CREATING IMPACT The Promise of Impact Investing ANNEXES ANNEXES Annex A. Definitions of Impact Investment That Have Been Used in the Industry TABLE A.1 Definitions of Impact Investment Impact investment …positive social and No. ORGANIZATION …is made with the intent… ...to contribute to… ...measurable… environmental impact 1. Cambridge Associates is “made in an enterprise “a market-based LLC that offers” solution to a social or environmental challenge” 2. Global Impact Investing has “intention” “to generate” “measurable” “positive social and Network (GIIN) environmental impact” 3. Global Steering Group “optimizes risk, return and by “setting” “and measuring “specific social for Impact Investment impact to people and the their achievement” and environmental (GSG) planet” of objectives” 4. Mission Investors is “intended” “to generate” “social and/or Exchange environmental impact” 5. Monitor Institute is “actively placing capital in “that generate” “social and/or businesses” environmental good” 6. Omidyar Network “seeks” “to generate” “social change” 7. Organisation for has the “expectation of” “measurable” “social return” Economic Co-operation and Development (OECD) 8. Overseas Private “deliver[s]” “social and Investment environmental benefits Corporation (OPIC) to emerging markets” 9. Social Impact “intentionally” “targets” “and measure[s]” “specific social Investment Taskforce the “achievement” objectives” of 10. The Rockefeller has the “intention” “of generating” “social and/or Foundation environmental impact” 11. U.K. National Advisory has the “deliberate intention” “to make a” “positive social or Board on Impact environmental impact” Investing 12. UN Global Compact has the “intent” “to create” “benefits beyond financial return” 13. World Economic Forum “intentionally seeks” “to create” “that is actively “positive social or (WEF) measured” environmental impact” Sources: Organizations’ websites and publications. Note: Definitions of impact assessment used in the industry include three components, in addition to a focus on social or environmental impact. A notion about a causal contribution is shared by 12 of 13 organizations; intent is shared by 8; and measurement is shared by 5. 1 ANNEXES Annex B: An Estimate of Investor Appetite for Impact Investment In 2018, the private and public sectors owned an Mass affluent households, or those with less than $1 estimated $268.9 trillion in financial assets (Figure million in financial assets, have insufficient wealth to B.1).1 PwC forecasts that as institutional investors seek participate in most private markets. Therefore, even diversification, assets under management in private though they comprise a substantial share of total assets, equity will rise faster than managed products in public the extent to which their assets may be invested for securities.2 They will invest these over the short, impact is limited. Such households are likely saving for medium, and long term. Of this total, $101.6 trillion retirement or education for children, which requires safer is owned by public and private institutions: pension and more liquid investments, such as stocks and bonds. funds, insurance companies, sovereign wealth funds, There are also regulatory barriers. The United States and development finance institutions.3 The remainder, Securities and Exchange Commission, for instance, only $167.3 trillion, is owned by households, with $87.6 gives “accredited investor” status, allowing investment trillion held by high-net-worth individuals, who have in private equity or hedge funds to investors with financial assets of over $1 million, and the rest are held assets greater than $1 million, or income of more than by what are called the “mass affluent” segment, or $200,000 in the two prior years, and a plan to do so in individuals with assets of less than $1 million. the next.4 This is justified by an imperative to protect smaller investors from taking excessive risk. FIGURE B.1 In 2018, $268.9 Trillion in Financial Assets were Available for Investment TOTAL FINANCIAL ASSETS, BY OWNER Development finance institutions Mass a uent US$ trillions, 2018 Sovereign wealth funds High-net-worth individuals Insurance companies Pension funds 7.4 9.3 35.9 48.9 79.7 87.6 268.9 $101.3 trillion is owned by $167.3 trillion is owned by institutions (38%) households (62%) Sources: Credit Suisse, PwC and DFI annual reports. Note: Financial assets do not include land, housing or, in some jurisdictions, equity in small businesses held by households. Assets of private banks are reflected in the graph in the total financial assets, as the asset owner’s financial assets include claims on their equity, debt, and deposits. 1 Estimate for 2018, based on forecasts from PwC. The daily value of financial assets may vary substantially, day-to-day, due to volatility in market prices. 2 See https://www.pwc.com/gx/en/asset-management/asset-management-insights/assets/awm-revolution-full-report-final.pdf. 3 This includes the assets of 106 development banks that satisfy three criteria: (a) their mission statement and reference documents suggest a mission that relates to social and economic development, as opposed to just financial return, and (b) they have some government ownership or were originally formed by an act of government (multiple banks are identified in some countries), and (c) recent balance sheets were available. Export credit agencies are excluded from the analysis. 4 U.S Securities and Exchange Commission 2019. 2 CREATING IMPACT The Promise of Impact Investing In our analysis, we do not separately distinguish size include the Bill and Melinda Gates Foundation between households and the foundations and ($51.8 billion)6, the Wellcome trust ($33.1 billion)7, a endowments they donate money to, due to variance publicly traded British charity which funds biomedical across countries in how these organizations are defined research, and the Azim Premji Trust ($12.0 billion)8, by the tax code, which creates differential incentives named for the founder of the Indian software company for financial disclosure.5 Overall, though some Wipro Ltd.The world’s largest university endowments foundations and endowments have been leaders in the include Harvard University ($39.2 billion in assets)9 practice of impact investment over the past decade, and Cambridge University and its colleges ($15.1 their contribution to total asset value is likely less than billion).10 Their assets may be illiquid, however, as in 1 percent of total assets. Foundations notable for their the case of artwork or real estate given by bequest. FIGURE B.2 Assets of Development Finance Institutions TOTAL ASSETS OF 106 SELECT DEVELOPMENT FINANCE INSTITUTIONS US$ billions, 2017 DFI Total Assets 7,403 European Investment Bank (EIB) 659 International Finance Corporation (IFC) 94 European Bank for Reconstruction and Development (EBRD) 67 Other HIPSO Signatories 415 Non-HIPSO Signatories 6,167 China Development Bank 2,361 KfW (Germany) 569 Cassa Depositi e Prestiti Group (Italy) 499 International Bank for Reconstruction and Development (IBRD) 403 Development Bank of Singapore 388 National Bank for Economic and Social Development (Brazil) 324 Korea Development Bank (Republic of Korea) