture capital, private equity, private debt, infrastructure, and other asset classes. Some invest in emerging markets, some in developed markets. There are approaches that are applicable across situations, but it is also instructive to see how the Principles can be adapted to different situations. What emerges from this report is that the impact investing market is both growing and maturing. Just considering impact funds with identifiable measurement systems and the development finance institutions that use the Harmonized Indicators for Private Sector Operations (HIPSO, see chapter 1), we now estimate the market size for total assets of impact investors in 2019 to be $505 billion. Adding in other funds and DFIs with impact objectives, the total market size could be slightly over $2 trillion. 2 We also include estimates of the size of the green, social, and sustainable bond market, and active public market strategies, which suggest that the full scope of impact investing may be substantially larger. We can see the maturation in the thoughtful and practical approaches to managing for impact described in the case studies. Despite the suddenly more challenging environment, we will continue to seek additional Signatories to the Principles and to collaborate with other Signatories to increase and deepen our knowledge of best practices in implementing the Principles. Over the coming months, many of the initial Signatories will publish their first annual Disclosure Statements, which will be a big step forward in transparency for the industry. IFC will publish an analysis of what we find in these disclosures—the common best practices, gaps, and areas of innovation. There is one final sign of how far we have come over the past year. Last year’s Creating Impact report was prepared by IFC. This Growing Impact report includes two chapters prepared by IFC along with 31 case studies prepared by Signatories. Growing the impact investing market with credibility and transparency is truly a collaborative endeavor, and we thank all the Signatories for joining us on this journey. 2 An explanation of the methodology used in the report, can be found on pages 88 and 89. xiii OVERVIEW OF POTENTIAL MARKET SEGMENTS IN THE IMPACT INVESTING MARKET FIGURE A Size of Potential Market Segments in the Private Impact Investing Market Total Impact and Measurement HIPSO DFIs Intent and $300bn Measurement Funds $505bn $205bn Total Other DFIs Other Intent Funds Other Intent $1,357bn $1,567bn $210bn Total DFIs Total All Impact Total Private Funds $1,657bn $2,072bn $415bn Source: Preqin, Global Impact Platform, EMPEA, Syminvest, GRESB, IRIS, B-Analytics, HIPSO, MDB Mobilization reports, Disclosure Statements to Operating Principles for Impact Management and DFI annual reports, Environmental Finance, Global Sustainable Investment Alliance. CHAPTER 1 The Size of the Impact Investing Market, 2019 What is Impact Investing? result to a single activity. Thus, the thesis is a credible narrative that the outcome would not have occurred—at It has been difficult for investors and analysts to track least not to the same extent—without the investment. the growth of the impact investing market. Different reports, using varying definitions, have attempted Measurement. The investor has a system of to estimate parts of the market, based on type of measurement in place to link intent and contribution investor or of product. As more investors adopt the to the improvements in social and environmental Operating Principles for Impact Management and outcomes delivered by the enterprise in which the publicly disclose the size of their impact assets under investment was made. The measurement system enables management (AUM), it will become possible for the the investor to assess the level of expected impact, ex first time to accurately measure the amount of assets ante, in order to continuously monitor progress and that follow a consistent approach to investing for take corrective actions when appropriate, and then finally to evaluate the achievement of impact, ex post. impact. Many investors will make these disclosures for the first time in 2020. In the meantime, we follow the Investments may be made into the full range of public methodology introduced in 2019 in Creating Impact to and private assets, and by a wide range of institutions provide an estimate of the total market size, based on and funds, if by doing so the investor contributes key market segments. to achieving impact. Following the methodology introduced in the Creating Impact report,4 which uses Following the definition laid out in that report, we the three attributes described above to identify assets define impact investments as investments made in managed for impact, this chapter estimates the 2019 companies or organizations with the intent to contribute market size for impact investing. This includes assets for measurable positive social or environmental impact, which evidence is available to show intent for positive alongside a financial return.3 Specifically, the definition impact, identifiable contribution, and measurement of encompasses three observable attributes of impact impact, as well as assets for which available information investors that can distinguish them from other investors: on their alignment with these three elements of impact Intent. The investor articulates an intent to achieve a investing is incomplete. In this way, this chapter social or environmental goal by identifying outcomes provides an overview of the scale of impact investing that will be pursued through the investment and across a range of asset classes and institutions. specifying who will benefit from these outcomes. Contribution. The investor follows a credible Size of the market—Overview narrative, or thesis, which describes how the investment We identify segments of the market that have the contributes to achievement of the intended goal—that potential to fulfill all three attributes, even if information is, how the actions of the impact investor will help on whether they actually do so is incomplete. achieve the goal. Contribution is considered at the level Private investment funds and development finance of the impact investor and can take financial as well as institutions can most credibly provide evidence of non-financial forms. It is worth noting that in the realm intent, contribution, and measurement of impact. of impact investing, it is seldom possible to attribute a However, not all funds and DFIs that show intent 3 Here investments refer to debt or equity, as well as the provision of guarantees or risk insurance, which facilitate the provision of debt by a third party. 4 IFC. 2019. “Creating Impact – The Promise of Impact Investing.” See also www.ifc.org/creatingimpact. 1 CHAPTER 1. The Size of the Impact Investing Market, 2019 to invest for impact provide information on whether In public markets it is more difficult to credibly invest they measure their impact, making it impossible to for impact. Assets totaling $10,582 billion have the determine how much of their investments meet that potential to contribute to positive impact, consisting criterion. Thus, we provide two estimates for each of two segments. First, there is $9,835 billion of equity segment—a higher number representing all those assets invested using shareholder action strategies, which can managed with intent for impact, and a lower number have intent for impact. However, we estimate that only representing only those for which we also find evidence a small proportion of these assets are managed with of measurement systems in place. For private market an intent to achieve measurable positive impact and funds, we use information available in commercial for which there is a thesis of how these investments databases. For DFIs, we use adoption of the directly contribute to impact. Second, green, social, Harmonized Indicators for Private Sector Operations and sustainability bonds ($747 billion) provide a (HIPSO) to indicate that impacts are measured. limited amount of impact measurement. Where On this basis, assets managed by private funds investors buy these bonds with intent for impact, and with intent for impact total $415 billion, of which the proceeds contribute to additional impact, they can $205 billion can be identified as also having impact be considered impact investments. But the degree to measurement. DFIs have impact intent assets totaling which these conditions are met is not observable. It is $1,657 billion, of which $300 billion can be identified important to note that these bonds may be issued by as having impact measurement. Adding these two DFIs to finance their impact investments and may be segments together, assets with intent for impact total purchased by impact funds, so this amount cannot be $2,072 billion, of which we have identified $505 added to the private market estimate without potential billion as having impact measurement (the yellow double counting. bars in Figure 1.1). This represents the range of assets The following sections provide details on the strategies under management in private markets that meet our that can be used to invest for impact, and the definition of impact investing. circumstances under which this is possible. FIGURE 1.1 Total Assets of Potential Private Impact Investors in 2019 (US$ billions) Total All Private Funds All DFIs Impact Intent and Measurement Funds HIPSO Signatories Impact Intent Funds Other DFIs Total 2,072 All Private Funds 415 Impact Intent and 205 Measurement Funds 210 Impact Intent Funds 1,657 All DFIs 300 HIPSO Signatories Other DFIs 1,357 (US$ billions) 0 500 1,000 1,500 2,000 2,500 Source: Preqin, Global Impact Platform, EMPEA, Syminvest; GRESB, IRIS, B-Analytics; MDB Mobilization Reports, DFI annual Reports, Disclosure Statements to Operating Principles for Impact Management, HIPSO. 2 GROWING IMPACT New Insights into the Practice of Impact Investing FIGURE 1.2 Total Assets of Potential Public Impact Investors in 2019 (US$ billions) Total Green, Social and Shareholder Action Sustainability Bonds Strategies Total 10,582 Green, Social and 747 Sustainability Bonds Shareholder Action 9,835 Strategies (US$ billions) 0 2,000 4,000 6,000 8,000 10,000 12,000 Source: Global Sustainable Investment Alliance, Environmental Finance. Size of the market—Private markets funds’) include private equity and venture capital funds, infrastructure, real assets and real estate, and Private Funds private debt funds, as well as funds that invest in more Private and institutional investors inclined to move than one asset class. While access to data on private beyond value-aligned investing face the choice of impact funds is growing, this estimate shows that the whether to invest their assets directly into a company market remains relatively small. The need for greater or institution, or indirectly via a fund. There is little transparency in the space has inspired increased efforts information available on direct impact investments by to identify impact investing funds and to make that private investors, but only on the vehicles that investors information available to the public.5 These efforts can use to indirectly invest for impact. Thus, this analysis show that impact investing has outgrown its niche and assembles the assets under management of private become of interest to a broader audience. investment funds whose operations demonstrate both Impact Intent Funds. In addition, we identify 891 positive intent and the use of a measurement system. funds with a total size of $210 billion that show intent These funds indicate intent for positive impact in for positive environmental and social impact, but Total All Private Funds various industry databases and either have a confirmed for which there is no confirmed measurement Impact system Intent and Measurement impact measurement system in place, or are owned or in place (‘intent funds’). In comparison, we found Impact Intent Funds managed by an institution using recognized impact conventional funds—which do not display an impact measurement tools: those of either IRIS, B-Analytics, motive—to have a total of $8,258 billion in committed Total or GRESB, the latter of which relates to real estate and capital between 2009 and 2019.TotalHence, the capital All Private Funds All Private Funds 415 infrastructure. We assume that the specific contribution committed to funds with positive impact—with or and Measurement Impact Intent of an investor to impact in the private market is well- withoutImpact Intent and a fraction205 measurement—is Impact of the Intent Funds available defined, as investors maintain significant influence over Measurement Funds capital in conventional funds. their portfolio companies. Private investors can also Total 210 Impact Intent Funds contribute to the achievement of impact by providing All Private Funds 415 knowledge or technology to investees. All DFIs Impact Intent and 205 300 Intent and Measurement Funds. We were able HIPSO Signatories Measurement Funds to identify 887 funds, with a collective size of $205 Other DFIs 210 billion, that show intent for positive impact as well as Impact Intent Funds (US$ billions) 0 500 1,000 a measurement system in place. These funds (‘impact All DFIs 300 5 $71 billionSignatories As a consequence, we cannot directly compare these overall figures to our finding of HIPSO raised by impact intent and measurement funds from last year’s Creating Impact report, as we now have access to a dramatically larger amount of information on impact investing funds. Other DFIs (US$ billions) 0 500 1,000 3 CHAPTER 1. The Size of the Impact Investing Market, 2019 FIGURE 1.3 Overview of Private Investment Funds CAPITAL COMMITTED For funds with vintage year 2009–2019 8,258 210 205 (US$ billions) Conventional Impact Intent Impact Intent and Funds Funds Measurement Funds NUMBER OF FUNDS 22,647 891 887 AVERAGE FUND SIZE 365 235 230 (US$ millions) Sources: Preqin, Global Impact Platform, EMPEA, Syminvest, GRESB, IRIS, B-Analytics. Despite the small overall market size, there is anecdotal capital, respectively. Impact investment funds have evidence that impact investing funds have become more remained smaller than the average conventional ambitious in their efforts to raise capital, with several private fund, suggesting that—at least in the past— funds having raised more than $1 billion. What used to asset owners may have had limited appetite for such be the terrain of smaller, specialized impact investors products, or that there is an insufficient available now attracts larger private equity funds. Examples pipeline in suitable projects and companies. Despite include TPG’s Rise Fund II, which has raised $1.7 the considerably smaller number of funds, the median billion as of October 2019 and is targeting to raise size of impact intent and measurement funds is larger $2.5 billion.6 TPG’s first Rise Fund closed in 2017 with ($124 million) than those of conventional funds ($100 commitments of $2.1 billion, far exceeding its $1.5 million), suggesting that Limited Partners (LPs) have a billion target. In February 2020, KKR announced the considerable interest in sizable impact funds. final closing of its $1.3 billion Global Impact Fund, which seeks investment opportunities in companies Achieving a fund’s target size has traditionally been a whose core business models provide commercial measure of success, yet impact funds have consistently solutions to environmental and social challenges. failed to meet their targets in the past, with the exception of funds with the vintage year of 2017. Despite being some of the largest funds in the impact Conversely, impact intent funds have met their goals investing market, these funds are dwarfed in size by for capital commitments since 2013, and conventional conventional funds, which can exceed $10 billion in funds, on average, have surpassed their target size over commitments. Conventional funds continue to be the last ten years.7 larger on average ($365 million) than ‘impact intent’ or ‘impact intent and measurement’ funds, which Due to their impact objective, impact funds more often on average log $235 and $230 million in committed invest in underserved markets. We estimate that 30 6 At time of publication of this report. 7 Includes only funds for which both fundraising goal and current committed assets were available. 4 GROWING IMPACT New Insights into the Practice of Impact Investing FIGURE 1.4 Impact Intent and Measurement Funds Fall Short of Target Fund Size RATIO OF FUND SIZE TO TARGET FUND SIZE Conventional Funds NImpact Intent Funds = 566 Impact Intent Funds NImpact Intent and Measurement Funds = 611 NAlternative Fund Universe = 12,370 Impact Intent and Measurement Funds 1.20 1.13 1.06 1.12 1.09 1.03 1.04 1.05 1.06 1.05 1.03 1.00 1.05 1.07 1.03 1.08 1.01 1.01 1.02 1.02 .98 .91 .88 .88 .87 .86 .84 0.80 .85 .75 .82 .75 .71 .69 .66 0.60 .60 0.40 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: Preqin, Global Impact Platform, EMPEA, Syminvest, GRESB, IRIS, B-Analytics. percent of the volume of impact funds was raised for 78 percent of all committed capital. Similarly, 79 projects in emerging markets, in comparison to 20 percent percent of capital committed to intent funds is invested of the volume of conventional funds. Emerging market in these regions. Conventional funds targeting these funds are, on average, smaller than developed market developed markets are the largest investment vehicles, funds, regardless of whether they are impact funds or with an average fund size of $472 million, compared conventional funds. This possibly reflects limited investor to an average fund size of $142 million for funds demand for investments in more risk-prone markets or focusing on Africa. Intent and measurement funds also greater difficulty in generating deal flow, or both. invest in Europe and North America, but to a lesser Most conventional funds invest in North America extent (60 percent of committed capital). They are and Europe, which together account for more than comparatively more likely to take global, rather than FIGURE 1.5 Regional Focus of Fund Volume8 REGIONAL FOCUS BY Global/Multi-Region Middle East and Africa Africa CAPITAL COMMITTED (percentage of total) Asia and the Pacific Latin America and Caribbean Oceania Middle East Europe North America Conventional Funds 1% 18% 2%1% 23% 55% Impact Intent Funds 2% 5% 10% 2%1% 43% 36% Impact Intent and 21% 6% 4% 7% 3% 1% 26% 34% Measurement Funds Sources: Preqin, Global Impact Platform, EMPEA, Syminvest, GRESB, IRIS, B-Analytics. 8 For a part of the data, it was not possible to distinguish funds focusing on the Middle East from funds focusing on Africa. 5 CHAPTER 1. The Size of the Impact Investing Market, 2019 regional, approaches to sourcing transactions. Twenty- in which case they were established by more than one percent of impact intent and measurement funds one country. There are also regional development are focused on more than one region, of which more banks that focus on the development of a region (for than half (53 percent) target emerging markets only. example the Inter-American Development Bank) and subregional development banks that lend only to their When conventional funds invest in emerging markets, member countries—for example the West African they primarily invest in private equity and venture Development Bank (BOAD) or the Black Sea Trade and capital (79 percent of all commitments). In comparison, Development Bank (BSTDB). 54 percent of impact funds’ emerging market committed capital is dedicated to private equity and Despite their differing organizational structures, DFIs venture capital. Impact funds utilize a greater variety of share a common purpose: They have a mandate to strategies: 17 percent of emerging market impact funds’ pursue some combination of economic, social, and/ committed capital is invested in infrastructure and or environmental goals, which can be understood as another 17 percent in private debt. the intent to create positive social and environmental impact. DFIs typically use proprietary measurement Overall, $78 billion has been allocated to infrastructure and monitoring systems to evaluate their impact. impact funds, which is the preferred strategy for impact These systems help them select, design, and adjust investors in developed markets, where $63 billion is projects to maximize and assess their impact before, invested using infrastructure impact funds. Notably, an after, and over the course of an investment. DFIs’ overwhelming share of this capital supports renewable contributions to impact is rather clear, given that they energy businesses and projects. often operate on the explicit premise of additionality, which involves providing services and financing beyond Non-Sovereign Operations of Development what the commercial market offers. Hence, DFIs are Finance Institutions not intended to crowd out private impact investments Development finance institutions (DFIs) have been by using their ability to offer better loan pricing and created by governments to provide equity, loans, and longer tenors; rather, DFIs are utilizing scarce public guarantees for projects in low- and middle-income money as the catalyst to mobilize contributions from countries. Many DFIs also do sovereign lending, so the private sector. DFIs can de-risk projects, for we only include non-sovereign operations. DFIs can be example, through guarantees or subordinated capital, bilateral, implementing a single government’s foreign and offer financing and technical expertise for deals development and cooperation policy, or multilateral, that otherwise would not be feasible to finance through FIGURE 1.6 Target Asset Class of Private Investment Funds with Verifiable Impact Intent and Measurement IMPACT INTENT AND MEASUREMENT FUNDS Private Equity Natural Assets & Real Estate 2009–19, N = 826 (percentage of total) Mixed Infrastructure Private Debt .1% Developed Markets 31.6% 3.4% 13.8% 51.1% Emerging Markets 54% 4.4% 17% 7.3% 17.3% Note: Excludes funds with global focus. Sources: Preqin, Global Impact Platform, EMPEA, Syminvest, GRESB, IRIS, B-Analytics. 6 GROWING IMPACT New Insights into the Practice of Impact Investing commercial banks. By doing so, DFIs can open the $7.1 billion from eight institutional investors, six of door to private investment in emerging markets and which are private institutions.9 MCPP also includes help achieve measurable positive impact, especially in an infrastructure facility that aims to help close the the least-developed sectors and countries. funding gap for emerging market infrastructure HIPSO Signatories. One group of DFIs stands out projects. To date, IFC has raised $2 billion via MCPP in its efforts to measure impact. The need to track Infrastructure for this purpose. development results across a broad range of structures, IFC also manages the largest amount of assets among mandates, and shareholders of development finance HIPSO members—$83 billion—in alignment with institutions motivated the creation of HIPSO in 2013. the Impact Principles, followed by the two largest Today, 27 DFIs have signed the Memorandum of European institutions, the European Bank for Understanding, to work together toward an improved Reconstruction and Development (EBRD) and the framework for impact measurement. HIPSO data is European Investment Bank (EIB). A group of bilateral in the public domain and includes 38 indicators in 15 institutions, collectively known as the European sectors and industries. The development of HIPSO Development Finance Institutions (EDFI), represents a serves both DFIs—by helping them understand the fourth sizable group of HIPSO signatories. All of them impact of their investments—and their investees that were established in a Member State of the European need to report on their activities to their financiers. Union or the European Free Trade Association (EFTA), The combined outstanding private sector operations and invest in the private sector in countries outside of portfolio of HIPSO Signatories is around $300 the European Union. EDFIs collectively manage one- billion. This estimate comprises three components: the tenth of all private sector portfolios invested in firms by estimated non-treasury investment portfolios of loans, HIPSO signatories. equity investments, and debt securities to non-sovereign Other development finance institutions. There entities; the estimated stock of third-party investment is a large number of multilateral, regional, bilateral, that has been directly mobilized by DFIs over five and national development banks that are not part years; and the estimated gross exposure to guarantees of HIPSO but operate with a development-focused to non-sovereign entities. mandate. We identify 12 multilateral development Total All Private Funds All DFIs Direct mobilization refers to assets managed and banks and 68 bilateral and national development banks Impact Intent and Measurement Funds HIPSO Signatories invested by DFIs on behalf of others, including Impact Intent Funds that are serving the public interest. These institutions Other DFIs IFC’s Managed Co-Lending Portfolio Platform are often backed by sovereign guarantees that ensure (MCPP). MCPP is an Total investment fund that allows their creditworthiness and enable them2,072to raise funds other investors to Funds gain exposure to subsets of the in global capital markets. Collectively, we assess their All Private 415 IFC debt portfolio, such as through tranches of a lending to non-sovereign entities to be $1,357 billion. Impact syndicated Intent loan and or by 205 insurance to providing credit Many multilateral development banks (MDBs) Measurement Funds IFC’s own account. As of 2020, MCPP had raised that did not sign HIPSO primarily engage with 210 Impact Intent Funds 1,657 All DFIs 300 HIPSO Signatories Other DFIs 1,357 (US$ billions) 0 500 1,000 1,500 2,000 2,500 9 These six are the private insurers: Allianz, Axa, Liberty Mutual, Munich Re, Prudential, and SwissRe, who together have committed $3.1 billion. The remaining $4.0 billion was committed by two sovereign investors—China’s State Administration of Foreign Exchange (SAFE), which manages state foreign-exchange reserves, and the Hong Kong Monetary Authority, the currency board of Hong Kong SAR, China. See https://www.ifc.org/wps/ wcm/connect/2458ed31-8c1d-4242-860c-273865976c46/MCPP+Overview+Flyer+2018.pdf?MOD=AJPERES&CVID=mco9eqz. 7 CHAPTER 1. The Size of the Impact Investing Market, 2019 governments and the public sector to further economic Size of the Market—Public Markets and social development, using financial resources, By virtue of their complex stakeholder relationships, knowledge, and technical services. They can provide long supply chains, and large employee bases, strategic advice, which helps governments reform, many listed companies hold the potential to have improve services, encourage more private investment, enormous impact. Investors pursuing nonfinancial and promote innovative solutions to development as well as financial goals in public markets can challenges. Some of these MDBs have a specialized reallocate capital away from companies that harm private sector arm that is a HIPSO signatory, such as society and the environment, and toward companies IDB Invest (the private sector arm of the IDB Group). that intend to contribute to solutions to social or Non-HIPSO MDBs allocate only a small share of environmental challenges.10 By doing so, they can capital to investments in the private sector, which we collectively lower the cost at which a company must estimate to total $3.3 billion. raise capital and enable growth. It is, however, The remaining 68 national development banks, not straightforward to identify the positive intent operating nationally and on a broader global basis, of individual investors and the direct contribution invest in private firms and issue loans to individuals they make to measurable impact. Two strategies in and households in addition to their investments in public markets hold the potential to demonstrate public entities. They are a diverse group located intent, measurement and a direct contribution to in developing and developed countries and have a impact: Green, social, and sustainability bonds, in plethora of functions, which include furthering local which approximately $747 billion is invested, and entrepreneurs and small and medium enterprises shareholder engagement strategies, which amount to (SMEs), supporting municipal and social services, and $9,835 billion in public equities. providing educational loans to students, among others. We estimate their non-sovereign lending to be around Green, Social, and Sustainability Bonds11 $1,354 billion. How much of this pool of capital Green, social, and sustainability (GSS) bonds are a way directly contributes to measurable impact is unclear, for issuers to raise funds specifically for projects that as there is limited and often dated information on the enable positive change for society and the environment. private sector operations of many of these entities. They appeal to investors as a straightforward In addition, the actual ability of these institutions instrument to integrate environmental, social, and to measure the impact of these investments and the governance outcomes into fixed income portfolios, and willingness to publish their results varies considerably often offer similar yields, ratings, and return profiles to and is difficult to assess. Total Green, Social and other Action investments. fixed income Shareholder Sustainability Bonds Strategies Total 10,582 Green, Social and 747 Sustainability Bonds Shareholder Action 9,835 Strategies (US$ billions) 0 2,000 4,000 6,000 8,000 10,000 12,000 10 Neuberger Berman. 2019. “Having a positive impact through public markets investments.” https://impactmanagementproject.com/wp-content/ uploads/Neuberger-Berman-Public-Markets-Paper.pdf. 11 Sustainability bonds were not part of last year’s estimate. 8 GROWING IMPACT New Insights into the Practice of Impact Investing Impact investing using GSS bonds is possible if an sustainable projects, but when a bond is used as a investor buys the bond(s) with the intent for positive refinancing tool, little additional positive impact is impact, and the issuer measures and reports on the achieved, as no new projects with positive impact are impact that is directly related to the funds raised financed. Nevertheless, GSS bonds have been immensely with the bond. The Green Bond Principles (GBP), attractive to sustainability focused investors, with an a set of widely accepted guidelines for green bond increase of 50 percent in volume issued in the past year. transparency, require any bond following the GBP to We estimate that as of 2019 there was $631 billion disclose which projects have benefitted, the amounts in 1,971 outstanding green bonds, an increase of allocated and their expected impact, and recommend 56 percent over 2018.13 Of that, $260 billion in reporting on the environmental impact of the funded green bonds were issued in 2019 alone. Since the projects. A 2019 study by the Climate Bond Initiative first issuance in 2007, green bonds have become an on post-issuance reporting, however, shows that only important contributor to financing the Sustainable 38 percent of green bonds report on the use of proceeds Development Goals. A catalyst for the market, IFC post-issuance, and one-in-five green bonds does not issued the first $1 billion-sized benchmark green bond report on environmental impact metrics.12 in 2013. Despite their fast growth, green bonds still Issuers of GSS bonds define the use of proceeds represent less than one percent of the $100 trillion according to intended social or environmental impact. global bond market. That is, they identify the types of spending that are While supranational institutions were the first to eligible to be financed by the bond proceeds. This issue green bonds, corporates almost doubled their information helps investors make informed decisions issuances in 2019 and overtook financial institutions as about the specific activities they will be investing the largest pool of issuers of green bonds. In 2019, 38 in but does not directly link the investors’ financial percent of green bond volume was issued by corporates, contributions to the impact achieved. Attributing which includes private enterprises as well as state- impact may be even more difficult when bonds are used owned enterprises. Twenty-seven percent of green bond for refinancing: issuing a sustainable bond modifies volume was issued by financial institutions, including the balance sheet of an issuer to allocate funds to private and state-owned commercial banks. FIGURE 1.7 New Green Bond Issuances by Type, 2014–19 (US$ billions) Corporate Agency Sovereign (US$ billions) Financial Institution Municipal Supranational 100 94.3 80 63.2 60 49.1 40 21.3 20 13.6 17.0 9.6 15.6 7.5 3.7 0 1.0 .8 2014 2015 2016 2017 2018 2019 Source: Environmental Finance. 12 Filkova, Monica, Miguel Almeida, Krista Tukiainen, and Pietro Sette. 2019. “Post-Issuance Reporting in the Green Bond Market.” Climate Bonds Initiative. September 2019. https://www.climatebonds.net/files/files/CBI_post-issuance-reporting_rev092019_en%281%29.pdf. 13 Our current estimates put the size of the market for outstanding bonds at the end of 2018 at $404 billion. 9 CHAPTER 1. The Size of the Impact Investing Market, 2019 The green bond market remains nascent in emerging the first sovereign blue bond in 2018, aided by a partial markets, though it shows the potential for promising World Bank guarantee and $5 million in a concessional growth.14 Acorn Project LLP raised $41 million in loan from the Global Environment Facility, and has Kenya’s first green bond offering, making it the first raised $15 million.15 Since then, Nordic Investment and the only low-income country green bond to be Bank, the international financial institution of the released in 2019. IFC, along with the World Bank, Nordic and Baltic countries, launched a “Nordic-Baltic has supported multiple developing countries in the Blue Bond” in January 2019, with which they have development of their green bond regulations. In 2017, raised SKr 2 billion ($197 million) for projects related Fiji issued its first sovereign green bond to bolster to wastewater treatment, the prevention of water climate change mitigation and adaptation. This bond pollution, and water-related climate change adaptation. was also the first sovereign green bond issued by an The popularity of green bonds has promoted regulation emerging market nation. Since then, the World Bank changes and, in general, driven growth in green finance. and IFC have also supported Brazil, Egypt, Lebanon, In 2019, as part of the European Sustainable Finance Malaysia, and Vietnam, among other countries, Action Plan, the EU Technical Expert Group on in issuing sovereign green bonds; they also publish Sustainable Finance published their recommendations guidance and resources for new green bond issuers. for an EU taxonomy—which determines whether an Green bonds have opened the market for other types of economic activity is environmentally sustainable—and bonds with a sustainability focus—these include social, an EU Green Bond Standard, which aims to accelerate sustainability, transition, blue, and climate bonds. A the flow of capital toward environmental objectives. In nod to SDG 14, so-called blue bonds aim to enhance December 2019, the European Commission launched ocean and coastal resilience. The Seychelles premiered its European Green Deal Investment Plan, with the FIGURE 1.8 Annual Bond Issuances, 2010–19 (US$ billions) (US$ billions) Green Social Sustainability 300 250 200 150 100 50 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Environmental Finance. 14 IFC and Amundi. 2018. “Emerging Market Green Bonds Report—A Consolidation Year Paving the Way for Growth.” https://www.ifc.org/wps/wcm/ connect/9e8a7c68-5bec-40d1-8bb4-a0212fa4bfab/Amundi-IFC-Research-Paper-2018.pdf?MOD=AJPERES. 15 The World Bank also partnered with Morgan Stanley to launch a $10 million Blue Bond in April 2019 with the aim of promoting the sustainable use of ocean and marine resources, with special attention to better waste management. 10 GROWING IMPACT New Insights into the Practice of Impact Investing objective of mobilizing €1 trillion of sustainable and social projects. As of 2019, there were 193 investments over the next ten years. The aim is to sustainability bonds outstanding, with a total value make Europe climate-neutral by 2050, while enabling of $74 billion. In 2019 alone, $41 billion were newly European citizens and businesses to capitalize on the issued. This signifies an increase of more than 200 sustainable green transition.16,17 percent in the size of the sustainability bond market. Similar to green bonds, social bonds are use-of-proceed Shareholder Action Strategies bonds. That is, the proceeds are designated to finance or refinance new or existing eligible social projects in At year-end 2017, $9,835 billion in assets, which were part or in full, such as education, healthcare, housing, generally public equities, were managed under the or employment projects.18 Since 2016, social bonds strategies of “corporate engagement” or “shareholder have had their own set of guidelines that promote action.” By buying stock in a publicly traded company, transparency, disclosure, and reporting, and these investors seek to influence and nudge corporate guidelines have been formalized in the Social Bond behavior through both direct and indirect corporate Principles (SBP). In 2019, $16 billion in 44 social engagement, such as communicating with senior bonds were issued, bringing the size of the market for management or boards of companies, filing shareholder outstanding bonds to $42 billion by the end of 2019. resolutions, or voting, including proxy voting guided by This constitutes an increase of 61 percent over 2018. In comprehensive ESG guidelines.19 2019, only one social bond was issued in an emerging While there is some evidence that shareholder market, a $260 million senior unsecured social bond engagement on ESG issues decreases companies’ risks, issued in Mauritius by Bayport Management Ltd., the extent to which shareholder action strategies intend which focuses on job creation by financing small and to have measurable positive environmental and/or medium enterprises, as well as financial inclusion. social impact remains unclear. 20 Much of this activity is Sustainability bonds are a hybrid of green and social intended only to improve financial returns, including by bonds and finance a combination of both green reducing ESG risk. Measurement of the direct effects of FIGURE 1.9 Assets in Corporate Engagement and Shareholder Action, 2014–18 (US$ billions) (US$ billions) 10,000 9,835 8,385 80,000 60,000 5,919 40,000 20,000 0 2014 2016 2018 Source: GSIA. 16 EU Technical Expert Group on Sustainable Finance. 2019. “Taxonomy Technical Report.” June 2019. https://ec.europa.eu/info/sites/info/files/business_ economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-taxonomy_en.pdf. 17 EU Technical Expert Group on Sustainable Finance. 2019. “Proposal for an EU Green Bond Standard.” June 2019. https://ec.europa.eu/info/sites/info/ files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-green-bond-standard_en.pdf. 18 Social bonds should not be confused with social impact bonds, which are usually government funded and contingent on the success of the targeted social program. 19 Percentage increase in absolute value invested in corporate engagement and shareholder action. 20 Hoepner, Andreas G. F., Ioannis Oikonomou, Zacharias Sautner, Laura T. Starks, and Xiao Y. Zhou. 2018. “ESG Shareholder Engagement and Downside Risk.” https://www.q-group.org/wp-content/uploads/2018/02/SHAREHOLDER-ENGAGEMENT-2018-01-31.pdf. 11 CHAPTER 1. The Size of the Impact Investing Market, 2019 such strategies is often unavailable, and there have been (SEC). Between 2016 and 2018, the leading issue that limited efforts to do so. emerged in shareholder proposals was the demand for Between 2016 and 2018, assets managed using “proxy access,” which is the ability of shareholders to nominate directors to corporate boards and, by doing shareholder action strategies increased by 17 percent so, influence companies’ decision making, including their globally. 21 The majority of these assets (56 percent) environmental and social strategies. Shareholders were are held in Europe, but global interest is growing. 22 also concerned about disclosure and management of In Japan, assets managed in shareholder engagement corporate political spending and lobbying, particularly strategies more than quadrupled between 2016 and in companies that support lobbying organizations that 2018, as awareness of sustainable investing has grown. oppose regulations to curb greenhouse gas emissions. Japan now holds 13 percent of all assets in shareholder engagement strategies. This growth was accompanied In 2019, the SEC proposed changes to regulations on by revisions to Japan’s Stewardship Code in May 2017, the process for including shareholder proposals in a which encourage institutional investors to engage with company’s proxy statement. For companies subject to companies collectively, together with other investors. these rules, investors who have held at least $2,000 in The newly established Institutional Investors Collective stock or 1 percent of a company’ securities for at least Engagement Forum supports this collective engagement one year can submit a shareholder proposal, which the by coordinating suitable events and activities with company must add to its voting agenda at its annual listed companies. 23 shareholder’s meeting. 24 Additionally, for the first time since 1954, the proposed amendments would update Two of the major institutional asset owners—the the levels of shareholder support that a proposal must Government Pension Investment Fund and the receive to be eligible for resubmission at the same Pension Fund Association—have become Signatories company’s future shareholder meetings. 25,26 Concerns to the Principles for Responsible Investment (PRI), have been raised that some aspects of the proposed demonstrating their commitment to sustainable amendments may make the proxy voting process investment. Furthermore, in August 2019, Japan costlier and more difficult, especially for investors, and International Cooperation Agency (JICA) adopted the that the additional costs may outweigh any additional Operating Principles for Impact Management. benefits for investors and the market. 27,28,29 If so, the In 2018 alone, almost 5,700 proxy materials were filed ability of investors to have a direct impact on company with the U.S. Securities and Exchange Commission behavior could be diminished by these rule changes. 21 The data is based only on Europe, the United States, Canada, Japan, and Australia and New Zealand. The term “Global” here refers to the collated data of these regions. 22 Some regional differences are definitional. Australia and New Zealand combine positive, negative and norms-based screening into one bucket and do not track corporate engagement and shareholder action as standalone strategies. The United States only counts the portion of corporate engagement assets that are deployed in filling shareholder resolutions as sustainably invested assets. 23 See website of the Institutional Investors Collective Engagement Forum. https://www.iicef.jp/en/#sec_01. 24 Kimbrough, Liz. 2020. “Investors Drop Demands After Tyson Foods Commits to no Deforestation.” Mongabay, February 20, 2020. https://news. mongabay.com/2020/02/investors-drop-demands-after-tyson-foods-commits-to-no-deforestation/?fbclid=IwAR1hZPhDt4Z214Lv3l0xxSd-WWwJN PDuTVkjICBuJ3N4foDRxgFTYEJve0U. 25 For example, a proposal would need support from at least 5 percent of voting shareholders in its first submission to be eligible for resubmission in the following three years. Those submitted two and three times in the prior five years would need 15 percent and 25 percent support, respectively. 26 U.S. Securities and Exchange Commission. 2019. “SEC Proposes Amendments to Modernize Shareholder Proposal Rule.” Press release 2019-232, November 5, 2019. https://www.sec.gov/news/press-release/2019-232. 27 O’Brien, Amy and Yves P. Denizé. 2020. “TIAA Comment Letter on Proposed Rules on Proxy Voting Advice and Shareholder Proposals.” Harvard Law School Forum on Corporate Governance, February 12, 2020. https://corpgov.law.harvard.edu/2020/02/12/tiaa-comment-letter-on-proposed-rules- on-proxy-voting-advice-and-shareholder-proposals/. 28 SEC Investor Advisory Committee (SEC IAC). 2020. “Recommendation of the SEC Investor Advisory Committee (IAC) Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals.” https://www.sec.gov/spotlight/investor-advisory-committee-2012/sec-guidance-and- rule-proposals-on-proxy-advisors-and-shareholder-proposals.pdf. 29 Principles for Responsible Investing (PRI). 2019. “Signatory Sign On Letter: SEC’s Proposed Changes to Shareholder Proposals and Proxy Advisory Firms.” https://collaborate.unpri.org/group/2206/stream. 12 GROWING IMPACT New Insights into the Practice of Impact Investing While most shareholder engagement takes place in Larger amounts of capital are invested in public nonpublic spaces, some shareholder activism has markets, including in green, social, and sustainability been quite vocal. Following the 2019 fires in the bonds and in shareholder action strategies. There Amazon, over 250 investors representing $17.7 trillion is limited evidence of intent, measurement, and in assets urged business leaders to reverse worrying contribution for the individual investor in public deforestation trends and uphold commitments to markets, but if even half of GSS bonds and 10 percent end commodity-driven deforestation.30 However, of shareholder action strategies fulfill all three according to a 2018 report by Global Canopy, none attributes, another $1.4 trillion can be added to the of the 500 most important companies in commodity total for impact assets. We may, therefore, conjecture supply chains that threaten tropical forests is on that in 2019 between $505 billion and $3.5 trillion in track to eliminate its deforestation footprint, despite assets were invested for impact through a wide range of committing to do so by 2020.31 funds, assets, and institutions. As more investors adopt the Operating Principles for Conclusions Impact Management, publicly available information about Investors employ a variety of strategies to achieve impact the size of the impact investing market will increase. in private and public markets. The portion of the market Signatories to the Principles commit to an annual public in which intent to contribute to measurable impact is disclosure of their total assets under management in most clearly observable, and in which there exists a alignment with the Principles, in both public and private direct narrative of contribution to impact, is relatively markets. Over time, further evolution of GSS bond small and restricted to private markets: private impact standards may also help clarify the extent to which these funds with measurement and HIPSO DFIs collectively instruments contribute to measurable impact, while the manage $505 billion in assets. Including the broader broader range of development banks may also increase universe of development banks and impact funds their disclosure of how they measure their impact. All of without identified measurement systems increases that this will serve to bring more transparency and certainty estimate to $2.1 trillion invested for impact. to estimates of market size in future years. 30 Investor statement on deforestation and forest fires in the Amazon, dated October 29, 2019. https://d8g8t13e9vf2o.cloudfront.net/Uploads/r/q/s/ investorstatementondeforestationandforestfiresintheamazon_29_oct_2019_665598.pdf. 31 Forest 500. 2019. “Forest 500 Annual Report 2019: The Companies Getting it Wrong on Deforestation.” https://forest500.org/publications/forest- 500-annual-report-2019-companies-getting-it-wrong-deforestation. 13 SPOTLIGHT The Operating Principles for Impact Management Investors are increasingly looking to invest with finance institutions, specialist impact funds, and impact, with a growing number of investors adopting others with many years of experience in managing the Sustainable Development Goals (SDGs) as a investments for impact. reference point to illustrate the relationship between On April 12, 2019, 58 global investors came together their investments and impact goals. Despite the to launch the Principles at the World Bank Group growth in the impact investing market in recent years, (WBG)–International Monetary Fund (IMF) Spring the lack of a common standard for what constitutes Meetings in Washington, D.C. These First Adopters impact investing created confusion for investors. In became the initial investors committing to manage response, IFC, in consultation with leading impact their impact assets in accordance with the Principles. asset managers, asset owners and other key market Investor interest continues to grow since the launch, participants, led the initiative to create a framework with more organizations stepping up to become for impact investing—one that is focused on ensuring that impact considerations are purposefully integrated Signatories. As of June 2020 we count almost 100 throughout the investment lifecycle. Signatories. A complete list of all Signatories is shown on the penultimate page of this report. The Operating Principles for Impact Investment By providing greater discipline and transparency Management (the Principles) describe essential features in impact investing, IFC and the other Signatories of managing investment funds with the intent to intend to foster increased mobilization of capital contribute to the achievement of social, economic or for impact and a high standard for the social and environmental impact alongside financial returns. environmental impact that these funds could achieve. This goes beyond asset selection which aligns investment portfolios with impact goals (e.g., SDGs), For more details about the Operating Principles and requires a credible investment thesis of how the for Impact Management, the Signatories, and investment contributes to the achievement of impact. how you can become a Signatory, please visit: They reflect emerging best practice across development https://www.impactprinciples.org/. 15 SPOTLIGHT The Operating Principles for Impact Management The Principles SPOTLIGHT The Operating Principles for Impact Management PRINCIPLE 1: PRINCIPLE 3: Define strategic impact objective(s), Establish the Manager’s contribution to the consistent with the investment strategy. achievement of impact. The Manager shall define strategic impact objectives for The Manager shall seek to establish and document a the portfolio or fund to achieve positive and measurable credible narrative on its contribution to the achievement social or environmental effects, which are aligned with the of impact for each investment. Contributions can be Sustainable Development Goals (SDGs), or other widely made through one or more financial and/or non-financial accepted goals. The impact intent does not need to be channels.32 The narrative should be stated in clear terms shared by the investee. The Manager shall seek to ensure and supported, as much as possible, by evidence. that the impact objectives and investment strategy are consistent; that there is a credible basis for achieving the PRINCIPLE 4: impact objectives through the investment strategy; and that the scale and/or intensity of the intended portfolio impact is Assess the expected impact of each proportionate to the size of the investment portfolio. investment, based on a systematic approach. PRINCIPLE 2: For each investment the Manager shall assess, in advance and, where possible, quantify the concrete, positive impact33 potential deriving from the investment. The Manage strategic impact on a portfolio basis. assessment should use a suitable results measurement The Manager shall have a process to manage impact framework that aims to answer these fundamental achievement on a portfolio basis. The objective of the questions: (1) What is the intended impact? (2) Who process is to establish and monitor impact performance experiences the intended impact? (3) How significant is for the whole portfolio, while recognizing that impact may the intended impact?34 The Manager shall also seek to vary across individual investments in the portfolio. As part assess the likelihood of achieving the investment’s expected of the process, the Manager shall consider aligning staff impact. In assessing the likelihood, the Manager shall incentive systems with the achievement of impact, as well as identify the significant risk factors that could result in the with financial performance. impact varying from ex-ante expectations. In assessing the impact potential, the Manager shall seek evidence to assess the relative size of the challenge addressed within the targeted geographical context. The Manager shall also consider opportunities to increase the impact of the investment. Where possible and relevant for the Manager’s strategic intent, the Manager may also consider indirect and systemic impacts. Indicators shall, to the extent possible, be aligned with industry standards35 and follow best practice.36 32 For example, this may include: improving the cost of capital, active shareholder engagement, specific financial structuring, offering innovative financing instruments, assisting with further resource mobilization, creating long-term trusted partnerships, providing technical/market advice or capacity building to the investee, and/or helping the investee to meet higher operational standards. 33 Focus shall be on the material social and environmental impacts resulting from the investment. Impacts assessed under Principle 4 may also include positive ESG effects derived from the investment. 34 Adapted from the Impact Management Project (www.impactmanagementproject.com). 35 Industry indicator standards include HIPSO (https://indicators.ifipartnership.org/about/); IRIS (iris.thegiin.org); GIIRS (http://b-analytics.net/giirs- funds); GRI (www.globalreporting.org/Pages/default.aspx ); and SASB (www.sasb.org), among others. 36 International best practice indicators include SMART (Specific, Measurable, Attainable, Relevant, and Timely), and SPICED (Subjective, Participatory, Interpreted & Communicable, Cross-checked, Empowering, and Diverse & Disaggregated), among others. 16 GROWING IMPACT New Insights into the Practice of Impact Investing SPOTLIGHT The Operating Principles for Impact Management PRINCIPLE 5: PRINCIPLE 7: Assess, address, monitor, and manage Conduct exits considering the effect on potential negative impacts of each investment. sustained impact. For each investment the Manager shall seek, as part of a When conducting an exit,41 the Manager shall, in good systematic and documented process, to identify and avoid, faith and consistent with its fiduciary concerns, consider the and if avoidance is not possible, mitigate and manage effect which the timing, structure, and process of its exit Environmental, Social, and Governance (ESG)37 risks. will have on the sustainability of the impact. Where appropriate, the Manager shall engage with the investee to seek its commitment to take action to address PRINCIPLE 8: potential gaps in current investee systems, processes, and standards, using an approach aligned with good Review, document, and improve decisions international industry practice.38 As part of portfolio management, the Manager shall monitor investees’ ESG and processes based on the achievement of risk and performance, and where appropriate, engage with impact and lessons learned. the investee to address gaps and unexpected events. The Manager shall review and document the impact performance of each investment, compare the expected and PRINCIPLE 6: actual impact, and other positive and negative impacts, and use these findings to improve operational and strategic Monitor the progress of each investment in investment decisions, as well as management processes. achieving impact against expectations and respond appropriately. PRINCIPLE 9: The Manager shall use the results framework (referenced Publicly disclose alignment with the in Principle 4) to monitor progress toward the achievement of positive impacts in comparison to the expected impact Principles and provide regular independent for each investment. Progress shall be monitored using a verification42 of the alignment. predefined process for sharing performance data with the The Manager shall publicly disclose, on an annual basis, investee. To the best extent possible, this shall outline how the alignment of its impact management systems with the often data will be collected; the method for data collection; Principles and, at regular intervals, arrange for independent data sources; responsibilities for data collection; and how, verification of this alignment. The conclusions of this and to whom, data will be reported. When monitoring verification report shall also be publicly disclosed. These indicates that the investment is no longer expected to disclosures are subject to fiduciary and regulatory concerns. achieve its intended impacts, the Manager shall seek to pursue appropriate action.39 The Manager shall also seek to use the results framework to capture investment outcomes.40 37 The application of good ESG management will potentially have positive impacts that may or may not be the principal targeted impacts of the Manager. Positive impacts resulting from ESG matters shall be measured and managed alongside with, or directly embedded in, the impact management system referenced in Principles 4 and 6. 38 Examples of good international industry practice include: IFC’s Performance Standards (www.ifc.org/performancestandards); IFC’s Corporate Governance Methodology (www.ifc.org/cgmethodology), the United Nations Guiding Principles for Business and Human Rights (www. unglobalcompact.org/library/2); and the OECD Guidelines for Multinational Enterprises (http://mneguidelines.oecd.org/themes/human-rights.htm). 39 Actions could include active engagement with the investee; early divestment; adjusting indicators/expectations due to significant, unforeseen, and changing circumstances; or other appropriate measures to improve the portfolio’s expected impact performance. 40 Outcomes are the short-term and medium-term effects of an investment’s outputs, while the outputs are the products, capital goods, and services resulting from the investment. Adopted from OECD-DAC (www.oecd.org/dac/). 41 This may include debt, equity, or bond sales, and excludes self-liquidating or maturing instruments. 42 The independent verification may be conducted in different ways, i.e., as part of a financial audit, by an independent internal impact assessment committee, or through a portfolio/fund performance evaluation. The frequency and complexity of the verification process should consider its cost, relative to the size of the fund or institution concerned, and appropriate confidentiality. 17 CHAPTER 2 What We Know About the Signatories to the Operating Principles for Impact Management— Survey Results What we already know about Where do Signatories invest? impact investors The Signatories show a strong focus on investments in As of April 1, 2020, more than 90 institutions have emerging markets, with 71 percent of Signatories in the signed onto the Principles, which corresponds to more survey investing only in emerging markets, possibly to than a third of the 266 respondents to the latest GIIN take advantage of untapped business opportunities in survey of impact investors.43 geographical areas with the greatest development needs. Many development finance institutions (DFIs) have This is consistent with the large number of DFIs among taken the opportunity to be early adopters of the the Signatories, which often have a geographically Impact Principles: Among the Signatories, we count restricted development mandate. Only one respondent eight multilateral and 16 bilateral DFIs. Over two reports that all of their impact investments are targeted thirds of Signatories are asset managers, which includes toward developed markets, while 14 respondents split institutions such as banks, specialized impact investors, their impact investments between developing and asset and investment managers, funds and fund developed markets (See Figure 2.1). managers, among others. To date, three asset owners Four out of five Signatories report investing in Sub- have adopted the Impact Principles, among them a Saharan Africa, Latin America and the Caribbean, and/ pension fund and two insurance companies. or South Asia (See Figure 2.2). Only a few Signatories Most Signatories beyond DFIs are headquartered in invest in developed markets such as Europe, the North America (25 percent) and Western Europe (37 United States, or Canada. This differs from previous percent). Only four Signatories are headquartered in assessments of impact investors: The GIIN reports that emerging markets, three of those in Sub-Saharan Africa. among its survey respondents worldwide, close to half invest at least some of their assets in the United States Results from the survey and Canada, followed by Sub-Saharan Africa, where 44 To learn more about the characteristics of the Signatories, percent of GIIN survey respondents invest.44 IFC conducted a survey in December 2019. The results How long have Impact Investors been active? from the survey paint a clearer picture of how and where the Signatories invest for impact, their thematic focus, Many of the Signatories are pioneers in the impact and their target returns. Fifty institutions participated investing market. Two-thirds of respondents have been in the survey; respondents only answered in regard to investing for impact for more than ten years, while funds or strategies that they manage in alignment with less than 10 percent of Signatories have less than three the Principles. Some questions allowed for more than one years of experience in impact investing. Experience answer. The survey was conducted anonymously and the in how to manage assets for impact seems to be results are not representative of all Signatories. advantageous for adopting the Principles. 43 Mudaliar, Abhilash, Rachel Bass, Hannah Dithrich, and Noshin Nova. 2019. “Annual Impact Investor Survey.” Global Impact Investing Network (GIIN), June 19, 2019. 44 The GIIN survey distinguishes between South East Asia, South Asia, and East Asia, whereas the World Bank Group classification only distinguishes East Asia and the Pacific from South Asia. 18 GROWING IMPACT New Insights into the Practice of Impact Investing FIGURE 2.1 Share Invested in Emerging Markets vs Developed Countries Emerging and Frontier Markets Developed Countries 100% 80% 60% 40% 20% 0% Respondents Source: IFC. Are impact investments made as private FIGURE 2.2 In Which Regions Do Impact Investors Invest? or public investments? Signatories report that they primarily invest in private assets; only one out of five Signatories invests in any Sub-Saharan Africa publicly traded assets (See Figure 2.3). Nevertheless, even these respondents also have private market Latin America and strategies in place, in addition to their public market the Caribbean strategies. The Signatories that invest in public assets concentrate on public debt rather than public equity. South This reflects the fact that it might be difficult to Asia contribute to measurable positive impact via publicly Middle East and traded equity securities, and in general, through North Africa publicly traded assets. We find that Signatories that invest in emerging markets are somewhat more Eastern Europe focused on private investments, while those targeting and Central Asia both developing and developed markets more often East Asia hold both public and private assets. and Pacific Do Impact Investors have thematic Western preferences, and if yes, what are they? Europe Many impact investors invest along one or multiple US & “themes.” Only nine Signatories reported that their Canada institution does not have a theme for their investments. 0 5 10 15 20 25 30 35 40 Among impact themes, the largest percentage of Signatories invests with the goal of financial inclusion, Number of Respondents followed by green or sustainable technology/products, Source: IFC. energy or energy efficiency, and agriculture/agri- processing (See Figure 2.4). We see that preferences for 19 CHAPTER 2. What We Know About the Signatories to the Operating Principles for Impact Management—Survey Results FIGURE 2.3 Share Invested in Public or Private Investments Private Investments Public Investments 100% 80% 60% 40% 20% 0% Respondents Source: IFC. specific impact themes differ depending on the target FIGURE 2.4 Thematic Preferences as Reported market (See Figure 2.5): The appetite for investments by Signatories that further financial inclusion seems to be driven more, relatively speaking, by investors in emerging Financial 75.0% markets. The GIIN similarly reports that investments Inclusion in microfinance and financial services seem to be driven Green or 70.0% Sustainable Tech by emerging markets-focused investors, while investors Agriculture/ 57.5% focused on developed markets report little interest in Agri-Processing financial inclusion.45 Jobs and 52.5% Employment Generation Notably, Signatories that invest in education also often aim to improve health outcomes; health and Health 42.5% education are comparatively often named as preferred Infrastructure 40.0% themes by investors that target both emerging and developed markets. Emerging market investors pay Water and/or 40.0% Waste Management special attention to furthering job creation, gender-lens Education 35.0% investing, as well as infrastructure.46 Half of all Signatories have five or more thematic focuses, Housing 32.5% demonstrating the diversity with which Signatories to the Gender-Lens 32.5% Principles invest. Other impact themes mentioned include Investing disruptive technologies, racial equity, and fragile states. Other 27.5% We can also observe a preference for certain impact No Theme 20.0% themes depending on which markets respondents invest in: Signatories that invest in both public and private Percentage of Firms markets more often report an interest in water and/or Reporting an Impact Theme Source: IFC. waste management than Signatories that only invest 45 Mudaliar, Abhilash, Rachel Bass, Hannah Dithrich, and Noshin Nova. 2019. “Annual Impact Investor Survey.” Global Impact Investing Network (GIIN), June 19, 2019, p. 20. 46 The category “mixed” in Figure 2.5 includes one Signatory that reported investing in developed markets only. 20 GROWING IMPACT New Insights into the Practice of Impact Investing FIGURE 2.5 Investors Prefer Different Themes, Depending On Where They Invest Investing in Emerging Markets Only Mixed and Developed Markets Only Investing 90% Percentage of firms reporting an impact theme 80% 70% 60% 50% 40% 30% 20% 10% 0% Health Agriculture/ Infrastructure Education Housing Jobs and Gender-Lens Green or Financial Water Agri-Processing Employment Investing Sustainable Inclusion and/or Waste Generation Tech Management Source: IFC. in private markets. Conversely, investors in private allow investors to adopt a shared language with markets are investing comparatively more toward other investors, governments, and civil society. The agriculture/agri-processing. framework can also be used to seek out investable opportunities and drive innovation. Signatories aim for risk-adjusted market rate The Signatories invest along impact themes that of returns relate to the SDGs. We mapped each theme to one of Most respondents (84 percent) reported that they strive the SDGs, based on which SDG related most clearly for risk-adjusted market rate returns, while for 15 to that theme. No SDG was mapped to the theme percent of respondents, target returns were not a single of financial inclusion, as working towards financial choice. Some Signatories report that they have more than inclusion contributes to multiple SDGs, such as SDG one portfolio, and these can have a range of expectations 10: Ending Inequalities and SDG 8: Decent Work and regarding target returns. They range from the return of Economic Growth. Similarly, we do not map to SDG capital only to market-oriented, but not maximizing, 1: Ending poverty,as many other SDGs contribute financial returns. Others employed a portfolio approach, toward this overarching goal. The challenge of in which investment decisions allow for differing impact climate change is a priority (See Figure 2.6): Twenty- and return expectations across projects. In contrast, eight respondents invest toward ensuring access to one-third of respondents to the GIIN survey reported affordable, reliable, sustainable, and modern energy targeting returns below the market rate. for all (SDG 7). Twenty-three respondents target SDG 2, which seeks to end hunger, achieve food security Matching Impact Themes to Sustainable and improved nutrition, as well as promote sustainable Development Goals agriculture, via their investments in agriculture and Since their launch in 2015, more and more investors agri-processing. Recognizing the importance of have recognized the Sustainable Development Goals private sector development, 21 respondents invest (SDGs) as the dominant framework around investing in job and employment generation and contribute to with impact. The SDGs and the global indicator achieving SDG 8, which promotes sustained, inclusive, framework associated with the SDGs can be used and sustainable economic growth, full and productive to identify, analyze, and manage business risk, and employment, and decent work for all. 21 CHAPTER 2. What We Know About the Signatories to the Operating Principles for Impact Management—Survey Results FIGURE 2.6 SDGs Most Targeted A ordable and Clean Energy 28 Zero Hunger 23 Decent Work and Economic Growth 21 Good Health and Well-Being 17 Clean Water and 16 Sanitation Industry, Innovation 16 and Infrastructure Quality Education 14 Gender Equality 13 Sustainable Cities 13 and Communities 0 5 10 15 20 25 30 Source: IFC. BOX 2.1 Signatories to the Operating Principles for Impact Management: Creating a Community The Signatories to the Operating Principles for Impact Management (the Principles) are creating a community of practice that is engaged in learning from all members, developing and sharing knowledge on emerging best practices in impact management, and implementing the Principles. Signatories have also expressed interest in converging on common approaches to impact measurement. To that end, in 2019 a workstream was formed to harmonize approaches to impact measurement, including the harmonization of metrics, indicators, definitions, and data used. Several important SDG cross-cutting themes have also been identified as the first to focus on, harmonizing metrics around gender, climate, and direct job creation. In creating this unique community, Signatories are moving beyond merely signing the Principles. They are looking to develop common impact measurements and impact performance management, which could eventually lead to common impact reporting. Going forward, this community effort will seek to go beyond harmonized metrics and indicators and attempt to define sets of metrics that, when taken together and described in context, will identify meaningful indicators of performance for each investment theme and SDG. Ultimately, the output of this work can be shared with any investor looking to measure and manage impact performance. 22 CHAPTER 3 Case Studies—Experiences of Signatories to the Operating Principles for Impact Management Following the launch of the Operating Principles for Sharing these case studies is intended to promote an Impact Management in April 2019, IFC reached out to exchange of experiences among Signatories, to build a Signatories in the fall of 2019, and invited each of them community of practice among impact investors, and to to write a brief case study about their experience with share best practices with impact investors who are not implementing the Principles. Signatories were asked to yet Signatories and the investing community at large. choose one of the nine principles to illustrate how they Facilitating this exchange will promote the growth of are implementing the Principles as impact investors. A the impact investing market. total of 32 Signatories submitted case studies. You can We expect additional Signatories, both existing and find the participating Signatories and the principles prospective ones, to identify principles and write case they selected on page vi of this report. The case studies studies about them. To access all current case studies, are organized by the Principle chosen, i.e., case studies please visit https://www.impactprinciples.org/. on Principle 1 appear first followed by case studies on Principle 2, and so forth. 23 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 1: AXA IMPACT FUND— CLIMATE & BIODIVERSITY Signatory Principle 1 Define strategic impact objective(s), consistent with the investment strategy. Impact investment at AXA Investment Managers about how climate change threatens biodiversity. Our follows a simple guiding principle—what we do should parent company AXA Group has been at the forefront deliver outcomes that are intentional, measurable, and here, and at the G7 Environment meeting in May 2019 positive. This principle lies at the heart of the AXA launched “Into the Wild—Integrating nature into Impact Fund—Climate & Biodiversity, our third investment strategies,” a joint report with the World impact fund and one focused on the ecosystems that Wildlife Fund France. The report highlighted the will support our world into the future. economic and financial impacts of biodiversity loss and We believe that finance has a role in fostering a climate change. society that supports fairness and equity, as well as The Fund will invest up to $200 million of capital an environment that can sustain our population and into credible solutions that deliver those intentional, our investments over the long term. This is core to our measurable, and positive outcomes, targeting both identity and is embedded in what we do and in how we climate change and the loss of biodiversity. It will invest serve our clients. to promote mitigation, adaptation, and resilience in This is why we established the AXA Impact Investing relation to these critical environmental challenges. (Private Equity) strategy in 2012. Our objective To do that we will seek out projects, such as those in was to use our institutional investing expertise to the Peruvian region of Madre de Dios (see below), that demonstrate that investors can address critical social and Protect Natural Capital, Promote Resource Efficiency, environmental challenges and generate positive outcomes and improve the Resilience of Vulnerable Communities for people and the planet, all while meeting fiduciary to the effects of climate change and biodiversity loss. obligations to generate risk-adjusted financial returns. The success of the Fund will be measured according to Our core impact program deploys capital through two criteria, financial and impact. Our investments are alternative assets—private equity, venture capital, private expected to generate market-rate financial returns. In debt, and project finance—providing access to the addition, we have identified key performance indicators deepest and most diversified investment opportunity sets and expect our investments to contribute at significant to generate impact outcomes. scale to carbon dioxide emissions reduction, healthier The Climate & Biodiversity fund, launched in July ecosystems, habitat conservation, and empowerment of 2019, was developed in response to increasing concerns vulnerable people and communities. TABLE 3.1.1 KPIs, Target Outcomes, and Performance Indicators KPI TARGET OUTCOME PERFORMANCE INDICATORS KPI-1 Climate change mitigation Tonnes of CO2 avoided KPI-2 Landscape conservation Number of hectares under improved management KPI-3 Habitat protection Area of critical habitat conserved or protected (for globally important or threatened species) KPI-4 Climate resilience Number of people empowered 24 GROWING IMPACT New Insights into the Practice of Impact Investing “Addressing eroding biodiversity is a complex but increasingly pressing challenge. Nature produces elements essential to human activity and to our very Illustrative Investment— survival, from food and shelter Forest Conservation in Peru to medicines’ active ingredients. We are investing capital and working with a range of partners and stakeholders to restore degraded Moreover, diverse ecosystems are lands and prevent deforestation of primary forest key to tackling climate change, in the Madre de Dios region in Peru while helping smallholder farmers to develop sustainable as flourishing forests and well- agroforestry livelihoods. preserved oceans absorb carbon This primary forest is home to thousands of plants, fish, and animal species, including species listed as emissions. Conversely, climate endangered by the Convention on International change accelerates biodiversity Trade in Endangered Species of Wild Flora and Fauna (CITES). loss, creating a vicious circle. Our The positive impacts of the investment are clear: dependence on diverse ecosystems protection of 600,000 hectares of high value ecosystems, 2.5 million tonnes of carbon emissions to thrive, if not survive, is savings through natural sequestration, over 30 therefore not to be doubted.” High Conservation Value Species Protected, and improved income generation for 300 smallholder —THOMAS BUBERL, CEO, AXA GROUP famers and their families. The Fund will directly address six of the UN Sustainable Development Goals that tackle climate change and environmental degradation and we will monitor, manage, and measure the direct contributions made by our investments to these SDGs. The Fund is a further demonstration that we recognize the need for new capital to meet both the social and environmental challenges identified by the SDGs. Authors | Shade Duffy, Jonathan Dean, Matt Christensen 25 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 2: CHRISTIAN SUPER Signatory Principle 1 Define strategic impact objective(s), consistent with the investment strategy. Christian Super’s first impact investment was in 2006 Christian Super’s impact portfolio is notably diverse, and was driven by a desire to better align our members’ which makes it challenging to develop impact investments with their values and beliefs. Since then, objectives for each investment. Additionally, the we have looked for opportunities that could contribute goals and measurement tools each manager uses vary, to human welfare and have expanded our impact making it difficult to verify that depth of impact. In investment portfolio to around 10 percent of our total this regard, industry standards such as the Operating assets. Impact investing has become a successful part Principles, IRIS+, and the Impact Management Project of our portfolio, delivering our targeted returns while have helped us to achieve consistency in response to also diversifying our investments. This opportunity to great diversity. contribute to positive social and environmental impact Our impact objectives balance the challenge of is highly valued by our members. providing members with strong returns for their Principle 1 of the Operating Principles for Impact retirement while contributing to the broader goal of Management requires Signatories to “Define strategic improving human welfare—something our members impact objectives, consistent with the investment value deeply. We consistently review and measure these strategy.” Christian Super has approached this in two goals with managers, and then celebrate when positive ways. First, our Investment Management Policy defines results are achieved, or discuss how to mitigate any our impact asset classes and outlines both the specific potentially negative impact. We also assess whether financial returns and the general positive impact we broader positive impact may be occurring that is expect. Second, we have an Impact Investing Policy beyond the initially intended impact. This feedback that specifies the impact goals for each investment ensures that positive impact continues to be the main and aligns with key measures such as the Sustainable objective of our investments. Development Goals or the IRIS metrics. Christian Super is proud of the impact we have Implementing strategic impact objectives occurs at an achieved with our partners, and we continue to work investment level through our due diligence process. on achieving greater depth of positive impact and Rather than setting whole-portfolio targets, Christian enhancing our impact measurement tools so that we Super works with fund managers and investee companies consistently ensure that our impact objectives are in to understand their intentions regarding impact and to line with our goals. develop objectives and metrics that demonstrate impact achievement. Without clear goals that align with industry Authors | Jenni Adamson, Tim Macready standards, it would be difficult to measure impact achieved, and thereby the success of the intended impact. Having goals helps build the integrity of the impact investing industry. When strategic impact objectives are developed and aligned with industry standards, it reduces the risk of “impact washing.” 26 GROWING IMPACT New Insights into the Practice of Impact Investing “Being a Signatory to the Operating Principles for Impact Management reflects our commitment to achieving genuine impact through our investment portfolio. These case studies represent an opportunity for Signatories to demonstrate what strategic thinking about impact investment looks like in practice, and also to learn valuable lessons from each other.” —ROSS PIPER, CHIEF EXECUTIVE Soapbox, a Christian Super impact investment through Sovereign’s Capital, has donated nearly three million bars of soap, and has OFFICER, CHRISTIAN SUPER funded over 6,000 hygiene lessons across the globe. Photo supplied by Soapbox. 27 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 3: IFC ASSET MANAGEMENT COMPANY Signatory Principle 1 Define strategic impact objective(s), consistent with the investment strategy. In 2014, IFC and Goldman Sachs 10,000 Women To manage these challenges, the investors and the founded the Women Entrepreneurs Opportunity fund team together created “Impact Criteria” as part Facility (WEOF)—the world’s first global finance of the investment evaluation criteria, in addition to facility designed to help address the vast unmet the commercial assessment of the investment. The financing needs of women-owned businesses in “Impact Criteria” include factors such as low income, developing economies. The Women Entrepreneurs Debt economic inequality of the country, credit gap for Fund (the Fund) was launched in 2016 and focused on women-owned small businesses in the country, and a dual bottom line: investments that create impact for bank size, among others. women entrepreneurs and generate commercial returns. Defining impact objectives in this way allowed the fund It provided external investors an opportunity for the to manage its impact and returns on a portfolio basis. first time to finance women entrepreneurs at scale. It also allowed for better communication with investors The Fund is an innovative investment vehicle tailored and included them as part of the process. More for investors seeking to empower women entrepreneurs important, the investors and the fund manager were in emerging markets globally while taking more well aligned and were working together to create both traditional commercial bank credit risk. The Fund the predefined impact criteria and the impact reporting was a fundraising, investing, and impact success needed for full transparency in the process. and demonstrates that spurring lending to women In addition to quantitative reporting, the investors entrepreneurs in emerging markets is a commercially and the WEOF team actively discussed the qualitative attractive proposal. aspects of each investment, such as actions taken, The Fund’s guiding principle and investment strategy or to be taken, by the banks to catalyze lending to were communicated to and understood by investors women-owned small businesses. In addition, annual upfront. In addition, reporting standards for both the site visits were arranged for the investors to meet with financial and nonfinancial results were agreed upon one of the investee banks and, when possible, women early in the Fund’s life. In this way, the interests of entrepreneurs that the bank has provided financing investors and the fund manager were well aligned from to. By interacting with these women entrepreneurs, the start, with the fund manager aware of expectations the investors were able to hear their stories and on what they must deliver, and investors cognizant of financing needs firsthand and witness the impact of exactly what their investments are expected to achieve, their financing. both in terms of impact and financial return. There were initial challenges, however. From a Authors | Selena Baxa, Chongsi Bi, Mona Tarpley portfolio construction point of view, one particular challenge was that to reach the maximum number of women-owned small businesses, the manager had to reach out to banks with already established networks. In addition, risk-adjusted returns to investors needed to be factored into the equation. Thus, there is a bias against working with smaller banks in more frontier markets that may be better positioned to encourage lending to these women owners. 28 GROWING IMPACT New Insights into the Practice of Impact Investing “This was one of the first funds to have implemented what is now Principle 1 back in 2016, and IFC AMC has taken it one step further by having an interactive and collaborative partnership with its investors, from setting the impact criteria to the development of the impact reporting. Although the fund fills just a fraction of the total credit gap, it has broader demonstration effects by showing that women-owned SMEs are an attractive market for commercial banks.” Having worked in a printing business in Japan, the founder of this printing factory decided to use her experience to build her own printing business in Vietnam. As a result of the loan she received —RUTH HOROWITZ, DIRECTOR, IFC from ABBank, this businesswoman was able to scale her factory to ASSET MANAGEMENT COMPANY accommodate a steady inflow of contracts as manufacturing shifts from China to Vietnam. Credit: IFC AMC. 29 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 4: LEAPFROG Signatory Principle 1 Define strategic impact objective(s), consistent with the investment strategy. LeapFrog is a growth private equity investor in Africa LeapFrog’s funds are designed to address these. and Asia focused on financial services and healthcare Second, LeapFrog drives intense hands-on operational businesses that address the opportunity to serve engagement at company board and management levels. four billion emerging consumers. Founded in 2007, The focus on just two sectors has enabled LeapFrog LeapFrog’s companies now reach over 200 million to build its expertise and depth in responding to the people, 162 million of whom live on less than $10 a day.47 unique needs of investee companies and their consumer In total, global institutional investors have committed bases. This has enabled LeapFrog companies to grow, over $1.5 billion to the group’s funds, enabling LeapFrog on average, at over 30 percent per year while also to invest in 27 high-growth business that reach low- improving the quality and sustainability of earnings. income consumers across 35 countries with essential Such value creation reflects expert solutions ranging services and support over 128 thousand jobs.48 from designing new products, advising on pricing, LeapFrog’s investment approach, Profit with Purpose, building out systems infrastructure, and rapidly scaling pursues synergies between financial returns and social new digital-based distribution. impact, where each enhances the other. Profit meets The Profit with Purpose ethos is embedded in each purpose at the customer, where each low-income person LeapFrog fund through dual targets: top-quartile has the ability to buy a quality product or service that emerging market private equity financial returns protects their household against risks and empowers (“profit”) and reaching millions of emerging consumers them to be their own agents of change.49 with critical tools and services (“purpose”). “Purpose” Thanks to LeapFrog’s companies, many millions of integrates environmental, social, and governance (ESG) low-income consumers and their households have risks in addition to positive impact. For the first two accessed high-quality tools for mitigating risks and LeapFrog funds, Financial Inclusion Fund I and Fund enhancing their financial and physical health, as well II, at inception, the purpose goal was set of reaching 25 as taking entrepreneurial leaps out of poverty. Over million and 50 million emerging consumers, respectively. four billion low-income people are able to pay for these Both goals have now been exceeded. For the most recent critical financial and health tools but have been either LeapFrog fund, Emerging Consumer Fund III, the excluded or underserved because of income or factors purpose goal is reaching 70 million emerging consumers related to a health condition, caste, religion, ethnicity, or with quality healthcare and financial inclusion tools. gender. Prior to the term impact investing being coined, LeapFrog was one of the first fund managers to declare, LeapFrog therefore set out to address this historic quantify, and track its impact goals alongside financial challenge and opportunity, at scale. goals, and it has been an innovator in integrated LeapFrog’s focus on delivering impact through reporting of the two. Setting purpose goals as a practice investments in financial services and healthcare was undertaken to respond to the lack of actionable is based on two factors. First, financial inclusion insights and benchmarking of impact performance, as and access to quality healthcare remain two of the is expected for financial performance. By declaring an world’s most pressing development challenges. At the impact goal, LeapFrog has had to ensure it continues to time of LeapFrog’s inception, the UN Millennium invest in measuring impact well and keeping the fund’s Development Goals represented the global financial performance accountable to all relevant stakeholders. inclusion challenge and effectively anchored LeapFrog’s Most recently, the impact track record achieved across Financial Inclusion Fund I and Fund II. Today they previous funds was utilized as the basis for deriving and are encapsulated in Sustainable Development Goals expanding the expected impact of the newest LeapFrog #1 No Poverty and #3 Good Health and Well-Being. 30 GROWING IMPACT New Insights into the Practice of Impact Investing FIGURE 3.4.1 The Emerging Consumer Opportunity Source: LeapFrog. fund. A measurable track record made it possible to undertake a bottom-up performance analysis through comparison of actual quantifiable results achieved versus those expected, the suitability of specific business models “The business case for impacting in achieving Profit with Purpose results, and risk factors that could hinder performance. The internal learnings investing was envisioned at LeapFrog’s were combined with knowledge codified in external founding thirteen years ago, and today academic sources and market studies undertaken by field global investors are waking up to leaders such as CGAP, The Lancet Commission, and this opportunity. We set out to reach The Global Findex. 25 million emerging consumers by The dual targets act as the foundation for portfolio construction. Each investment opportunity is assessed 2020 and have exceeded our wildest against its potential contribution to the dual return expectation by reaching 200 million and impact focus of the given fund. The contribution people, often with life-changing health to both goals is based on the current and expected and financial well-being products performance of the company over the holding period. The goals continue to be refined based on the diligence through our portfolio companies. We findings, most importantly the commercial, impact, have seen first-hand how Profit with and consumer centricity diligence results, as well as Purpose inspires an innovative mindset the latest best practices (e.g., industry-specific client protection principles) that materially influence the that enables leaps of growth, profitability, return and impact expectation. Finally, the goals of and impact. The journey of impact each investment are stated in line with the declared fund investing is in its early days, however, goals, representing the financial returns target and the and billions are yet to be served, while impact target (reaching a defined number of emerging consumers), which are used as the core decision making entire markets are yet to be reshaped.” factor by the investment committee. —DR ANDREW KUPER, FOUNDER AND CEO, LEAPFROG INVESTMENTS Author | Roshni Bandesha 47 Purchasing Power Parity (PPP) exchange rate. 48 FIIRM results, September 2019. 49 The goal of enabling choices, or capabilities, is based on the pioneering work of Nobel Prize-winning economist, Amartya Sen, and his Capability Approach for human development. See Sen 1999. 31 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 5: PROPARCO Signatory Principle 1 Define strategic impact objective(s), consistent with the investment strategy. Proparco is the private sector financing arm of Agence This strategy has been combined with organizational Française de Développement (AFD) Group. It finances changes in response to the rapid growth in activity, and supports projects led by private companies, and, more important, to the evolving needs of our investment funds, and financial institutions in clients. It has proved successful so far, as Proparco developing and emerging countries. was able to achieve its financial targets in 2017 and For its 40th anniversary, Proparco defined and adopted a 2018 while redirecting its commitments toward more new strategy and objectives for the period 2017–2020 to impactful projects:50 guide its growth and build on its strengths. • €1.2 billion to climate projects The core objective of this action plan was to double • €1.3 billion on the African continent annual commitments in order to triple impacts on • €0.55 billion in “frontier” states sustainable development. Four targeted impacts were clearly defined in relation to the key Sustainable • €0.7 billion in equity and quasi-equity Development Goals (SDGs): creating jobs, improving • €0.5 billion of mobilized public third-party access to essential goods and services, tackling climate resources change, and supporting innovation. Through this A key lesson from this strategy is that being impact- strategy, Proparco committed to supporting an effective, driven does not prevent us from growing our portfolio. responsible, and sustainable private sector. On the contrary, it has created new opportunities, To reach these targets, specific investment objectives in particular toward start-ups and micro, small, and were identified for the investment teams in order to medium enterprises (through Choose Africa), and has attain our impact goals. These are: increased Proparco’s visibility. • Increase investments in Africa as well as in After 2.5 years of implementation and learnings, least-developed and post-crisis countries where we have decided to update our strategy to take into development returns are higher (frontier countries); consideration a paradigm shift for Proparco regarding • Finance climate-action projects that contribute to our capacities and instruments. Indeed, in 2018, low-carbon transitions while developing access to restructuring within the AFD Group led to the transfer essential services such as green electricity and water; of all private sector activity to Proparco, giving it access to a wide range of blending instruments. For this • Help businesses implement good environmental and purpose, we have collected feedback from stakeholders, social (E&S) practices so they can maximize impact clients, partners, and our teams both locally and in through E&S risk mitigation and good governance; Paris. The key element today is to ensure that the • Support innovative projects that can offer new organization continues to provide the responsiveness solutions to alleviate poverty; and level of service expected by its clients, and stays • Develop equity projects where we can deploy more relevant in order to build more sustainable and resources to transform actors; inclusive societies. • Mobilize public third-party resources to scale impacts. 32 GROWING IMPACT New Insights into the Practice of Impact Investing FIGURE 3.5.1 Our Strategy for Action “I am convinced that the industry really needs content Principles. As for Proparco, we think that designing an impact-driven strategy is the cornerstone for any serious impact creation approach. The OPIM are a first step for impact investing, which will have to be complemented progressively with ‘substance standards’ for Impact Management.” —GREGORY CLEMENTE, CEO, PROPARCO The Choose Africa Initiative Source: Proparco. In Africa, small businesses and start-ups will play Proparco’s 2020–2022 strategy will focus on: an essential role in integrating the 450 million young people expected to enter the job market by • Measuring our impact both on direct and indirect 2050. The Choose Africa initiative will harness 2.5 jobs and access to goods and services, as well billion euros from all of the resources of Proparco as on the long-term transformation of sectors, and AFD to provide unprecedented support for economies, and actors to better support sustainable African small businesses, through: development objectives; • Financing to meet the specific needs • Developing specific support to actors of the future of businesses, adapted to their stage of economy (transformation and emergence); development. • Increasing our ambition in fragile states for climate, • Technical and strategic support to accompany financial inclusion, and gender; local financial partners and MSME beneficiaries • Developing new high-leverage/mobilization effect in their strategies, operations, and environmental, instruments and activities. social, and governance practices. • Promotion of local entrepreneurial ecosystems Authors | Pierre Forestier, Lorraine Talon that are favorable to entrepreneurship and innovation in order to stimulate local economic development and MSME competitiveness. 50 Cumulative commitments for 2017 and 2018. 33 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 6: SARONA ASSET MANAGEMENT Signatory Principle 1 Define strategic impact objective(s), consistent with the investment strategy. Sarona Asset Management traces its roots to 1953 when within these companies. Fourth, we look for improved Mennonite Economic Development Associates (MEDA) governance within the company’s management. Fifth, was created. Today, MEDA is a Canada-based not-for- we measure whether the environmental footprint drops profit organization whose mission is to create business as these companies scale. Sixth, we seek to understand solutions to poverty. However, in 1953 MEDA was a for- community benefits such as product and service depth profit corporation making social investments supporting and breadth, the number of consumers being affected Mennonite refugees fleeing economic and political by the companies’ operations, the companies’ supplier hardship in the aftermath of the Second World War. bases, and the taxes the companies pay to local MEDA’s first act as a corporation was to lend to a governments. We measure all of these using IRIS- Mennonite community resettled in the Chaco, a dense, compliant metrics as well as case studies and stories on jungle-like area of rural Paraguay. There, the local the companies and the local investment partners, and community sought funding and know-how to establish how they contribute to these six impact objectives, as a dairy farm that could employ local aboriginals as well as to the Sustainable Development Goals. well as local Mennonites and first processed milk, then Our reporting is open, public, and transparent. We yoghurt and cheese, and eventually expanded into a also subject ourselves to third-party validation of our tannery to create leather for goods such as shoes. A business model through the transparency report of the study commissioned by MEDA Paraguay in the 1990s United Nations-supported Principles for Responsible demonstrated that over 70 percent of the Paraguay’s dairy Investment and the B Lab assessments, and we recently sector could be traced to people who worked and were became a Signatory to the Operating Principles for Impact trained in this dairy company. The name of the company Management. It is important for us to maintain a dialogue was Sarona Dairies, which is the origin of our name. with our stakeholders, understanding that we do not have Sarona Asset Management, founded in 2010, today a perfect system or solution, but that we strive to improve seeks to achieve three things: to act as a bridge for incrementally each year as we learn and adapt to ever- private investors seeking commercial returns in impact changing market dynamics. Our investors, both public investments; to invest in private debt and private equity and private, appreciate our approach and wish to support that benefit growing businesses in markets in Asia, our impact through different means. Our public partners Latin America, Emerging Europe, and Africa; and have at times provided bespoke technical assistance that to do these through a values lens, supporting local enables greater impact at the company and fund manager partners that invest with impact. level. They have also improved the risk/return profile of these investments through blended finance, helping private Sarona does these through a theory of change that seeks investors become involved in emerging markets. to help our local investment partners improve their impact and ESG policies. We also use processes that If there is one thing the original MEDA investment in enable them to improve the positive effects of capital the Sarona Dairies has taught us, it is the importance and allow us to better understand how these growing of planting a patient seed of economic development and companies affect local economies. To measure whether letting it grow over time, perhaps to influence an entire we are successful, we apply six impact objectives to our industry. Our dream is that Sarona can do the same in monitoring activities. First, we measure job growth and impact investing. who benefits from it. Second, we measure job quality. Third, we seek to identify ways to empower women Author | Serge LeVert-Chiasson 34 GROWING IMPACT New Insights into the Practice of Impact Investing “Generating positive impact is at the core of who we are. And measuring outputs and impacts has become extremely important. But that isn’t even Sarona Dairies in Paraguay in the 1950s following MEDA’s the half of it. If we as business investment. leaders are to deliver prosperity for all, our work must go both deeper and wider. We must rapidly advance our own understanding of the crises facing the earth and society; we must change industry thinking; and we must create healthy new economies through deep and trusting public-private collaboration. Achieving the SDGs and beyond will only Original Sarona farm gate taken from the site of the Sarona be possible if we as business Dairies in Paraguay. leaders take risks to lead.” —GERHARD PRIES, FOUNDER, CEO, AND MANAGING PARTNER, SARONA 35 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 7: RESPONSABILITY INVESTMENTS Signatory Principle 2 Manage strategic impact on a portfolio basis. When responsAbility Investments was founded in 2003, in Kenya. Our rigorous and disciplined reporting impact investing was not yet broadly embraced by process covers not only financial aspects, but equally mainstream investors. More than a decade before the considers impact indicators specific to each product world started talking about the Sustainable Development and sector. We use these indicators as part of our Goals and Impact Principles, we set out to shape our monthly reporting to investors on our private debt entire investment strategy around a single objective: using funds. Once a year, we aggregate the impact reporting for-profit investments in emerging economies to deliver for our entire portfolio and present it in an impact measurable impact. Sixteen years later, our investment report. By broadly sharing our approach within the products have successfully delivered on our promise industry, we actively contribute to the discussion by disbursing assets worth a total of $10 billion since around impact measurement and enable investors to 2003, into non-listed companies in over 90 emerging make more informed decisions as to the allocation of economies. Our distinct investment approach has enabled their impact portfolio. us to manage strategic impact on a portfolio basis. While this careful selection of assets according to their When defining our investment strategy, we adopted a impact potential ensures that our entire portfolio is three-step approach to ensure impact. Our first decision 100 percent impact focused, for some of our products concerned the markets where we would be active. We we go a step further and base each financing decision chose to focus on emerging economies both for their on how it meets a set of impact indicators. One of the potential to achieve impact and to address the clear responsAbility-managed climate funds is an example financing gap. Our next step was selecting the sectors of this approach: it targets companies and projects that and themes that would deliver the biggest contributions will either generate renewable energy or improve energy with regard to what are now the SDGs and those that efficiency by at least 20 percent. By using proprietary presented attractive investment opportunities. We chose monitoring software developed by responsAbility to financial inclusion, climate finance, and sustainable track each sub-loan made by our partner institutions, agriculture. Finally, we defined the type of businesses our energy specialists are able to ensure that the fund that we wanted to target: successful companies clearly achieves targets for volumes disbursed by partner banks, adhering to Environment, Social, and Governance (ESG) and reductions in carbon emissions. These targets are requirements, and those with a business model that can central to the fund’s fee structure, with incentives in provide the products and services needed to address place for the fund manager to reach appropriate levels. development gaps. Since 2015, the fund has financed 85,000 sub-loans that With this investment approach we ensure that every have removed 13 million tons of lifetime carbon dioxide dollar we channel to emerging economies delivers emissions in projects ranging from bakeries in Ecuador on our impact objective, be it through microfinance to tuk-tuks in Cambodia. investments in El Salvador, energy efficiency financing in Bangladesh, or funding for agricultural processors Author | Paul Hailey 36 GROWING IMPACT New Insights into the Practice of Impact Investing “The careful selection of assets according to their impact potential ensures that our entire portfolio is 100 percent impact focused.” —PAUL HAILEY, HEAD OF IMPACT, RESPONSABILITY INVESTMENTS In this climate finance project, a Mongolian bank used targeted loans to drive the adoption of renewable energy. With 2,500 hours of sunshine a year, the harnessing of solar power has triggered a veritable development boom, with renewable energy becoming affordable for those with even modest incomes. 37 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 8: TRIPLE JUMP Signatory Principle 2 Manage strategic impact on a portfolio basis. Investing for impact has been Triple Jump’s focus since 2. Projecting portfolio impact using benchmarks: its start in 2006. As an impact-driven asset manager, we A model portfolio based on the abovementioned believe that investing in entrepreneurship has the potential block benchmarks is constructed in such a way to overcome global challenges such as poverty, inequality, that the allocation between blocks optimizes the and climate change. We therefore select investments where expected performance against the various impact capital empowers people and improves lives. and financial objectives that should be reached Our impact management framework has evolved over at the end of the fund. This projection model the years from a top-down approach in selecting sectors allows us to calculate the overall expected impact that generate impact, to actively managing impact at and how each block contributes to it. This serves the portfolio level and selecting individual investments to steer portfolio construction and investment based on their expected contribution to the overall selection. impact of our portfolio. 3. Using benchmarks during investment Applying a portfolio approach is a key pillar of an active selection: At the investment selection stage, each impact management strategy. The funds and mandates potential investment’s expected impact is assessed we manage aim to deliver double or triple bottom against the benchmark of the corresponding block line returns, and within their impact theses, we target and is also viewed with respect to the fund’s several impact objectives. Combining diverse impact and impact to date. financial objectives often entails trade-offs that must be 4. Projecting portfolio impact using investee- looked at from a portfolio-level perspective in order to level impact projections: If selected, the guide a portfolio construction and investment selection expected impact of the new investment is added process that optimizes the impact, risk, and return to the portfolio to generate an expected impact profile of the fund. of the entire portfolio to date. This figure is then Our approach to managing impact at the portfolio level compared to the projection model to assess our includes the following steps: progress against expectations. Doing so allows us to identify expected over- and underperformance 1. Setting benchmarks per segment: Once the against the fund’s impact indicators, and to impact thesis and key impact indicators of the fund inform priorities for portfolio construction and have been set, the investment universe is segmented investment selection. into what we call “blocks,” which are categories of investments with similar characteristics in terms of 5. Incorporating actual impact results: The impact, risk, and return. For each block, we estimate actual (ex-post) impact results of each investment the expected performance of a typical investment are collected on a regular basis and entered into for all of the fund’s impact indicators. These then the projection model. As ex-post impact results become our impact benchmarks per block. Setting replace ex-ante projections, earlier assumptions realistic impact targets per block is based on on blocks and benchmarks are revised for greater existing data and on a large number of examples of accuracy. investments that fit each category within the block. 38 GROWING IMPACT New Insights into the Practice of Impact Investing Through the Dutch Good Growth Fund, Triple Jump supports the development of local early stage finance initiatives for SMEs, such as here with an incubator in Morocco. This portfolio approach to impact management allows us to have a continuous view of where the portfolio is heading in terms of impact, based on the best available estimation of the impact of individual investments at that time. With this information we are able to “By applying a portfolio optimize the portfolio on an ongoing basis and make approach to managing impact, strategic decisions in terms of portfolio allocation and investment selection. This approach requires a rigorous Triple Jump is able to steer its impact framework with a consistent way to assess portfolio toward an optimal investments ex-ante against different impact objectives. combination of impact and Author | Christophe Bochatay financial results for its clients.” —STEVEN EVERS, CEO 39 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 9: ACTIS Signatory Principle 3 Establish the Manager’s contribution to the achievement of impact. In the 70 years Actis has been investing in high-growth and via targeted interventions that increase impact, markets, we have never seen a compromise between then our contribution would be classified as High. Such responsible investing and delivering competitive investments might include a successful expansion into returns. We understand the positive social and underserved markets, the launch or innovation of new environmental impacts that can be achieved in our products or services, the forging of new partnerships markets through private investment, which is why that catalyze significant scaling, or surpassing existing Actis became a founding Signatory to the Operating industry practices to impose international best practices Principles for Impact Management in April 2019. and set a new bar for the industry. Prior to signing, we developed an impact measurement Below we present specific examples to demonstrate how framework called the Actis Impact Score (AIS), Actis interprets its contribution to the achievement of which enables us to compare the impact of different impact: investments and assess Actis’s contribution to the achievement of impact. 1. Low Contribution— Affordable Housing in India To assess our contribution, we consider what would The project will create 650 local construction have happened in the absence of our investment. jobs at peak, as well as 60 skilled/highly-skilled We look at the circumstances that led to a positive permanent positions, in a country with high youth outcome and whether or not this outcome was the unemployment. However, it is reasonable to assume result of specific decision-making and stewardship that a competitor would have created similar local by Actis and the management team. As an active employment opportunities. investment manager, typically with a controlling equity position, Actis does not distinguish between initiatives 2. Moderate Contribution— advocated by Actis and those initiated by the company Tertiary Education in Brazil management team. We work with management teams Before Actis invested in an established tertiary that are closely aligned with our values and share our education institution in Brazil, it was serving only intention to generate positive impact. students from middle- and high-income groups. Actis recognized an opportunity to improve access We measure our contribution on a scale ranging from and affordability, by providing quality education to Low to Moderate to High. Each impact is considered lower-income students through distance learning, on a case-by-case basis, recognizing that contribution which increased enrolment by 350 percent during levels to any particular impact can differ. For example, our ownership. This strategy also increased female if an impact was already occurring at the time of enrollment in the student body by 390 percent. our investment, continues to occur throughout the management period without significant change, and 3. High Contribution— our contribution to the business is predominantly a Credit Bureaus in Africa financial one, then our contribution is scored as Low. A lack of access to credit is a major obstacle to In contrast, if positive impacts have significantly economic growth in Sub-Saharan Africa: only 8 increased as a result of our active ownership style, percent of adults are covered by credit bureaus, strategic decision-making, goal setting, and execution, compared with 63 percent in OECD countries. 40 GROWING IMPACT New Insights into the Practice of Impact Investing Actis investments in affordable housing. (Photo for representation only.) Actis’s investment established the first credit bureaus in three African countries and increased the variety of financial products offered by the company threefold. This resulted in an additional 25 million credit reports per year and the development “The Actis Impact Score takes of a new biometric identification system that was an evidence-based approach subsequently adopted by the Ugandan government as its national ID system. to ensure that we are focused on making a meaningful Authors | Shami Nissan, James Magor contribution to positive social and environmental impact through our investments across multiple asset classes in high- growth markets.” —TORBJORN CAESAR, ACTIS SENIOR PARTNER 41 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 10: CREDIT SUISSE Signatory Principle 3 Establish the Manager’s contribution to the achievement of impact. In 2017, Credit Suisse (CS) committed to increasing its commitment to the highest standards of green impact investing by establishing its Impact Advisory building—is driving capital into the greenest solutions and Finance (IAF) Department, which reports directly and encouraging others to do the same. CSAM has to Thomas Gottstein, CEO of Credit Suisse. The IAF been a pioneer in setting up the first green real estate Department is responsible for setting CS’s impact fund and creating scalable investor demand for this investing strategy, as well as directing, coordinating, and new green investment product. As such, the CHF facilitating activities across the company that lead to multi-billion fund has not only directly contributed to sustainable and impact investing. The department serves the environmental impact of the properties financed, the growing demand for impact investing solutions, but has also created a precedent of a successful particularly from CS’s private wealth clients. green real estate investment strategy, which has high Credit Suisse Asset Management’s (CSAM) Real potential for replication. Estate Fund, Green Property, is one of the sustainable Field building: In addition to the direct financing of investing solutions we offer to our clients, and we believe green buildings, CSAM is contributing to the green it generates impact. According to the International property industry through its proactive improvement Energy Agency, real estate is responsible for 33 percent of building standards for green real estate. In 2009, of all carbon dioxide emissions, 40 percent of energy CSAM developed its own ‘green property’ seal to consumption, and 50 percent of all natural resource address sustainability factors across five dimensions, consumption.51 With Swiss francs (CHF) 2.6 billion with 50 criteria. At the time of our launch, no other assets under management, Green Property is the first comprehensive standard was available, and this real estate fund dedicated to investing in newly built has supported the development of best practices for properties and project developments in Switzerland that sustainable real estate. We believe that our setting of achieve energy efficiency and de-carbonization, while concrete standards will enable others to follow our lead targeting stable returns from rental income. In 2018, and achieve additional impact. the fund achieved energy consumption of 92 kWh/m2 , Active ownership: During both building construction against the national average of some 125 kWh— and refurbishment processes, CSAM ensures the a decline of 7 percent since 2012. Similarly, carbon responsible consumption of resources; efficient and dioxide emissions fell to 13.6 kg CO2 /m2 , which is 60 optimized water consumption; conservation of percent below the national average of 33 kg CO2 /m2 and environmentally-sensitive areas; the development a decline of 9 percent since 2012. of sustainable ecosystems; carbon dioxide emission In implementing Principle 3 on the Manager’s reductions; and improvements in energy efficiency. contribution to the achievement of impact, we highlight CSAM also collaborates with Siemens on an the three following aspects: environmental management system to measure and Direct funding: There is a clear link between the report the environmental performance at the asset level. capital raised for Green Property and the actual The optimization measures we have implemented for funding of underlying green assets. The funding CSAM’s properties cover energy and heating systems, of greenfield real estate projects would not have and we have set and defined performance objectives for materialized, or been developed as fast, had the Green both energy efficiency and carbon reduction strategies. Property financing not been accessible. We believe that CSAM’s participation in this industry—and Authors | James Gifford, Aurélie Gupta 42 GROWING IMPACT New Insights into the Practice of Impact Investing Credit Suisse Real Estate Fund Green Property: Institutionalizing investments in green real estate. “A robust and coherent framework is essential in order for CS to transparently demonstrate real impact. A measurable contribution by the investor is a key pillar underpinning our impact investing framework, which champions direct funding of impactful enterprises, alongside robust, active ownership during the investment period, to demonstrate the additionality of capital.” MARISA DREW, CEO, IAF, CREDIT SUISSE 51 Sources: International Energy Agency (2017), Credit Suisse Asset Management (Switzerland) Ltd. 43 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 11: DPI Signatory Principle 3 Establish the Manager’s contribution to the achievement of impact. Development Partners International, or DPI, is a leading focusing on an integrated approach to each investment private equity firm focused on investing in companies by 1) intentionally stating our impact objectives at the poised to benefit from the growth of Africa’s rapidly beginning of each investment and 2) engaging each team expanding middle classes. DPI was founded on the on their respective initiatives. DPI’s new integrated ESG belief that sustainability delivers impact, and therefore and Impact Management System was created with both it seeks to generate strong financial returns for investors impact and ESG in mind and is therefore more robust by creating competitive companies, while also focusing and granular in trying to address Key Performance on the benefits these companies deliver for societies Indicators (KPIs) upfront, outlining work, the timing and the environment. By doing so DPI can also deliver of this work, and measuring results at exit. All of these positive results to the employees and customers of our are determined during due diligence, approved by the companies, as well as their communities. Investment Committee, discussed in our portfolio DPI seeks to outperform other PE firms both on returns meetings, worked at the investee company level, and and on ESG and impact. The firm’s DNA combines reported to both our team and our LPs. the two, and every DPI professional is devoted to both. As an example, one of our investments is a microfinance While DPI has a dedicated ESG/Impact team in addition business that we helped to achieve higher operational to its investment and portfolio management teams, every standards by improving social and environmental professional at DPI undergoes annual training in ESG performance, business integrity systems, customer care, and impact investing. And performance against ESG and the approach to client protection. In the African and impact objectives are evaluated annually, which regions in which DPI operates, this requires direct and inform the Investment and Portfolio Management team regular engagement, active board membership, and renumeration packages. DPI’s ESG/Impact team serves frequent on-site visits. The result of active engagement on the general partner’s Portfolio Management team, by DPI led to improved terms of capital and direct access so operating changes and impact work are combined to capital to better deliver impact. The access to capital, within every investee company, and each new investment such as favorable debt from international sources, would has impact objectives and measurement plans identified not have previously been available for this company, during the due diligence phase that are included in the as it did not have the institutionalized systems to shareholders agreement. In this way, impact is fully provide international financial institutions comfort. integrated into the investment, portfolio management/ The company’s new status was then used to leverage value add, and exit processes. the improved cost of capital, thereby allowing it to offer We have found that the impact initiatives included more financial products to women entrepreneurs, in in our approach as an active and engaged investor many cases for the first time. contribute to better and stronger businesses. Yet it is Portfolio monitoring has proven essential to DPI a constant challenge to document the impact of our in managing investments for both ESG and impact investments. This is not because the outcomes are not performance. On a number of occasions, opportunities clear and measurable, but because of the difficulty in to further contribute to impact have been identified accurately communicating the increasingly complicated during such monitoring visits. DPI currently carries links between our initiatives and their contribution to out formal monitoring visits to each portfolio company increased impact. We are working to address this by to assess ESG and Impact. This monitoring is further 44 GROWING IMPACT New Insights into the Practice of Impact Investing “From the beginning, we’ve worked in the knowledge that we can contribute more than just invested equity. In being an active and engaged investor, we’ve made a bigger, measurable difference to our portfolio companies and the communities they operate in. A customer of MNT, one of DPI’s Egyptian portfolio companies. It is also our belief that these supplemented with quarterly and annual data gathering contributions will have impact on key agreed metrics, not only on impact, but on broader ESG performance. However, DPI’s portfolio well beyond the life of our management team and the investment team carry out involvement.” significantly more visits; and having clearly stated impact objectives allows every member of the team to identify —MICHAEL HALL, SUSTAINABILITY opportunities to further our contribution. MANAGER, DPI In conclusion, DPI has worked for many years to combine impact with commercial returns. Our challenge now is to better demonstrate the idea that impact and commercial returns are not mutually exclusive, and that both have been achieved simultaneously in the past and can be again. Authors | Runa Alam, Michael Hall 45 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 12: PARTNERS GROUP Signatory Principle 3 Establish the Manager’s contribution to the achievement of impact. Partners Group is implementing Principle 3 through and services that offer consumption data on a regular active private equity ownership. basis and incentivize more efficient resource use through In 2018, Partners Group, a global private markets lower costs. Today, Techem’s services lead to a total CO2 investment manager, launched an impact-at-scale avoidance of more than seven million tons per year. investment strategy focused on companies and The impact assessment for Techem established that infrastructure assets with business models that can installing and maintaining sub-metering devices in advance the Sustainable Development Goals. A central apartment buildings enables better monitoring of tenet of this investment thesis is that active ownership energy use and temperature regulation, helping to is the primary lever to improve an asset’s financial improve energy efficiency and advance SDG target 7.3 performance while also increasing its impact. By to: “by 2030, double the global rate of improvement in acquiring a controlling interest in companies on behalf energy efficiency.” The assessment also outlined that, of its clients, Partners Group implements significant as Techem’s lead investor, Partners Group would hold value creation and environmental, social, and corporate majority governance rights and could use its expertise governance (ESG) initiatives that drive financial and to enhance the company’s impact through strategic and social returns and minimize negative impacts. The firm operational improvements. has created a simple yet robust framework for measuring Partners Group’s impact contribution includes: the impact of these initiatives. 1. Business building: Partners Group identifies assets Identifying Partners Group’s contribution to impact whose core business generates positive impact, begins in the due diligence process for all investments and then scales that business by leveraging the within the strategy, with the first step being the firm’s internal team of industry and ESG experts proprietary impact assessment. During this assessment, and business-building toolkits. Partners Group Partners Group engages an independent provider to build is scaling Techem’s business by proliferating sub- an evidence-based model linking a potential investment’s metering services and accelerating energy efficiency core business activities to measurable outputs, outcomes, improvements across the company’s customers. and impacts that contribute to a specific SDG target. 2. Impact value creation: Partners Group also In line with Principle 3, the assessment also estimates identifies discrete ways in which it can increase an the degree to which Partners Group, as manager, would investment’s positive impact while also improving materially contribute to the asset’s SDG impact, and operational and/or financial metrics. At Techem, outlines specific metrics to measure the firm’s impact one strategy is to improve digital communication contribution during ownership. The final output of the tools so that inhabitants can more easily monitor assessment is a clear framework for Partners Group’s their heat and hot water consumption and also impact narrative, which is documented over the life of compare it to their peers. This uses consumer the investment. behavior to further reduce consumption while also Techem: In 2018, Partners Group invested on behalf attracting new customers interested in more tech- of its clients in Techem, a German energy infrastructure enabled solutions. In addition, Techem is exploring and energy services company and market leader in “sub- technology innovations to optimize heating metering” services. Sub-metering is a cost-efficient way systems and save fuel. Providing such systems to to reduce individual heat and water consumption by customer properties could further reduce resource providing residential energy consumers with technology consumption and increase energy savings. 46 GROWING IMPACT New Insights into the Practice of Impact Investing In 2018, Partners Group invested on behalf of its clients in Techem, a German energy infrastructure and energy services company and market leader in “sub-metering” services. 3. Working with management teams: Driving impact at portfolio assets requires buy-in from the management teams, and Partners Group’s active ownership model is highly beneficial to implementing these initiatives. Many management teams are also “Driving impact at portfolio often eager to drive the conversation forward. For assets requires buy-in from the example, Techem’s management team supports quantifying the company’s impact on energy management teams, and Partners consumption, as it has positive effects on government Group’s active ownership relationships, consumer marketing, employee satisfaction, and the overall business strategy, as the model is highly beneficial to company seeks to reposition itself from a “metering” implementing these initiatives.” firm to an “energy efficiency” firm with a vision to “make buildings green and smart.” —CARMELA MONDINO, SENIOR 4. Ensuring accountability: Partners Group OPERATING ASSOCIATE, ESG & SUSTAINABILITY, PARTNERS GROUP establishes impact Key Performance Indicators (KPIs) for all of its impact investments, which are then tracked and reported annually. Techem improved the way it measures the reduction in energy consumption achieved by its clients. To monitor its impact contribution, Partners Group has also built impact governance into the firm’s broader asset management process. This means that investment teams report on impact performance alongside financial performance to the Operational Value Creation committee, which oversees all assets across Partners Group’s portfolio. Author | Carmela Mondino 47 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 13: STOA Signatory Principle 3 Establishing the Manager’s contribution to the achievement of impact. At STOA, we believe that impact investing is critical under the platform. The company hired an Environmental to achieving universal access to affordable, reliable, Health & Safety (EHS) manager to manage the EHS risks and sustainable modern energy for all. Our firm, of the project, and the Environmental and Social head of which is dedicated to meeting the need for essential STOA monitors the progress through an Environmental infrastructure in emerging markets, is building and and Social Action Plan. operating wind power plants in the Tamil Nadu and As an example, bird deflectors have been installed to Gujarat regions of India. To reach our goal, we have enhance bird protection on all the associated project partnered with French electric utility company Engie transmission lines, and they are the only such deflectors in a joint venture to install wind power capacity of in the Tamil Nadu region where many other wind around 700 MW. This is expected to support India’s operators are also located. economic growth, provide employment opportunities, and contribute to the South Asian nation’s transition to clean energy. STOA’s financing contribution is through two kinds of instruments: a commitment to invest construction equity in the projects developed by the platform, and participation in the various guarantees required by local off-takers, transmission companies, construction companies, and banks. STOA’s financial support has Bird deflector installed STOA E&S Head site visit. helped the platform build a current project portfolio on all transmission lines. whose total project costs exceed 400 million euros. Once the target of 700 MW has been reached, the STOA and Engie expect the project to create 15,340 jobs STOA-Engie partnership will have installed over 300 (the sum of direct, indirect, induced, and second-order wind turbines in the states with India’s most prolific jobs sustained in the economy). Over the life of the project, wind resources and a combined population of 120 STOA will monitor results by measuring direct and million people. The project’s technical teams will indirect job creation, based on the project’s added value. have to demonstrate their ability to achieve optimal Given the country’s carbon-intensive electricity mix, commissioning in time for the windy season, while also the project is expected to achieve emissions reduction of dealing with constraining weather conditions, including around one million tons of carbon dioxide equivalent per the heavy rains typical in the project area. year. STOA has calculated this figure based on existing STOA engaged with Engie early in the process to carry out power generation, and we will measure the actual amount Environmental and Social Impact Assessments for each as part of our annual reporting. Altogether, the project’s wind power plant, following IFC performance standards. wind turbines are expected to produce an amount of The company also implemented an Environmental and electricity equivalent to the consumption of two to three Social Management Framework Manual (ESMF) for million Indians, and to reduce power outages as well. managing the E&S risks across the project life cycle (through the screening, mobilization, construction, and Authors | Virginie Vitiello, Matthew Saville, operations stage) for the projects acquired or developed Romain Vélon, Benoît Blanc 48 GROWING IMPACT New Insights into the Practice of Impact Investing “Our challenge is how to integrate a social dimension into energy transition, where the infrastructure sector in which we operate will have to fully play its role. We are convinced that impact investments have the potential to make a significant contribution; and to achieve positive and measurable social and environmental effects, we have defined strategic impact objectives. Our ambition is to achieve measurable, positive impact, and to progress in achieving the Sustainable Development Goals.” —CHARLES-HENRI MALÉCOT, CHIEF EXECUTIVE OFFICER, STOA INFRA AND ENERGY Project Calabria—a 480 MW wind power platform in India. 49 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 14: CALVERT IMPACT CAPITAL Signatory Principle 4 Assess the expected impact of each investment, based on a systematic approach. Calvert Impact Capital is a U.S.-based nonprofit impact This means that the impact investor has a consistent investor that connects capital and communities, bridging methodology for assessing the expected impact of a loan the gap between investors in capital markets and or investment at the due diligence stage, before capital mission-driven organizations working to create impact in is committed. This approach enforces quantitative rigor communities around the world. To date, we have raised and accountability when predicting the investment’s $2 billion in investor capital, deploying debt capital to impact, as opposed to relying on “gut checks” and funds and financial intermediaries in over 100 countries narrative rationales. and across nine sectors, including affordable housing, Over the past two years, Calvert Impact Capital microfinance, small business, and renewable energy. has been developing and refining an internal impact Over the past 25 years, we have seen many firms scorecard that reflects a proprietary impact rating enter the market with varying levels of impact rigor. system. As a small shop with a team of just 36 people, What excites us most about the Operating Principles we thought this was a great opportunity to demonstrate for Impact Management is their emphasis on impact that rigorous internal impact ratings are achievable for integrity and public disclosure. We believe that firms asset managers regardless of an organization’s size. that have and disclose their impact management We built our impact scorecard to align with the five practices will be preferred by investors, who will have dimensions of impact as described by the Impact tools such as the Principles at their disposal to evaluate Management Project: impact investment options. 1. What The nine Principles encompass the entire investment lifecycle from deal sourcing to exit/repayment. A key 2. Who (and where) component of a robust impact management practice is 3. How much (scale and depth) embodied in Principle #4: Assess the expected impact 4. Contribution (investor and enterprise/borrower) of each investment, based on a systematic approach. 5. Impact risk FIGURE 3.14.1 Impact Scorecard Source: Calvert Impact Capital. 50 GROWING IMPACT New Insights into the Practice of Impact Investing “The widespread adoption of the Principles will introduce the clarity and consistency necessary to unleash greater The farmers in Rwanda’s Nyamasheke District once struggled to get a decent price for the pineapples they grow. An investment in investor participation and, juice and biscuit producer Agasaro Organic by Grofin—a Calvert portfolio member—provided the working capital for needed ultimately, enable the industry equipment to increase production, providing 550 local farmers with fair pricing for their produce. Credit: Agasaro | GroFin Rwanda. to achieve the scale required to address the Sustainable Our impact scorecard has two parts, which are aligned with these dimensions. The first section scores the Development Goals.” projected market impact (the value our financing —JENN PRYCE, CEO, CALVERT provides to the markets in which we operate) and investor IMPACT CAPITAL contribution (the added value our capital provides to our borrowers) we expect through the loan. The second section scores the impact we project the borrower to have on the community and/or planet (the tangible positive Our scorecard has not only allowed us to assess the impact on social and environmental challenges), internal projected impact of our entire portfolio—roughly 100 policies related to ESG (environmental, social, and loans and investments totaling $400 million—but has governance policies) practices, DEI (diversity, equity, and also allowed us to build robust benchmarking tools for inclusion) practices, gender diversity in senior leadership evaluating new loans. For example, when considering and on the board, and the anticipated impact risk (the a new loan, we can compare the impact score of the risk that the impact will not be achieved). Overall, the proposed loan to a benchmark of other similar loans in scorecard has 29 indicators across 10 categories, the our portfolio in the same sector. These analyses enable scores of which are added together and normalized on a our staff and credit committee to be more diligent in 0-5 scale for comparison. considering impact before capital goes out the door. It is important to note that we developed our impact FIGURE 3.14.2 Borrower Performance Against Portfolio Metrics scorecard over a period of two years, consistently testing it with our investment officers and the management team, and iterating the model based on feedback and learning. We now have a customized tool that can project the expected impact of a loan and help us learn more about the actualized impact of a loan after capital has been deployed. Consistent with best practices and Principles 5 and 6, we can use the impact scorecard to monitor the progress of the borrower and the impact of our capital, and manage and address impact risks. These efforts help maximize the impact of our capital for the benefit of our investors, the communities our borrowers serve, and the planet that we share. Authors | Caitlin Rosser, Leigh Moran Source: Calvert Impact Capital. 51 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 15: EUROPEAN INVESTMENT BANK Signatory Principle 4 Assess the expected impact of each investment, based on a systematic approach. As the European Union’s public policy bank, the Pillar 1 rates a project’s contribution to policy European Investment Bank’s role is to provide financial objectives and establishes whether it falls within one support to projects that address market failures and are of the high priority areas, such as climate action. The also sound in economic, technical, and environmental rationale for EIB support, in terms of the specific terms. For a project to receive EIB finance, it should be market failures to be addressed, is also set out here. clear that it could not have proceeded—at least not to Pillar 2 assesses quality and soundness in terms the same extent—without the Bank’s backing. of what the project will contribute to growth, Standardized quality assessment has been a key focus environmental and social sustainability, and of our project appraisal procedures since 2005. In the employment, as well as the promoter’s ability to intervening years, we have honed our methodology deliver the project. The project’s economic viability based on our experience and in line with Multilateral is evaluated in most cases through a cost-benefit Development Bank (MDB) best practice and EU analysis, using a set of rigorous and publicly available policy changes. All projects are subject to a rigorous appraisal guidelines developed in-house and in line assessment carried out by a multidisciplinary appraisal with international standards and best practice. team. At the core of the appraisal process for our Pillar 3 looks at how the EIB’s contribution will projects within the EU is a structured value-added ensure the project’s success in terms of the Bank’s methodology. This mechanism is the foundation of our financial and technical contribution. Does EIB due diligence process. It aims to identify and prioritize funding offer better conditions than other lenders? projects for financing by assessing them along a number Will the Bank’s presence catalyze financial support of dimensions. The value-added analysis identifies the from other sources? Can the EIB make a difference by market failures and priority policy objectives addressed contributing technical advice? by a given project, thereby providing both a rationale for EIB intervention and a number of indicators of the EIB project team members award each project Bank’s additionality. It also supports the tracking of proposal points according to the degree to which it those projects through their implementation and early meets the criteria set out within each pillar. A rating operational phases. is calculated for each pillar based on the total points received at project initiation; during the appraisal By requiring project team members to conduct phase, in preparation for presentation of the project a thorough analysis of each project proposal for to the EIB’s governing bodies for approval; and upon presentation to decision makers, the methodology completion, with a view to gauging success and ensures that the EIB invests in quality projects while drawing lessons learned. also ensuring that individual operations remain in line with the Bank’s remit, thereby maintaining In addition to the due diligence based on the pillars the highest possible quality in terms of the Bank’s themselves, a set of measurable, standard indicators is fulfilment of its mission. identified for each project. These comprise key project characteristics, which are the same for all projects; This methodology consists of three pillars, each of sector-specific indicators expressed in terms of outputs which represents a key dimension of project assessment. and outcomes; and custom outputs and outcomes Combined, they provide a clear framework to evaluate specific to the project. The indicators are used to set project proposals. 52 GROWING IMPACT New Insights into the Practice of Impact Investing “The Impact Principles have been developed to provide minimum standards for private investors in the process of managing and selecting investment funds for impact. The EIB, like many other investors, has decided to join the initiative led by IFC to EIB Vice President Ambroise Fayolle visiting the Blue Moon incubator in Addis Ababa. confirm its deep commitment to strong quality of investment a baseline and targets for each project, against which and focus on impact. This is progress and success can be measured, enabling the Bank to provide a concrete statement of the project’s part of our DNA!” impact. Pillar ratings as well as project indicators also feed into the ex-post evaluation of selected projects. —AMBROISE FAYOLLE, VICE-PRESIDENT, EIB EIB’s annual reports on its operations use aggregated ratings and indicators to showcase the impact of EIB financing in key policy areas and sectors across the EU. These reports are published on the Bank’s website and provide valuable insights into the difference that EIB finance makes to society. Author | “Projects Directorate, Legal Directorate and Operations Directorate” of the EIB 53 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 16: INVESTING FOR DEVELOPMENT SICAV, FORESTRY AND CLIMATE CHANGE FUND Signatory Principle 4 Assess the expected impact of each investment, based on a systematic approach. There are many good intentions driving impact 2. The balance between carbon stock enhancement in investment, as it is clear that significant additional the forest through improved forest management and capital needs to be redeployed if we are to achieve preservation, considering the extraction rate the Sustainable Development Goals. But the business 3. The substitution effect of harvested wood products case for impact investment needs to go beyond good from extracted wood. intentions. More work is clearly needed to demonstrate how impact contributions are being made and how These of course are highly dependent on the context of they can be measured. With this perspective in mind, each project, its geography, and deforestation pressures, Investing for Development became a Signatory of the and therefore our local team and investment adviser Operating Principles for Impact Management. spend considerable time on the ground seeking to understand the context of each project. Their first step At the launch of the Forestry and Climate Change Fund, is to establish a baseline scenario that looks at carbon two core output metrics were defined to keep track of sequestration prior to any intervention from the Fund. the Fund’s intended positive impact on a social and This involves a clear understanding of the area of forest environmental level. These metrics were: involved and its inventory—a process that is supported • The sequestration of 14 million tons of CO2 in by the Fund’s development of a forestry inventory app. secondary and degraded forests in which the Fund From this, the main carbon pools in the forest can be invests; and understood based on current operating dynamics. • The creation of 3,000 jobs in the value chains derived Once a baseline scenario has been established, the Fund from the timber production and transformation. will consider the current management practices and the Yet the Fund has a small portfolio of niche investments threats of deforestation. Based on this, it will determine and therefore a bottom-up approach is fundamental how the Fund’s intervention will change management to understanding how each individual project will practices and mitigate deforestation threats. A second contribute to these two overarching goals. To understand scenario will then be projected to assess the extent to this, prior to investment, the local investment team and which carbon sequestration can be attributed to the the investment adviser, UNIQUE, spend considerable project under the proposed management scenarios, and time on the ground assessing expected impact. to estimate the significance of the impact. This enables us to calculate one KPI for the projected environmental The methodology developed for carbon sequestration impact of the Fund. We are also aware that the Fund’s is fundamental to this. The Fund considers there to be intervention will have repercussions in other areas, from three main sources of carbon sequestration for each of biodiversity to landscape resilience. Although these do its projects: not form part of our core KPIs, they are monitored for 1. Avoiding deforestation when the project protects the each investment we make. secondary forest from land use changes 54 GROWING IMPACT New Insights into the Practice of Impact Investing Visiting client “Taller de Arte” in Petén, Guatemala; a project developed for the integration of women of the community in the wood industry. Assessing the social impact of the Fund requires a different perspective. During initial missions, investment staff assess the communities likely to be impacted by the Fund’s intervention. This allows them to determine which particular groups will be impacted and to identify “Working through the interventions that can be conducted to support women Operating Principles for Impact and indigenous communities, in particular. Based on the completed financial projections, the Fund can estimate Management has been a great job creation and then consider how best to ensure this learning process and a good work goes to those most in need of it. chance to appraise our internal Monitoring impact on a project-by-project basis helps to ensure that our expected impact is in line with the processes and build on them.” impact we initially forecasted. —APRICOT WILSON, HEAD OF IMPACT & DEPUTY CEO, FORESTRY AND Author | Apricot Wilson CLIMATE CHANGE FUND 55 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 17: FINDEV CANADA Signatory Principle 4 Assess the expected impact of each investment, based on a systematic approach. FinDev Canada is a development finance institution meaningfully contribute toward one or more of the three launched in 2018 to support inclusive private sector impact areas. Each impact area is underpinned by a set growth and sustainability in emerging and frontier of questions and indicators. For example, for women’s markets. We invest across Sub-Saharan Africa and economic empowerment, we evaluate every investment Latin America and the Caribbean, in businesses that on four vectors: 1. Women business owners; 2. Women economically empower women, develop local markets, in leadership roles; 3. Women’s access to quality and address climate change. employment; and 4. Women’s access to and control over Our commitment to the Operating Principles for basic services and economic empowerment tools. This Impact Management stems directly from our values and helps us direct our capital and advance gender equality strategic priorities. Right from the start, we established in a more comprehensive way, i.e. not just supporting that we were going to lead with impact and build more or better jobs for women but looking at addressing an organization able to evaluate deals for both their several other key gender gaps. financial performance and impact potential. When we screen for impact at origination, we leverage One of the first things we developed was our Impact data from national, regional, and sectoral datasets. Framework, which describes the changes we aim to This helps us understand country-specific development see in our priority markets, through our investments needs and assess a prospect investment on its relative and investees, and the strategies and activities impact potential. For example, it can highlight if a that underpin the achievement of this vision. The company is operating in a carbon intensive industry or framework pushes us to evaluate and proactively how the percentage of women employees compares to manage our portfolio’s contribution toward meeting regional averages. our three impact goals (Figure 1) and to embed impact In selecting our key impact metrics, we aligned them considerations in every step of our investment cycle, with industry best practice. For example, our gender from origination to asset management. metrics align with the 2X Challenge criteria52 and We screen each potential investment on its ability to IRIS indicators.53 FIGURE 3.17.1 FinDev Canada’s Impact Goals Market Development (MD) Women’s Economic Climate Change Mitigation & Empowerment (WEE) Adaptation (CMA) • Expand local ownership and leadership • Support women’s business ownership, • Support sustainable industries that • Strengthen local SMEs and value leadership and decent employment reduce natural resource use, waste chains • Improve equal access to and control and carbon emissions • Increase employment and local over basic services (water, energy) and • Contribute to the transition to a economy value-add (taxes and economic tools (financial services, low-carbon economy salaries) digital connectivity) • Scale climate adaptation solutions Source: FinDev Canada. 56 GROWING IMPACT New Insights into the Practice of Impact Investing To systematize the way we evaluate impact data at FIGURE 3.17.2 Examples of Impact Tools at origination, we developed a set of analytical and visual Origination tools (Figure 2). These tools enable us to quantify current and potential impact of a prospect investee and Pre-screening Due diligence compare it with other deals in the pipeline. We don’t Rankings and grid-based Impact scorecard based on expect each deal to score high on all three impact areas assessments benchmarks and models as our strategy is to build a balanced portfolio. However, as a gender-lens investor, what we look for in a deal is its ability to confidently demonstrate a strong performance and/or future commitment toward Women’s Economic Empowerment, plus at least one other impact area, either Market Development or Climate Action. Our tools help us identify and visualize key impact contributions of a potential investment and make more informed decisions. Without them and the framework, we would be throwing impact darts in the dark. Source: FinDev Canada. In applying our tools and framework over the past year, we also drew an important lesson, which is the way we define ‘impact’ may not always resonate with a client. For many of them, revenues, profit margins, satisfied “As a new Development Finance customers, and an effective workforce are the ultimate drivers of their business. Our role is to first understand Institution, it was clear that FinDev their perspective and then demonstrate how, for Canada had to build an organization example, achieving better working conditions for women that would be equally versed in, can drive up their bottom line. One of our clients, Danper Agricola La Venturosa, an EDGE-certified54 and able to, evaluate deals for their Peruvian agricultural producer, is a great example of financial performance and impact a corporation that has understood the link between a potential. Our Development Impact gender-sensitive approach and business performance. For example, Danper provides on-site health services Framework clearly articulates our to workers (46 percent of who are women) and their vision and strategy, and sets out children so that medical care for families does not hamper the ability of the workers, particularly women, the approach we use to proactively to earn a living—reducing absenteeism, retaining assess, evaluate, and manage our experienced and skilled staff and maintaining higher investment portfolio to ensure every worker productivity overall. We learnt that addressing impact and gender equality from a business perspective transaction contributes to meeting is a compelling way to build and sustain alignment with our impact goals.” our clients and achieve meaningful results. —STEPHANIE EMOND, HEAD OF IMPACT AND OPERATIONS, FINDEV CANADA Authors | Marina Svistak, Stéphanie Émond 52 2X Challenge is a global DFI-led initiative that aims to mobilize substantial capital toward women’s economic empowerment. To qualify under it, investments need to meet specific criteria in line with the four vectors mentioned earlier (https://www.2xchallenge.org) 53 IRIS is a generally accepted system of metrics used by impact investors and designed to help measure the social, environmental, and financial performance of an investment. IRIS is managed by the GIIN (Global Impact Investing Network) (https://iris.thegiin.org) 54 EDGE stands for Economic Dividends for Gender Equality and it is the leading global business certification for gender equality. EDGE provides a clear picture of a company’s commitment and measures workplace gender equality through five areas of analysis: equal pay for equivalent work, recruitment and promotion, leadership development training and mentoring, flexible working and company culture (http://edge-cert.org) 57 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 18: IDB INVEST Signatory Principle 4 Assess the expected impact of each investment, based on a systematic approach. From the CEOs of the world’s biggest companies to highly impactful projects. In this way, we can build institutional investing giants, a more holistic view and manage a portfolio that maximizes development of stakeholder value is taking hold. Investors are impact while maintaining financial sustainability and increasingly seeking opportunities to achieve social working toward meeting the SDGs in the region. and environmental impact alongside financial returns The DELTA score is comprised of two elements, and contribute to the Sustainable Development Goals. Development Outcome and Additionality. The This bodes well for the growth of the impact investing Development Outcome assessment is grounded in an industry. economic analysis that monetizes the potential net Despite the strong appetite for impact, it can be benefits of the investment to the economy and society. difficult for investors to know where to invest. Thus, This assessment also quantifies the project’s direct IDB Invest’s framework for systematically assessing the effects (who will benefit and how) and indirect effects expected impact of investments is critically important (how it will improve market linkages, foster the business to making resource allocation decisions for us and for climate, or create new markets through innovation our co-investors. and knowledge spillovers) on social and economic As the private sector arm of the Inter-American development. Environmental, social, and governance Development Bank Group, IDB Invest is leveraging (ESG) risks are also factored into the equation. decades of experience as an impact investor to crowd As far as Additionality, the DELTA scores both the in private capital to high-impact projects in Latin financial and nonfinancial value added that IDB Invest America and the Caribbean. We are bringing to bear brings to the investment, a key feature of our impact our Impact Management Framework, which includes investing approach. Valuing financial additionality a set of tools and practices to support the investment creates incentives to allocate IDB Invest resources process from beginning to end and manage our where they are needed most and maximize resource portfolio’s triple bottom line: impact, sustainability, mobilization efforts. Similarly, scoring nonfinancial and financial returns. 55 additionality encourages the use of our technical The backbone of our approach to assessing expected assistance resources to further enhance impact and impact is the Development Effectiveness Learning, mainstream sustainable business practices. Tracking, and Assessment tool (DELTA), one of the The DELTA also helps steer decision-making by instruments in our end-to-end framework. The DELTA capturing information on alignment with strategic is a fact-based scoring system that rigorously assesses institutional and country priorities, as well as the impact potential of each investment, assigning identifying the expected SDG contributions of each a score from zero to 10. The DELTA score is a key transaction. Additionally, the quality of project decision-making factor in IDB Invest’s portfolio design at entry is assessed to ensure proper results approach, together with our Financial Contribution measurement. Each project includes a results matrix Rating, which assesses each transaction’s contribution with indicators and targets, as well as a monitoring and to IDB Invest’s long-term financial sustainability. evaluation plan outlining how data will be collected Proposed investments need to meet certain impact and and results evaluated. The DELTA score is updated financial rating thresholds in order to advance, with annually to reflect actual progress toward the project’s decreasing financial contribution requirements for impact objectives. 58 GROWING IMPACT New Insights into the Practice of Impact Investing “The best way to make a dent in the Sustainable Development Goals is by connecting countries and private sector investment. For IDB Invest, this means offering our deep capacity to select and structure projects with the greatest impact potential and build a strong pipeline of investment opportunities in Latin America and the Caribbean with a renewed focus on mobilization and knowledge transfer.” Panama Canal Expansion Project. —ORLANDO FERREIRA, CHIEF STRATEGY OFFICER AND CHIEF FINANCE AND Ultimately, the DELTA is a hybrid approach, ADMINISTRATION OFFICER AD INT., encompassing both the “rating” and “monetization” STRATEGY AND DEVELOPMENT impact measurement framework archetypes. Looking DEPARTMENT, IDB INVEST forward, thanks to widespread digitalization, big and low-cost data, and an expanding evidence base on impact outcomes, there is enormous opportunity to improve how we as impact investors monetize the impact value upfront when assessing new opportunities. In turn, framing impact and financial returns similarly will help bring even more mainstream investors into the impact investing fold. Authors | Orlando Ferreira, Alessandro Maffioli, Norah Sullivan 55 For more details on our Impact Management Framework, see the 2019 Development Effectiveness Overview. 59 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 19: PHATISA Signatory Principle 4 Assess the expected impact of each investment, based on a systematic approach. Phatisa is a leading private equity firm operating across due diligence, specific initiatives are identified to drive Sub-Saharan Africa. Our investment strategies are rooted impact within the portfolio company and a plan to in our corporate mission of feeding and housing Africa. achieve the proposed impacts is created. That entails buying and building inclusive businesses During the investment period, data is collected and used that deliver positive impacts for all stakeholders and the to track performance, identify areas for improvement, environment where our investees are located. and assess whether our activities have any unintended To us, creating impact means investing in companies negative consequences. We relay this information to with the intention of generating positive and measurable fund investors and round up the fund managers’ impact social and environmental outcomes alongside financial performance on a biennial basis in data-driven impact returns. Phatisa’s business case for investing with impact reports.57 is clear. First and foremost, it ensures alignment with We have encountered multiple challenges along the way our funds’ strategic objective: to achieve what we call and learned important lessons, including: development equity.56 Second, we believe businesses that contribute to pressing development challenges are • Reliable and sufficient baseline data is needed to businesses of the future because of the critical role the determine whether we have been responsible for private sector is playing in achieving the Sustainable generating quantifiable positive changes and for Development Goals. Investing with an impact lens whom58; also helps drive revenue by tapping into previously • The portfolio company delegate should be undercapitalized markets. It propels operational empowered to drive tailored impact projects and efficiencies and, when engaging bottom-of-the-pyramid provide clearly defined impact data; suppliers, it stabilizes the supply chain. For a private • Indicators should be understood consistently across equity investor, it enhances the business’s value at exit, the entire investment portfolio; and ultimately creating long-term value for all. • Portfolio companies need to support impact projects The Phatisa Impact Measurement and Management and initiatives by selling the business case, and (IMM) system defines the steps and processes needed to they must understand the need to create inclusive ensure that our funds achieve strategic objectives. We businesses that benefit a variety of stakeholders, have integrated impact considerations into all aspects as well as the business and its neighboring of the investment process, from deal sourcing through communities. to exit. We consider the potential investment’s ability to address one or more of the SDGs, including zero hunger This impact management approach has unlocked new (SDG 2) and sustainable cities and communities (SDG opportunities for both our investment portfolio and 11), among others. In addition to the financial return for us as a fund manager. By making it easier to raise and ESG assessment, we have an internal scoring system much-needed funds from private and development- that assesses the potential of the investment to achieve focused investors, it has helped Phatisa build sustainable developmental outcomes against the core SDGs we are assets and communities in Africa while ensuring the best committed to (SDGs 1, 2,5, 8, 11, and 13). possible returns for investors. Moving an investment opportunity to the due diligence stage requires a minimum score for impact. During Author | Gwendolyn Zorn 60 GROWING IMPACT New Insights into the Practice of Impact Investing “At Phatisa, we believe—and our portfolio performance has proved this—that there is a positive correlation between business performance and socioeconomic and environmental value. We believe the SDGs are achievable, and as we strive to address food Eggs remain one of the most affordable forms of protein insecurity and build sustainable globally. Since Phatisa invested in Goldenlay’s expansion in 2012, production in this Zambian table-egg business has increased by cities, all while focusing on more than 50 percent. Credit: ©2018 Phatisa. empowering the poorest people in our value chains, we accept the challenge of creating a more equitable, just, inclusive, and sustainable future for all.” —STUART BRADLEY, MANAGING PARTNER, PHATISA 56 An introduction to development equity (DevEq), https://vimeo.com/184976980 57 2018 African Agriculture Fund Development Impact Report, http://online.fliphtml5.com/hucy/flcu/; and 2018 Pan African Housing Fund Development Impact Report, http://online.fliphtml5.com/hucy/mvie/ 58 Phatisa is aligned with the processes followed by the Impact Management Project, a forum for building global consensus on how to measure, manage, and report impact, https://impactmanagementproject.com/about/ 61 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 20: BLUEORCHARD Signatory Principle 5 Assess, address, monitor, and manage potential negative impacts of each investment. After almost 20 years of proven track record and and deficiencies in its business operations. Once the growth, BlueOrchard is a living example of the weak points are identified, we can decide how and if we commercial viability of, and business case for, will engage with the potential investee, keeping in mind impact investing. BlueOrchard’s mission is to make that improvements at an investee level have the potential an intentional, positive, social, and environmental to amplify overall impact for the end beneficiaries. impact across a variety of sectors in emerging and To assess the social performance policies and frontier markets, while providing attractive returns processes of current or prospective investees, SPIRIT to investors. In unison with BlueOrchard, the impact focuses on six key areas of social impact aligned investing industry has grown substantially over the with the Universal Standards of Social Performance years, attracting larger investors and the potential to Management, plus a seventh focused on environmental generate significantly more funding to scale up industry protection. Together these create an eligibility score up activity. However, an essential component of doing so to 100 for each investee. is improving, professionalizing, and standardizing the industry’s impact management, as this demonstrates In putting theory to practice, BlueOrchard recently the effectiveness and relevance of impact investments engaged with a potential investee operating in the retail toward achieving the SDGs. The Operating Principles sector and the financing of durable consumer goods for Impact Management play a key role in this regard, for low-income households in Latin America. The due as they demand transparency, consistency, and diligence and SPIRIT assessment showed a certain standardization, ultimately resulting in a sustainable lack of formalization in the social and environmental and responsible advancement of the industry that procedures of the company but reflected overall benefits all players. good practices. Moreover—and imperative for the advancement of the relationship—the company showed Assessing, addressing, monitoring, and managing great willingness to improve these procedures, as it the potential negative impacts of each investment is found the gaps were due to a lack of information and extremely relevant for our practice, as a proper impact guidance regarding best practices. BlueOrchard saw assessment needs to consider any negative impacts, this as an opportunity to increase its additionality and and mitigation can come only after those have been further develop its understanding of that particular identified. In order to assess both our positive and business model. Using loan covenants as a management negative impacts, we have been using and improving and monitoring tool, BlueOrchard and the investee our Social Performance Impact Reporting and agreed on binding conditions to the loan. These Intelligence Tool (SPIRIT) for 10 years as an integral conditions required the investee to go through a specific part of our investment analysis process. This tool not third-party certification that would entail a thorough only allows for the analysis of a potential investee’s analysis of client protection practices and formalization social or environmental impact, but also finds the gaps of its internal processes. 62 GROWING IMPACT New Insights into the Practice of Impact Investing An end client of one of BlueOrchard’s investee companies, using the computer that she has been able to purchase using a microloan. Credit: Grupo Monge. It is important to closely interact with and monitor investees in order to ensure that agreements are being implemented. From the manager side, however, this is limited by time and resources, as this thorough interaction cannot be done with all investees. Loan covenants “Guiding clients through a with early repayment features, good relationships journey of improvement in their with investees, and periodic impact assessments are therefore crucial as they help mitigate risks. Moreover, social practices is an incredibly having a goal of balancing financial and social return is rewarding experience and a imperative to succeed in the implementation of Principle 5 and in impact investing in general. core part of our role as an Overall, the Operating Principles for Impact impact investor.” Management provide structure to managers and confidence to investors, which together attract more —MARIA TERESA ZAPPIA, CIO, capital to be invested through a stricter process— BLUEORCHARD and thus allow for greater impact. Authors | Maria Teresa Zappia, Valerie Harrington, Kathryn Sutton 63 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 21: CORDIANT CAPITAL Signatory Principle 5 Assess, address, monitor, and manage potential negative impacts of each investment. Cordiant Capital believes that impact investing is developmental firms that seek change and improvement increasingly gaining traction among return-driven at a granular level. Although vitally important, these institutional investors. What used to be, almost small players seldom generate the commercial returns exclusively, the purview of development finance that would make a portfolio of them attractive to institutions, and a handful of foundations and return-seeking pension funds and insurance companies. endowments, is now seriously considered too by However, Cordiant’s large-scale investments in pension funds and insurance companies. Should these platforms such as mobile telephone networks, food institutional investors become fully engaged, the processing facilities, wind farms, and transportation magnitude of development impact could increase many- hubs can earn both attractive financial returns, and fold, as the monies they manage eclipse those of all of achieve meaningful and measurable development the current impact investors. impact for large numbers of people. For this change to occur, institutional investors must feel Cordiant invests in telecommunications infrastructure confident that they will get a compelling financial return, (mobile towers, data centers, fiber optics, and cable that the risks are identified and well managed, and that companies), agribusiness, renewable energy, and the development outcomes reported by asset managers are transporting goods and people. Each of these four meaningful, accurate, and independently audited. sectors offers attractive commercial returns, and can When deploying capital on behalf of pensioners and have system-level development impact, but they also insurance policy holders, the manager’s primary have associated environmental, social, and governance duty must always be a fiduciary one. But they can (ESG) risks (for example, food safety and packaging still achieve significant development impact by the standards in the agricultural sector). choices they make with regard to geography, sectors, If the risks are too great or would not be substantially and specific companies. For example, a mobile tower outweighed by the potential development impact, deal in Latin America can deliver a compelling risk- Cordiant will not invest. However, if we judge that the adjusted financial return, and at the same time provide risks are moderate and manageable, Cordiant works transformational connectivity for the small businesses, with the investee company to mitigate or eliminate its civil society organizations, and families that depend on ESG risks. Many good businesses in emerging markets telecommunications services. initially fall short with regard to ESG standards Commercially-minded managers, like Cordiant, because they are unfamiliar with international best are best positioned to make this type of “systems- practices, or they lack the financing necessary to level” impact. When managing hundreds of millions upgrade their equipment and processes, so they meet of dollars, it is impractical to deploy capital in ESG standards. Part of Cordiant’s financing and post- small increments. That is best left to the boutique, investment technical support package goes to helping investee companies comply with ESG standards. 64 GROWING IMPACT New Insights into the Practice of Impact Investing “We are delighted to witness the continually growing interest in impact investing amongst the institutional investor community. Cordiant was founded in 1999 with the goals of investing to generate strong commercial returns for investors whilst also producing positive developmental outcomes. We welcome the industry’s move towards more common standards and principles, as Sustainable agriculture in Brazil. this will enable more focused and effective deployment of capital. As we enter our third To measure the development impact of investments decade, Cordiant looks forward in Cordiant’s chosen sectors, we screen, select, and monitor investee companies using the Impact Reporting to continuing to work with and Investment Standards (IRIS) metrics developed our investment peers on this by the Global Impact Investing Network (GIIN). To important initiative. assess and manage ESG risk, we use tools developed by the International Finance Corporation, and the We are in a dynamic and Sustainable Accounting Standards Board (SASB). We transformative moment where have also begun to use third-party auditors to assess our ESG risk management capabilities, as well as our impact investing commands development outcomes. This move toward third-party the attention of institutional auditing gives greater credibility to Cordiant’s efforts in and retail investors alike. It is the impact investing space. now incumbent on the industry to deliver on the promise of Authors | Pascale Oligny, Obie McKenzie meaningful, measurable, and audited development outcomes.” —BENN MIKULA, CO-CHIEF EXECUTIVE OFFICER, CORDIANT CAPITAL 65 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 22: INOKS CAPITAL Signatory Principle 5 Assess, address, monitor, and manage potential negative impacts of each investment. INOKS Capital believes that impact investing is a E&S risks are analyzed at three levels, including powerful way to channel capital to companies that inherent risk (commodity and value chain segment), contribute to a sustainable and inclusive future and contextual risk (country of operations), and address the immediate needs of an economy. Such specific risk (level of compliance with standards investing goes beyond inclusion and compliance and regulation). INOKS uses the IFC Performance with international standards; it seeks to engage with Standards to identify and assess E&S risks associated counterparties to unlock and scale their potential with a prospective investee and its operations. If a impact. As impact investing becomes increasingly specific performance standard is triggered by the common and accepted, it is critical to adhere to nature of the operation, INOKS will examine whether recognized industry standards such as the Principles, or not the company complies with the performance which provide guidance for more consistent practices criteria of that standard, via both a desk review and and enhanced comparability across investment practices. field visits. In the case of noncompliance with the With a mission to provide capital access for added- identified performance standard, INOKS can engage value and resilient activities in the real economy, and with the prospective investee to develop a corrective in order to contribute to more sustainable value chains action plan to address the issue in a reasonable worldwide, INOKS places impact and ESG at the heart timeframe and stipulate this as a requirement in the of what we do and has done so since our founding. contract agreement. Over the years, INOKS developed consistent and ESG performance includes both the level of compliance integrated processes designed to measure and manage with INOKS ESG Standards and the successful the impact of our investments while also identifying, implementation of the defined improvement measures. mitigating, and monitoring potential ESG risks related It is monitored on an annual basis through on-site visits to our investees’ activities. and by collecting data on the occurrence of any ESG ESG risks are the actual or potential negative impacts issue, change in ESG policies, validity of environmental that business activities can have on the environment, permits, and media attention. We also closely follow on society, or on company governance. INOKS is the implementation of the improvement measures primarily involved in the agricultural sector, which specified in the corrective plan. Over the last two years, carries substantial environmental and social (E&S) 65 percent of the stipulated corrective measures have risks that need to be rigorously identified and managed. been implemented by our counterparties. These include child labor, harmful activities (such as the use of machetes and unsafe machines), heavy loads, Authors | Nabil Marc Abdul-Massih, Julie Montels exposure to hazardous materials, limited access to personal protective equipment, agricultural pollution, poor land management, and loss of biodiversity. These risks may be greater in emerging markets—where our investees mainly operate—because regulation in many of these areas is less institutionalized and law enforcement is often weaker in these regions. 66 GROWING IMPACT New Insights into the Practice of Impact Investing “By working with our counterparties to identify and mitigate these risks, we reduce our exposure to credit, liability, and reputational risks and improve our investees’ compliance with regulations and standards. This enhances their brand reputation, access to capital, and cost saving from operational efficiencies. We also believe it allows for the creation of business models that will be more resilient to current and upcoming challenges and is needed to achieve true Sustainable Development.” —NABIL ABDUL-MASSIH, CEO, A local rice processor in Côte d’Ivoire, working on the development INOKS CAPITAL and structuring of the local rice sector to promote production by smallholder farmers. 67 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 23: SWEDFUND Signatory Principle 5 Assess, address, monitor, and manage potential negative impacts of each investment. Swedfund’s energy investments have been exclusively assisting JCM in identifying good examples of relevant focused on renewable energy since 2016, and they environmental and social practices, and monitoring primarily promote the development of renewable energy JCM’s activities. Swedfund also provides funds for sources in developing countries. However, despite the technical assistance, which has included developing a huge potential for renewable energy, relatively few system for JCM to measure impact and evaluating the projects have been carried out in these countries. development impact of one of JCM’s wind farms. In 2018, Swedfund invested $15 million in JCM Power, One of JCM’s investments is the development of a and in 2019 we added another $10 million. Together solar-power plant near the town of Salima in Malawi. with its local partners, JCM owns and develops Only about 12 percent of Malawi’s population has renewable energy resources and it currently has several access to electricity, and most of the energy consumed projects at different stages of development in Sub- in the country comes from wood, which is obtained Saharan Africa, South Asia, and Central America. in a non-sustainable way. To construct the solar plant, Swedfund employs a rigorous environmental, social, JCM needed to purchase the rights to approximately and governance (ESG) process, which is initiated in 180 hectares of customary land. This presented a the due diligence phase of our investment process. potential negative impact on the livelihoods of 227 Our ESG analyses encompass everything from gender, project affected people (PAPs) who derived most of their environment, and health and safety, to human rights subsistence from the land. Through the application and good working conditions. Our process aims to of the ESMS, JCM was able to effectively mitigate identify gaps where a company is not complying with this potential impact and restore the affected persons’ the legislation and the conventions that Swedfund has livelihoods to the same or higher level than before. signed, and gaps in fulfilling our other investment To accomplish this, JCM implemented a Livelihood requirements and objectives. Our gap analysis results in Restoration Plan (LRP) that details the steps to restoring an action plan for the company to implement. livelihoods, beginning with paying compensation to Swedfund has set several requirements for JCM, the PAPs for their land and assets such that they have including development and implementation of a the financial means to re-establish their livelihoods comprehensive and effective Environmental and Social successfully. JCM has been monitoring their progress Management System (ESMS) to ensure that JCM and has followed the steps in the LRP, including the maintains a high standard in its ESG work, in due critical steps of identification and support of vulnerable diligence, and in its project companies; for JCM to or food-insecure PAPs. In late 2019 and early 2020, appoint an ESG Director at the corporate level; and JCM provided food security packages to identified for JCM to develop a complaints mechanism that is vulnerable PAPs, as well as seeds for planting, and accessible for employees, civil society organizations, and training on agricultural best practices. JCM is in the other stakeholders. process of implementing further livelihood restoration initiatives, specifically to educate all the PAPs, on Swedfund is collaborating with JCM on all of these conservation agriculture for more efficient and requirements, and together we have established an sustainable subsistence livelihoods. advisory committee for ESG, with one of Swedfund’s ESG Managers as an active member. This committee is advising JCM’s board on sustainability issues, Authors | Samira Aissi, Karin Kronhöffer 68 GROWING IMPACT New Insights into the Practice of Impact Investing A 60 MW project being built in Malawi. The project creates 300 local jobs and is expected to contribute significantly with 20 percent of Malawi’s current installed capacity. “Swedfund has the ambition to “The land and asset work actively on adding value compensation process and in all our portfolio companies. Livelihood Restoration Plan The investment in JCM is a are an outstanding example of good example of how we as JCM implementing the ESMS owners play an active part, policies and procedures that partly through our governance Swedfund supported JCM to role, and partly through the develop. This example clearly measures we identify prior to demonstrates how we have deciding to invest.” assessed, addressed, monitored, —MARIA HÅKANSSON, CEO OF and managed a potential SWEDFUND negative impact of the project.” —ALAN COCHRAN, ESG DIRECTOR, JCM 69 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 24: BLUE LIKE AN ORANGE Signatory Principle 6 Monitor the progress of each investment in achieving impact against expectations and respond appropriately. Blue like an Orange Sustainable Capital (Blue like levels what impact each investment will have against an Orange) seeks to mobilize private capital to invest each goal. Where the agreed UN SDG indicators are in a diversified set of emerging market companies less applicable (often as a result of the public sector that deliver both strong risk-adjusted returns and lens used to develop many of the SDG targets and social impact to directly support the United Nations indicators), we have “translated” the indicator into Sustainable Development Goals. something more applicable to private investments. As an investor, Blue like an Orange believes that In this translation process, we drew on the excellent each investment should have a social, economic, and work of our partners who developed the IRIS+ and the environmental purpose that supports inclusive growth, Impact Management Project. while also enhancing portfolio performance. SDG Blue also takes a proactive and “intentional” Tangibly measuring the social progress of our approach with regard to impact. This means that Blue investments is paramount for Blue like an Orange. like an Orange has a “point of view” regarding which In both our screening and monitoring processes, we goals and targets we would like to progress, given our systematically assess and document the social and sectoral focus, investment thesis, and values. development impact of each of our transactions against In developing SDG Blue, we opted for something that the SDGs. This drives not only our decision-making was “complicated enough” to be robust, but not so processes related to origination and investment, but complicated and multifaceted that the impact narrative also provides us and our borrowers with the data we all is obscured. need to maximize development outcomes. As we have begun to apply our rating tool, one Just as every investment in our pipeline and portfolio is particularly satisfying result has been discovering provided with an internal, shadow credit rating, every how our rating system generates dialogue, not just investment now receives an “SDG shadow rating” internally, but also with our borrowers, and that it through our internal rating system that we call “SDG creates a platform for substantive conversations about Blue.” During investment pipeline development and how to improve impact. origination, our system evaluates each investment’s While we believe that SDG Blue is robust, and it has potential to help achieve the SDGs. We annually review the support of our independent Sustainability Advisory all of our investments using SDG Blue to determine Committee, we know that our tool can and should be whether our rating (and underlying factors) has improved, and we are committed to doing so over time. improved or deteriorated. Blue like an Orange is not simply “aligned” with the Authors | Suprotik Basu, Augustin Degroote, SDGs or “mapped” to them but goes several steps Anna Oleksiak further to determine at the goal, target, and indicator 70 GROWING IMPACT New Insights into the Practice of Impact Investing “Through SDG Blue, our application of the Impact Principles is meant to contribute to the essential dialogue about the SDGs, which we view as the most meaningful international commitment to improve our people and planet. We also look forward to continuing the conversation and learning from other Signatories.” —SUPROTIK BASU, FOUNDING PARTNER OF BLUE LIKE AN ORANGE, HEAD OF IMPACT “The objective of Blue like an Orange is to show that it is Produbanco, one of Blue like an Orange’s borrowers, supports possible to have a significant SMEs and green businesses in Ecuador. return, while also having a positive impact. Furthermore, Blue like an Orange subscribes to some of world’s leading impact investing initiatives such as the Operating Principles for Impact Management. Such involvements reflect our commitment to be held accountable, and also to contribute to the dialogue around sustainable development” —BERTRAND BADRÉ, CEO AND FOUNDING PARTNER, BLUE LIKE AN ORANGE 71 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 25: DEG Signatory Principle 6 Monitor the progress of each investment in achieving impact against expectations and respond appropriately. In line with the Operating Principles for Impact The first three categories assess major contributions Management, Deutsche Investitions- und to development by the private sector, while the latter Entwicklungsgesellschaft (DEG), the German two measure the extent to which a company is acting Development Finance Institution and Member of the in a sustainable manner on behalf of the environment KfW Group, has created and implemented a new system and the communities within it. These five outcome to measure and manage the development impact of its categories form the backbone of the DERa rating. Each portfolio: the Development Effectiveness Rating (DERa). outcome category was operationalized in a two-step The DERa uses five outcome categories to assess approach to derive a single indicator score. By adding the development contributions of each client and to up the points of each of the five outcome categories, we present the development impact of investments made are able to establish a single key performance indicator by DEG clients: (KPI) for each client. • Decent jobs When developing the indicators and aggregate categories, DEG relies on both quantitative and • Local income qualitative indicators to fully grasp development • Market and sector development impact. Most indicators have been selected because • Environmental and social stewardship (E&S) they already exist and build on existing knowledge in other forms of reporting, including financial reports • Community benefits (such as tax payments from audited annual reports) or E&S data (such as the number of jobs that are part FIGURE 3.25.1 Development Effectiveness Rating of a DFI’s general E&S monitoring). By using existing indicators, DEG can limit the reporting burden and use existing data as efficiently as possible. Vital elements used to create DERa include the Sustainable Development Goal Agenda, the Harmonized Indicator Set for Private Sector Operations (HIPSO), and DEG’s 15 years of experience in impact management with the preceding “Corporate Policy Project Rating” system, among others. Utilizing the DERa to monitor and manage impact DEG manages the quality of both its entire portfolio and each individual investment. It has clear financial targets for its return on equity, and the average DERa score is the corresponding measure for development returns. In addition, an ex-ante assessment of a DERa score for each investment, an expected score to be achieved within five years, and an annual DERa update enable DEG to manage and enhance Source: DEG. 72 GROWING IMPACT New Insights into the Practice of Impact Investing development quality for each client. The average DERa score for the overall portfolio shows the development quality of DEG’s portfolio in a specific year. At an individual client level, DEG expects to see improvements over time. “DEG offers us substantial The DERa also allows for much-needed disaggregation, added value, mainly with as it is comprised of multiple data inputs at the level of advice on environmental and the individual client. This makes it possible to compare regions or specific client groups in relation to their social topics, and its extensive DERa scores and their role in supporting return on network in Africa.” development. With the DERa and this case study, DEG is referring to both Principles 4 and 6. —PAUL BOTHA, CO-FOUNDER AND CEO At the level of the individual client, the DERa has two OF THE SOUTH AFRICAN INVESTMENT COMPANY METIER primary management functions: • At acquisition, a baseline and an ex-ante estimate for the status in five years allows portfolio managers to determine whether a client supports DEG’s overall DERa portfolio target • For portfolio management, the DERa score shows the development potential of each client and, as the rating can be disaggregated and comparisons made for each indicator, the potential for improvement is visible up to the level of each single indicator. DEG has been using the DERa since the beginning of 2017. The system is applied annually to DEG’s entire portfolio and has been applied to all new commitments since January 2017, achieving 100 percent coverage of DEG’s clients in 2017, 2018, and 2019. The DERa score is one of the major KPIs to assess DEG’s own overall performance, and the DERa data is used for all impact-related DEG reporting, including the annual reporting on development impact. Authors | Christiane Rudolph, Dr. Julian Frede, Elleke Maliepaard 73 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 26: FINANCE IN MOTION Signatory Principle 6 Monitor the progress of each investment in achieving impact against expectations and respond appropriately. At Finance in Motion, we harness the power of finance to challenge, and we have developed special software make a positive difference for people and the planet. As solutions to facilitate these. Our requirement for an asset manager that has focused exclusively on impact regular reporting also creates an opportunity to investments in emerging markets since our 2009 inception, raise awareness for the key commitments and we welcome the growing interest in investing with positive objectives of our mandates and builds lasting impact. And we take it as a sign that our market-building capacities within the investees. efforts are bearing fruit. In fact, our track record shows • We conduct periodic, in-depth impact studies and field that investees committed to doing good for society or the visits, as well as collaborate on external evaluations environment tend not only to deliver on expected returns, and assessments, to collect additional quantitative and but also do so in the long term. qualitative information for a deeper understanding of Impact, however, is not an automatic component the funds’ impact mechanisms and the scale of their of existing investment opportunities. It requires final impact on people and the planet. intentionality, strategic focus, and continuous This monitoring system enables us to manage our management. strategic impact by providing a constant feedback loop For us, this starts with good groundwork. The “what” of how we are progressing toward our targets and and “how” of achieving impact—that is, the funds’ helping us to calibrate our strategy and planning for impact objectives and approaches for pursuing impact deeper, broader impact. These allow us to: through dedicated financing and technical assistance— • Inform portfolio composition. To address the diverse are defined in the funds’ strategy documents. We needs of our target group and work toward the then operationalize these strategic goals through, for full range of intended impact, our portfolio needs example, annualized targets for portfolio development to include different kinds of investee institutions. and impact results. When it comes to strengthening employment When it comes to selecting investments for our funds, opportunities, for example, our impact studies show impact is just as important as financial performance. that small enterprises are more likely to create jobs During each due diligence process, the alignment of an than micro enterprises, which are more likely to investment with the fund’s strategic impact orientation support self-employment. We therefore look for a is carefully reviewed. Only if an investment meets the balance of institutions that support microenterprises requirements for financial return and development as well as those that strengthen the SME sector, impact potential, as well as sound environmental and including commercial banks and leasing companies. social management, will it proceed. • Facilitate scaling of innovations across the Comprehensive monitoring then accompanies all portfolio—or the funds, as in the case of a share investments: class specially set up for local currency financing. • We require our investees to report on a set of After launching this instrument in one fund and predefined impact indicators, mainly on a quarterly observing its impact, we worked with our investors basis, that allow us to understand how our funds are to introduce it to two additional funds. On top of being used and who they are reaching. Collecting that, we have always pursued initiatives to raise and analyzing data from almost 140 investee awareness of the importance of local currency companies across five continents can present a financing among regulators and the financial sector in our target markets. 74 GROWING IMPACT New Insights into the Practice of Impact Investing Finance in Motion-advised funds constantly strive to enhance strategic impact management—including through integration of new technologies, such as drone-based land-use monitoring piloted by the eco.business Fund in El Salvador. Credit: eco.business Fund/Carlos Romero. • Guide expansion into new regions and activities with an evidence-based impact agenda. Having piloted and reviewed the potential of financial technologies for our target groups, our funds now support financial institutions in identifying and implementing fintech “For us, managing our impact is innovations. Working toward a systemic impact, they just as important as managing further help tech entrepreneurs develop and scale tools that are customized to our target group’s needs. financial performance. This Finally, our impact management practices matter for us allows us not only to track our as a company. We draw on our impact track record to progress toward our impact attract new investors for our funds and additional capital to the impact investing market. At a time when more and goals, but also to continuously more players are coming into the market, we want to help establish credible, transparent, and accountable impact hone our strategy. When we management and communication practices. In addition can show credible, clear impact, to publishing our own reports and white papers, we contribute both the knowledge we gain from our impact we can motivate investors monitoring as well as our experiences in collecting data and further build the impact from investee companies in 28 emerging markets to the development of common impact measurement and investing market.” management standards. —SYLVIA WISNIWSKI, MANAGING Finally, we are measured by how we ourselves measure DIRECTOR, FINANCE IN MOTION and manage impact. As fund advisor, our performance fee is also based on our funds’ development impact performance, in addition to meeting financial targets. Authors | Milena Bertram, Sarah Hessel 75 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 27: SYMBIOTICS Signatory Principle 6 Monitor the progress of each investment in achieving impact against expectations and respond appropriately. Symbiotics implements Principle 6 of the Operating Examples of the indicators collected include: Principles for Impact Management through its Social • Number of end borrowers by type of loans Performance Measurement and Management (SPM) (microcredit, small and medium enterprise (SME) Framework. This framework, in use since 2010 and loans, housing loans, and so on) formalized in a publication in 2017, 59 demonstrates the approach Symbiotics uses to systematically monitor • Number of depositors the social performance of all the investments in our • Average loan and deposit size portfolio. It defines a standardized set of indicators • End borrower’s sex collected on a regular basis to assess the extent to which Symbiotics’ investments are making a positive • End borrower’s location (rural or urban) social impact. • End borrower’s activity (agriculture, production, A key component of Symbiotics’ SPM framework is trade, services, or other activity) the systematic assessment of the likelihood that our Through these indicators, Symbiotics is able to investees will contribute positively to sustainable assess whether its investments fulfill our promise to development and social impact. This is done through investors—reaching out to low- and middle-income Symbiotics’ proprietary social responsibility rating. households and micro and small enterprises in We score each institution on a scale of zero (lowest) emerging and frontier markets and providing them to five (highest) stars, and usually do not invest in with responsible financial services that foster job institutions that receive a rating below two stars. We creation and access to primary goods such as affordable have used this rating system for all of our investment housing, food, and energy. decisions since 2010. If an institution’s social responsibility rating drops Symbiotics’ investment analysts rate each of our compared to that of the previous year, or if its social potential investees during the due diligence process performance indicators demonstrate that it is not we conduct before making any investment, and we reaching the targeted end clients, Symbiotics contacts repeat it on an annual basis to monitor how each the institution to ask for an explanation. If the institution’s social practices are progressing relative to company is no longer aligned with the announced their pre-investment levels. This rating methodology social mission, Symbiotics does not renew its loan has seven dimensions: (1) social governance, (2) labor beyond the current outstanding one.60 climate, (3) financial inclusion, (4) client protection, (5) Symbiotics also monitors its social performance product quality, (6) community engagement, and (7) through impact measurement studies. It offers investors environmental policy, and these dimensions together the option of conducting tailored research projects have 98 qualitative and quantitative indicators. that collect data directly from a sample of end clients. Symbiotics’ investment agreements with all its investees This enables the measurement of progress toward also include obligations that require them to report on specific objectives, using indicators that our investees a set of predefined social performance indicators on would otherwise not measure. Symbiotics is currently a monthly or an annual basis. Investees must collect conducting two such projects: (1) a four-year impact these data and report them to Symbiotics. study in 12 countries to measure the effect of loans 76 GROWING IMPACT New Insights into the Practice of Impact Investing An analyst during a due diligence. on SMEs in terms of their employment creation and business growth, and (2) an impact study to measure the effects of microfinance on financial inclusion, employment, and poverty in Sub-Saharan Africa. “Providing transparency on the Symbiotics’ promise to deploy funds where money usually does not flow is central to our relationship with social performance and impact investors. Symbiotics simply could not work in the of its investments is Symbiotics’ absence of social performance indicators, as they are at the core of all our investment operations, just like bread and butter. The success financial indicators. Social performance indicators are of impact investing depends on crucial to the selection, evaluation, and performance monitoring and reporting of investees. Symbiotics’ being able to demonstrate that portfolio-aggregated impact indicators allow investors to regularly follow—whether through factsheets or it can positively contribute to through annual social performance reports—what social progress while generating exactly their money is contributing to. We have found that investors greatly appreciate this level of rigor and attractive financial returns.” transparency, as it enables them to evaluate tangible —SÉBASTIEN DUQUET, CHIEF performance and voice any concerns. INVESTMENT OFFICER, SYMBIOTICS Author | Safeya Zeitoun 59 https://symbioticsgroup.com/wp-content/uploads/2017/10/SPM_web.pdf 60 As a debt investor, Symbiotics rarely resorts to early divestment. 77 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 28: ZURICH Signatory Principle 6 Monitor the progress of each investment in achieving impact against expectations and respond appropriately. At Zurich Insurance Group, being a responsible Our framework has had a promising start. As a result and sustainable company is at the foundation of of our pilot study, we calculated that, as of December our business. One of the key ways we achieve this is 2018, Zurich’s underlying investments helped avoid 3.4 through impact investments, which allow Zurich to million tons of CO2 -equivalent emissions worldwide help fund solutions to some of society’s most pressing and improved the lives of 2.4 million people. This social and environmental challenges. Doing so brings us half way to achieving our ambitious impact successfully means identifying investments that target investment targets. a specific impact goal while also generating a financial Measuring impact is admittedly a labor-intensive return commensurate with their risk. process. The first hurdle is often just finding the We also require such investments to be measurable in issuer’s reported impact. And the methodology has terms of impact achieved. This is why, when Zurich limitations. For example, there is no general industry- became the first private-sector investor to commit accepted definition of “people benefited” against to specific impact targets in 2017, we also set out to which to measure. Similarly, our measurements rely develop a methodology that allowed us to measure on self-reported data by issuers, which is heterogenous impact on a portfolio level, across asset classes and and uses different baselines and methodologies on underlying investment instruments. aggregated CO2 emissions avoided, for example. The targets we set in 2017 were 5-5-5: achieving impact However, we believe this is the best approach investments totaling $5 billion that would result in currently available. Timing can also be an issue, as avoiding 5 million tons of CO2 -equivalent emissions impact reporting can lag for up to a year after the while improving the lives of 5 million people each year. date of issue. Indeed, the actual impact may often be We developed a measurement framework for these underestimated, with additional projects undertaken targets, the first of its kind to measure CO2 -equivalent that are not captured in the latest reporting. emissions avoided and the number of people who Given these shortcomings, we therefore see our benefited. And we aggregated these two metrics across methodology framework as an important starting asset classes and investment instruments. point. We hope others will benefit from our experience The amount of CO2 emissions avoided is calculated and also measure their impact, and we would be using self-reported data from the issuers of impact interested to learn from their experiences and share investing instruments. We then compare this to a with them ideas for improvement. baseline scenario of the higher-carbon status quo of the In turn, the investment community can help to economy. For the number of people who benefited, we make reporting and measurement more effective by use our investees’ self-reported data to count the number providing readily accessible data, reporting according of people covered by their services in education, housing, to the International Finance Institutions’ harmonized or financial inclusion, in addition to other measures framework, and developing a common framework for of improved living standards. We count only those the concept of “people benefited.” individuals who are part of a specific targeted audience, who previously lacked access to these services. 78 GROWING IMPACT New Insights into the Practice of Impact Investing FIGURE 3.28.1 Shaping a More Resilient Tomorrow Source: Zurich. Generally, we have been impressed by the availability of impact reports—whether from bond issuers or private equity funds. However, there is more work to do together to find common standards and facilitate aggregation on the portfolio level. We are hopeful that “Setting targets and measuring progress on measurement can be achieved and that their achievement is the core this will help us move forward together toward greater societal resilience. of any impact strategy. At Zurich, we make a qualitative Authors | Johanna Köb, Danielle Brassel and quantitative assessment of each individual investment, and then aggregate the data for avoided CO2 emissions and people benefited across the whole impact investment portfolio. Setting targets truly encourages a gear-shift in how impact is measured, compared, and ultimately perceived within a portfolio. We’d recommend to consider it.” —JOHANNA KÖB, HEAD OF RESPONSIBLE INVESTMENT 79 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 29: DENHAM INTERNATIONAL POWER FUND Signatory Principle 7 Conduct exits considering the effect on sustained DENHAM INTERNATIONAL POWER FUND impact. (DIPF) The Denham International Power Fund (DIPF) became For example, in August 2019, Denham Capital a Signatory to the Operating Principles for Impact sold BioTherm, a South Africa-based pan-African Management in August 2019. The investment strategy renewable energy business, to Actis. BioTherm’s of the DIPF is to develop low-cost power projects assets included the operation, construction, and (renewables and gas) in markets where there is a development of a portfolio of assets, totaling fundamental need for new power generation. Several 288MW of electricity production. These are Golden studies show that access to competitively priced power Valley, a 123MW wind project in Eastern Cape; is a major enabler of industrial and economic growth, Excelsior, a 33MW wind project in the Western Cape; as well as improvement in living standards. Aggeneys, a 46MW solar project in the Northern The investment strategy of the DIPF contributes to Cape; Konkoonsies II, an 86MW solar project in Goal 7 of the SDGs: “Affordable and Clean Energy.” the Northern Cape; and a 4MW biogas facility. Our investment strategy also provides employment BioTherm’s energy business is intrinsically impactful: opportunities, contributing to SDG 8: “Decent Work once a renewable energy project is built and and Economic Growth.” This is achieved not just generating energy, the project generates clean power by providing employment opportunities, but also and carbon dioxide savings. through ensuring that international labor standards At the time of sale, BioTherm had invested in numerous are implemented. Also, implementing community- community projects, including: related projects contributes to a number of other SDGs. • Education-based initiatives, including providing The case study is drawing on Denham power team’s suitable staffing and properly trained teachers, experience from an older Denham fund (fund VI). adequate school equipment, and access to BioTherm Energy was a Fund VI investment. institutions of higher learning for students (through To develop the ‘impact’ exit strategy for the DIPF, we a bursary program) drew on experience and lessons learned from prior • Healthcare initiatives covering the procurement exits managed by Denham’s International Power of basic yet necessary healthcare equipment and team. Our strategy is two-fold in assessing the effect assistance, with a focus on the needs of healthcare on sustained impacts from an exit. First, we assess professionals in rural communities the buyer’s commitment to impact and shared values. Second, we take a preferred position in negotiating • Community infrastructure projects, including the sale agreements to ensure that our community financial support for the construction and commitments continue. We take this approach because, upgrading of community facilities (retirement in some cases, although a renewable energy sector homes, community libraries, and so on), and the developer has committed to investing in a community, electrification of community facilities, and once the project was sold, the buyer did not have the • Providing financial support to local small and same level of engagement or willingness to invest in medium enterprises (SMEs), as well as training and the community. This resulted in the community raising mentoring programs to aid the growth of these grievances. Thus, for each DIPF exit process, we will businesses. determine how such risks can be mitigated. 80 GROWING IMPACT New Insights into the Practice of Impact Investing 27MW Dassiefontein Klipheuwel Wind Project in South Africa, developed by BioTherm. Actis has a robust responsible investment approach, has been developing renewable energy projects since the inception of the Renewable Energy Independent Power Producer (IPP) program, and is also a Signatory to the Operating Principles for Impact Management. We felt “In selling BioTherm, it was comfortable that Actis would continue implementing important to know that best ESG practices. Also, in the case of BioTherm’s wind and solar projects, continued community our efforts in engaging with investment was ensured through obligations under the communities will be continued government’s implementation agreement for each of the respective projects. In summary, based on Actis’s prior in the same manner and experience in South Africa’s renewable energy sector, approach as initiated by we were confident that the company would effectively implement our projects to achieve positive impact. Denham Capital during the project’s formative years. It was Author | Sabine Chalopin important to us that support for the communities continues after our exit strategy” —JASANDRA NYKER, FORMER CEO OF BIOTHERM 81 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 30: INTERNATIONAL FINANCE CORPORATION Signatory Principle 8 Review, document, and improve decisions and processes based on the achievement of impact and lessons learned. Like every multilateral development bank, the World organization. Evaluations have been undertaken in Bank Group and IFC benefit from self-evaluation sectors such as manufacturing, agribusiness, tourism, programs and assessments that support their strategies retail, education, infrastructure, and financial markets. and operational learning agendas in real time and help For example, in response to questions about the meet commitments to donor and external partners. This development impact of investing in high-quality hotels is in addition to an independent evaluation function that as part of its tourism offerings in low-income and fragile reports directly to the Board and holds us accountable and conflict-affected states, a study was conducted to for the achievement of development impact, while assess the impact of IFC’s tourism investments on the supporting operational learning. This note focuses on local economy. IFC’s tourism strategy is to support the IFC’s self-evaluation agenda. development of critical infrastructure in places that lack At IFC, self-evaluations cover the spectrum of international standard hotels. These investments send operational activities—from individual transactions positive signals to other investors and are often among to sectoral and country level work. At the transaction the first private sector investments in a transitional level, IFC conducts mandatory self-evaluations on economy. In order to better understand how these a representative sample of its investment operations investments deliver impact, IFC engaged consultants to once they have reached operational maturity. These gather data and assess the nature of different types of self-evaluations are then reviewed, and their ratings impacts generated in three types hotel investments—a validated by our Independent Evaluation Group, or resort, a luxury hotel in a city, and a hotel focused IEG. The self-evaluation ratings are made public in on serving business travelers. The findings included IFC’s Annual Report, and the process of reporting on the economic footprint of each hotel in terms of GDP these is vetted by an external assurance provider that contribution, jobs created, and tax revenues generated. also audits the Annual Report. In addition, the IEG and The study also included recommendations about how self-evaluation ratings are integral to IFC’s Corporate the development impacts of these investments can be Scorecard and cascaded to the regional key performance amplified, for example through developing supply chain indicators (KPIs). For example, the KPIs track the linkages or training local suppliers and hotel employees. differences between the self-ratings and IEG ratings, IFC shared the findings of this assessment broadly, both with the goal of minimizing any gap in candor that may within and outside the organization. The results were exist. The KPIs also influence decisions on managerial discussed and disseminated to operational teams in IFC and departmental performance and inform incentive and presented to the Board of Directors in a discussion mechanisms. In this way, there is a clear and direct on the World Bank Group’s (WBG) engagement in the link between the self-evaluations and our performance tourism sector. They were also presented at the IFC metrics and incentives. Evaluation Conference to other International Finance Over the last five years, IFC has started to conduct Institutions, to deepen our collective understanding of demand-driven studies covering its investment the nature of direct, indirect, and induced development operations, in order to fill knowledge gaps and build impacts from tourism investments. Within IFC, the an evidentiary base for assessing IFC strategy, as well findings have also been incorporated into the sector as to inform key stakeholders within and outside the guidelines for investment teams originating tourism deals. 82 GROWING IMPACT New Insights into the Practice of Impact Investing “IFC was pleased to have our approach to impact used as a reference in the development of the Operating Principles for Impact Management. Now the Principles in turn are reinforcing our own approach. Self-evaluations are a critical The Azalai Group’s Grand Hotel has brought local firms into its element to ensure that we supply chain and improved local employment opportunities. are focused on monitoring and assessing the results of As a result of the tourism investment study, the design of a recent IFC and IDB investment in Latin America our operations from design incorporated an advisory component to work with a local vocational training institute to enhance the employability to completion. They create and upward mobility of the local workforce. This would a critical feedback loop that help local suppliers meet the quality standards required by the client and other hospitality businesses in the area. completes the end-to-end Tourism investments also now routinely incorporate support framework for impact green building components, as relevant. This experience has helped IFC further build on the methodology used assessment which starts for other such assessments. with an ex-ante approach The recent introduction of IFC’s AIMM tool allows IFC to demonstrate our intent to to strengthen the quality of information available for self-evaluations at the transaction level. The sector level manage for impact before self-evaluations, such as the one on tourism, provided estimating and measuring the important information in developing the sector guidance for assessing new tourism projects under AIMM. Where expected development impact the evaluation covers multiple markets, these self- evaluations provide an assessment on the development of IFC interventions.” gaps and the stage of market development in the sector. —HANS PETER LANKES, VICE PRESIDENT, Thus, they are an important source of information ECONOMICS AND PRIVATE SECTOR in those areas where IFC expects to stimulate strong DEVELOPMENT, IFC market movements.61 Authors | Deepa Chakrapani, Victoria Y. Chang 61 In addition to the self-evaluations at the program and sector level, the WBG’s IEG undertakes fully independent evaluations of policies, strategies, and reports on these directly to the Board of Executive Directors. These independent evaluations build from the transaction level assessments and are centered on broad development themes, strategies, sectors, or mandates that the WBG entities are charged with delivering. The evaluations include recommendations, for which Management develops and commits to an action plan, which is also monitored on an annual basis. 83 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 31: KKR Signatory Principle 9 Publicly disclose alignment with the Principles and provide regular independent verification of the alignment. Following a decade of investing in companies that teams use to evaluate and measure impact. It also addressed critical needs, including responsible included a series of interviews with KKR team production and consumption, next generation energy, members and the Fund’s nonprofit partner, BSR. The workforce development, and environmental solutions output included an evaluation of how aligned KKR’s and clean water, in 2018 we launched our first dedicated impact management efforts are with the Principles, impact investing fund, KKR Global Impact (the Fund). recommendations for improvement related to each Our thesis is that there are tremendous opportunities Principle, and a verification statement that the Fund to generate attractive financial returns by building and was aligned with the Principles. This assessment growing companies that aim to solve some of the world’s and verification was completed in April 2019 and a greatest sustainability challenges. This means investing summary shared with Fund investors. in companies that deliver locally relevant solutions to the Since early 2019, we have carefully implemented Sustainable Development Goals. Tideline’s recommendations, working to maintain As a global investment firm with more than 40 years and improve our areas of strength, as well as address of experience, we believed we had both the intellectual potential shortcomings in our approach to impact and financial resources to contribute to solving these management and future disclosures. Our early problems and help scale the practice of impact investing. assessment efforts helped uncover specific areas for At the same time, we knew that despite our deep improvement, including: experience of responsible investing, our journey into • Focusing on ongoing impact management. impact investing would not be easy. So we looked to With our external assessment having occurred early the early pioneers of impact investing to inform our in the life of our strategy, we were able to use the approach. And in April 2019, we became a founding findings to help inform the development of our impact Signatory to the Operating Principles for Impact management processes, post-investment. For example, Management. We recognized early on that any credible we built additional impact management considerations impact investor would need a rigorous approach to into our existing Portfolio Management Committee assessing and managing impact. In particular, we materials to revisit a transaction’s impact thesis and embraced the idea of disclosure and independent risks to achieving impact over time. verification of our impact management system. • Strengthening data collection and analysis. Since the Fund was relatively new, we decided to use a Understanding that data quality is critical to third-party to help us assess our progress to date and impact management, in 2019 we completed an define our priorities for 2019 and 2020. We engaged assurance readiness exercise to evaluate our data Tideline, a leading impact advisory firm, to assess and management and controls procedures and provide verify the extent to which KKR’s impact management recommendations for improvement. The findings of approach was aligned with the Principles and to make this assessment will be key to us as we develop our recommendations on how to further build on our work. asset-level reports in coming years. To perform the assessment and verify the Fund’s • Learning from our experiences. Based on ideas alignment with the Principles, Tideline conducted from the external assessment, we developed an a review of KKR’s impact management procedures. impact assessment checklist that explicitly captures This included a review of diligence and portfolio lessons learned from each investment, which has management guidance and templates that investment helped us improve our processes over time. 84 GROWING IMPACT New Insights into the Practice of Impact Investing In 2019 KKR Global Impact invested in Ramky Enviro Engineers Ltd., a leading provider of environmental services and responsible waste management solutions in India that advance several SDGs. In our view, alignment with these Principles and other ESG and impact-related constructs should be a journey of continuous improvement. We plan to repeat this exercise in 2020 with another external review of our impact management system that we intend to “Authenticity and transparency are make public as part of our Disclosure Statement to be critical to the continued growth published in April 2020. and evolution of the impact We believe impact accountability is key to scaling the impact investing industry. However, it is not just about investing market. While we are disclosure, but rather using disclosure and verification still early in our journey, we are to help drive continuous improvement. Although there are a variety of impact investing strategies, and impact proud to have built transparency management processes often differ, we believe the Principles provide a commonly applicable framework into our approach from the that can be universally adopted. We also believe that very beginning. We hope that IFC has built a community of investors committed to learning from each other, and that transparency will by sharing the details of our help inform other current and potential Signatories to efforts to date and goals for the Principles, thereby making it easier for more fund managers and investors to enter the impact investing future improvement, we can join space. We look forward to learning from others’ efforts, other current and future impact and together we must continue the work of scaling this field with integrity and transparency. investors in scaling this market.” —KEN MEHLMAN AND ROBERT ANTABLIN, Authors | Ken Mehlman, Robert Antablin, CO-HEADS, KKR GLOBAL IMPACT, KKR Elizabeth Seeger 85 CHAPTER 3. Case Studies—Experiences of Signatories to the Operating Principles for Impact Management CASE STUDY 32: NUVEEN Signatory Principle 9 Publicly disclose alignment with the Principles and provide regular independent verification of the alignment. As the asset manager for TIAA, Nuveen has been to engage a third-party consultant to verify our first set making impact investments for about three decades. Our of disclosures, rather than relying on an independent impact investments began with community development internal team. The reasoning for this decision was and affordable housing in the United States and have twofold, in line with the value-add we see above. First, expanded over time to a global portfolio that spans using a third party further enhances external credibility. asset classes and totals over $4 billion in assets under Second, a consulting firm with expertise in this area management today. Over this time, we have seen and could bring insights to help inform our own assessment helped prove out a strong business case for investments of our practice, relative to our peers. that can generate measurable positive changes for Once we decided to engage an outside provider of communities and the planet, while delivering market- verification services, we solicited proposals and rate returns. We have also seen clients grow increasingly evaluated them based on four main criteria: interested in understanding the impact of their investment portfolios, and increasing net-positive outcomes, while 1. Track record of providing high-quality services earning an appropriate risk-adjusted return. related to impact measurement and management As new players have entered the impact investing market 2. Verification methodology that is transparent, well- to meet growing demand, the need for transparency defined, relevant, and right-sized in asset manager practices around impact has never 3. Suitability of service offering for our firm’s diverse been greater. This is where Principle 9 of the Operating impact investment strategies Principles for Impact Management comes in. At Nuveen, 4. Value relative to cost. we see two types of value in this principle, which requires Signatories to disclose how they align with While we decided to pursue verification from a third party the other eight principles and to obtain independent for our first set of disclosures, we also appreciate that this verification of those disclosures: may be prohibitively expensive for some impact managers, such as those operating at smaller scale or in emerging • First, the transparency of the disclosures and markets. As a longtime partner of these managers, we verifications will bring clarity to the practices impact encourage other independent and cost-effective verification investors are implementing, ensuring credibility. methods to avoid creating artificial barriers to entry. We • Second, we look forward to learning from the selected a specialist impact consultancy and are currently verification process about where our own impact in the process of contracting them, aiming to have the management processes are already well advanced, verification done by mid-May 2020. and where they can improve. The novelty of the disclosure and verification tasks Nuveen’s impact measurement and management presented both challenges and opportunities for Nuveen. (IMM) systems are developed and led by dedicated Our participation in the development of the Operating experts, in collaboration with the investment teams, Principles for Impact Management instilled a high to ensure high-quality implementation of our impact level of comfort with the overall concept of disclosing frameworks, criteria, and monitoring systems. Because our alignment with the Principles. However, external these experts work in teams technically separate from validation of our IMM processes will be a first for the portfolio management teams, some degree of Nuveen (as it will for the rest of the industry), and it independent checking already occurs. However, after required socialization with various stakeholders. The careful consideration of our options, Nuveen has opted cost also needed to be justified and a budget identified. 86 GROWING IMPACT New Insights into the Practice of Impact Investing Disclaimer GWP-1053088PF-O0120X Past performance is no guarantee of future results. These materials are provided solely for use in private meetings and are intended for informational and discussion purposes only. These materials are only for use by the intended party and may only be circulated only to persons whom they may lawfully be distributed. Persons who do not fall within such descriptions may not act upon the information contained in these materials. Any entity responsible for forwarding this material to other parties takes responsibility for ensuring compliance with local laws, and in particular any applicable financial promotion rules. The information presented in these materials is believed to be materially correct as at the date hereof, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Data was taken from sources deemed reliable, but cannot guarantee its accuracy. The statements contained herein reflect opinions as of the date written and are subject to change without further notice. Nothing set out in these materials is or shall be relied upon as a promise or representation as to the past or future. Clients of a Nuveen investment. This document is not a prospectus and does not constitute an offer to the public. No public offering or advertising of investment services or securities is intended to have taken effect through the provision of Preparing our disclosures offered an opportunity to these materials. It is not intended to provide specific investment advice including, without limitation, investment, financial, legal, accounting or document a consolidated view across portfolios and tax advice, or to make any recommendations about suitability for any teams about how we manage impact. It helped us see the particular investor. commonalities more clearly and test our rationale for Nuveen Real Estate is a real estate investment management holding company owned by Teachers Insurance and Annuity Association of differences. In addition, as noted above, we anticipate America (TIAA). Nuveen Real Estate securities products distributed an opportunity to learn from our verifier about how in North America are advised by UK regulated subsidiaries or Nuveen Alternatives Advisors, LLC, a registered investment advisor and wholly our tools and processes compare to industry standards, owned subsidiary of TIAA, and distributed by Nuveen Securities, LLC, and to identify new ideas for further improvement. Member of FINRA and SIPC. Nuveen, LLC (“Nuveen”) provides investment advice and portfolio management services through TIAA and Over time, we expect verification and disclosure over a dozen affiliated registered investment advisers. Nuveen Real Estate to play a critical role in the evolution of the impact is an investment Past performance is no guarantee of future results. investing industry. Just as audited accounts enable trust These materials are provided solely for use in private meetings and are intended for informational and discussion purposes only. These and reduce transaction costs in the broader financial materials are only for use by the intended party and may only be industry, impact management verification will pave circulated only to persons whom they may lawfully be distributed. Persons who do not fall within such descriptions may not act upon the way for a more transparent, credible, and effective the information contained in these materials. Any entity responsible for forwarding this material to other parties takes responsibility for impact investing marketplace. ensuring compliance with local laws, and in particular any applicable financial promotion rules. The information presented in these materials is believed to be materially Author | Hannah Schiff correct as at the date hereof, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Data was taken from sources deemed reliable, but cannot guarantee its accuracy. The statements contained herein reflect opinions as of the date written and are subject to change without further notice. Nothing set out in these materials is or shall be relied upon as a promise or representation as to the past or future. This document is not a prospectus and does not constitute an offer “Nuveen enthusiastically to the public. No public offering or advertising of investment services or securities is intended to have taken effect through the provision of these materials. It is not intended to provide specific investment advice welcomes the new era of including, without limitation, investment, financial, legal, accounting or tax advice, or to make any recommendations about suitability for any transparency that disclosure and particular investor. Nuveen Real Estate is a real estate investment management holding independent verification of impact company owned by Teachers Insurance and Annuity Association of America (TIAA) . Nuveen Real Estate securities products distributed management practices will bring.” in North America are advised by UK regulated subsidiaries or Nuveen Alternatives Advisors, LLC, a registered investment advisor and wholly owned subsidiary of TIAA, and distributed by Nuveen Securities, LLC, —VIJAY ADVANI, EXECUTIVE CHAIRMAN Member of FINRA and SIPC. Nuveen, LLC (“Nuveen”) provides investment advice and portfolio management services through TIAA OF NUVEEN, A TIAA COMPANY and over a dozen affiliated registered investment advisers. Nuveen Real Estate is an investment affiliate of Nuveen. 87 METHODOLOGY Methodology for Calculating the Size of the Market for Impact Investing in 2019 The following describes the methodology applied to four parts of Chapter 1 in this report: Private Investment Funds with Intent resources. Their fundraising is equivalent to assets for and Measurement of Impact under management (AUM) under the assumption that it takes 10 years to return capital to investors. We We have assembled fund-level data from publicly explicitly exclude publicly traded assets and funds available sources and sources with restricted access. that are managed by development finance institutions These include the recently assembled Global Impact (DFIs), to avoid double counting. Platform (GIP) by Phenix Capital, the online database of the Emerging Market Private Equity Association Sources: Preqin, Global Impact Platform, EMPEA, (EMPEA), Syminvest, Symbiotics’ Online Platform for Syminvest, GRESB, IRIS, B-Analytics. Microfinance and Small Enterprise Impact Investments, and Preqin, an alternative assets database. Investments in the Private Sector by We identify conventional funds, “impact intent” funds, HIPSO Signatory DFIs and “impact intent and measurement” funds that were Estimates are for 2019 or latest financial year launched in the last ten years. For conventional funds, available. We include two groups of DFIs: First, there was no identifiable intent for positive impact. 14 multilateral development banks (MDBs) and 13 “Impact intent” funds indicated an “ethos,” or an bilateral DFIs that are signatories to the Harmonized intent to further or engage in economic development, Indicators for Private Sector Operations (HIPSO). environmental responsibility, microfinance, and/or Initially, 25 DFIs were part of HIPSO. Their social responsibility. “Impact intent and measurement” committed portfolios include non-treasury investment funds—or “impact funds” for short—need to portfolios of loans, equity investments, and debt demonstrate that they measure the impact of their securities to non-sovereign entities, the stock of third- investments. This can be confirmed by cross-checking party investment that has been directly mobilized against databases that confirm a measurement system by DFIs, and gross exposure to guarantees to non- and/or indicators used to measure impact for their sovereign entities. In general, DFIs only expect to pay listed funds, or by cross-checking against users of the claims on a small fraction of their gross exposure Global Real Estate Sustainability Benchmark (GRESB); to guarantees or risk insurance. Gross guarantee against IRIS, the generally accepted system for impact exposure amounts were taken as gross exposure to investors; or against B-Analytics, an impact assessment guarantees without counter guarantee. For MIGA, platform for B-Corporations. gross guarantee exposure does not include guarantees Fund sizes correspond to total fundraising from 2009 against the non-honoring of financial obligations by to 2019 by private investment funds with verifiable sovereigns, sub-sovereigns, or state-owned enterprises. intent for, and measurement of, impact. These Mobilization is reported as annual commitments funds operate only in private markets: private debt or approvals; we estimate mobilization assets by and equity, real estate, infrastructure, and natural assuming that assets are five times the five-year average of annual commitments. 88 Where available, data is sourced from public data available. In addition, we collected data on private disclosure statements, for instance as provided by the sector portfolios through direct outreach and by Signatories to the Impact Principles. Otherwise, data consulting annual reports and financial statements for is sourced from published financial statements and all multilateral and bilateral development banks. the Mobilization of Private Finance by Multilateral Sources: Annual Reports, personal outreach. Development Banks and Development Finance Institutions 2018. De Luna-Martinez, Jose, Carlos Leonardo Vicente, Ashraf Bin Arshad, Radu Tatucu, and Jiyoung Source: HIPSO, MDB Mobilization reports, Song. 2018. “2017 Survey of National development Disclosure Statements to Operating Principles for banks.” (English). Washington, D.C.: World Bank Impact Management and DFI annual reports. Group. http://documents.worldbank.org/curated/ en/977821525438071799/2017-Survey-of-National- Non-Sovereign Lending by Non-HIPSO development-banks. MDBs and Other National and Regional Development Banks Green, Social and Sustainability Bonds We compiled a list of development banks, which The value of all green and social bonds outstanding is are institutions with some government ownership as of year-end 2019. This includes sovereign issuance. and a mission statement to promote economic Outstanding bonds refers to bonds that were issued development. In addition to lists kept by associations between 2008 and 2019 and that had a maturity date such as the Organisation for Economic Co-operation in the year 2020 or later. If the data indicated a range and Development (OECD) and the International for maturity date—which would be custom when bonds Development Finance Club (IDFC), we conducted a of different lengths of maturity are issued together— web search for “development bank” for each World we were not able to discern the maturities of parts of Bank member country. Banks were included in the the issuance. Hence, we counted the full issuance as list if they satisfied three criteria: (a) their mission outstanding if all parts of the issuance are maturing in statement and reference documents suggest a mission or after January 2020. Bonds with missing maturity that relates to social and economic development, as dates could not be counted against outstanding bonds. opposed to just financial return, (b) they have some We base our estimate on data from Environmental government ownership or were originally formed by an Finance (EF), which includes self-labelled green/social/ act of government (multiple banks are identified in some sustainable bonds. EF claims that the majority of these countries), and (c) recent balance sheets were available. bonds adhere to one or more guidelines. We include 12 multilateral development banks and 68 Source: Environmental Finance. bilateral and national development banks with charters or mission statements describing intent to contribute to social or environmental impact alongside financial Corporate Engagement and Shareholder return. Given limited data on the share of portfolio Action allocated to treasury, sovereign, and non-sovereign Values are for start of 2014, 2016, and 2018, operations, we assume that national development respectively. Sustainable investing assets for 2018 are banks’ private sector portfolios correspond to the self- reported as of December 31, 2017, except for Japan, reported, weighted average of private sector lending which reports as of March 31, 2018, and currencies and guarantee operations as a percentage of total assets were converted to US dollars at the exchange rate in the 2017 Survey of National Development Banks. In the survey, national development banks reported prevailing at the time of reporting, for comparability. on average 38.7 percent of their total assets as private Source: Global Sustainable Investment Alliance, sector lending/guarantee portfolio, based on the latest Global Sustainable Investment Reviews 2014-2018. 89 FURTHER READING Investing for Impact: Operating Principles for Impact Management February 2019—12 pages Investing for Impact: Operating Principles for Impact Management (the Principles) have been developed by a group of asset owners, managers, and allocators to describe essential features of managing investments into companies or organizations with the intent to contribute to measurable positive social or environmental impact, alongside financial returns. The Principles may be adopted at the corporate, line of business, or fund level. Managers that offer a range of investment strategies may adopt the Principles for assets which they choose to identify as impact investments. Institutions and fund managers that only invest for impact may adopt the Principles at the corporate or fund manager level. The Principles may be implemented through different impact management systems and are designed to be fit for purpose for a range of institutions and funds. A variety of tools, approaches, and measurement frameworks may be used to implement the Principles. Creating Impact: The Promise of Impact Investing April 2019—82 pages Impact investing has emerged as a significant opportunity to mobilize public and private capital into investments that target priority development needs, particularly in emerging markets. Investors are increasingly looking to invest with impact by aligning their strategies to achieve the UN Sustainable Development Goals. To better understand what it would take to scale up credible impact investing, IFC published the Creating Impact: The Promise of Impact Investing report, which offers the most comprehensive assessment to date of the potential global market, along with practical suggestions for next steps. 90 SIGNATORIES TO THE OPERATING PRINCIPLES FOR IMPACT MANAGEMENT AS OF JUNE 2020 Actis The European Bank for Multilateral Investment Acumen Capital Partners Reconstruction and Guarantee Agency Development (EBRD) Norfund Adenia Partners European Development Neuberger Berman Albright Capital Management LLC Finance Institutions (EDFI) AlphaMundi Group Nuveen, a TIAA Company The European Investment Bank (EIB) Amundi Obviam Finance in Motion AXA Investment Managers Oesterreichische FinDev Canada Entwicklungsbank AG (OeEB) Belgian Investment Finnfund Company for Developing Partners Group Countries (BIO) Flat World Partners Phatisa Group Limited Big Society Capital FMO – the Netherlands Proparco Development Finance Company BlackRock, Inc. Prorsum Capital Foundation Corporation Holdings Blue like an Orange Prudential Financial, Inc., Sustainable Capital Franklin Templeton Social Impact Investments Group Infrastructure Fund BlueOrchard Finance The Private Infrastructure FullCycle Development Group Ltd. (PIDG) BMO Financial Group GEF Capital Partners Latam Quona Capital BNP Paribas Asset Management IDB Invest, Member of responsAbility Investments Calvert Impact Capital the Inter-American Capria Ventures Development Bank Group Sarona Asset Management Inc. Cardano Development (ILX IFC SEAF Fund and TCX) IFC Asset Management STOA Infra & Energy CDC Group Company (AMC) Swedfund CDP – Cassa Depositi e Prestiti IFU – Investment Fund for Swiss Investment Fund for Christian Super Developing Countries Emerging Markets (SIFEM) COFIDES Impact Bridge S.A Symbiotics S.A. Community Investment Incofin Investment Management The Osiris Group Management (CIM) INOKS Capital SA The Rise Fund Cordiant Capital Investing for Development SICAV The Rock Creek Group Credit Suisse Investisseurs & Partenaires – I&P TriLinc Global, LLC Deetken Impact Sustainable Energy Islamic Corporation for Trill Impact AB DEG – Deutsche the Development of Triple Jump Entwicklungsund the Private Sector (ICD, Turk Ventures Advisory Limited Investitionsgesellschaft mbH Member of IsDB Group) UBS Group Denham International Japan International Power GPLP SCSp Cooperation Agency UOB Venture Management Private Limited Developing World Markets Kohlberg Kravis Roberts & Co. U.S. International Development Bank of Latin LeapFrog Investments Development Finance America (CAF) LGT Lightstone Europe LLP Corporation (DFC) Development Partners LGT Venture Philanthropy (formerly OPIC) International LLP Foundation VentureWave Capital Ltd. DWS Group GmbH & Co. KGaA MicroVest Capital Management Water.org Earth Capital Mirova WaterEquity Egyptian-American Enterprise Fund Mountain Nazca Zurich Insurance Group IFC 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 U.S.A. ifc.org/ThoughtLeadership impactprinciples.org JUNE 2020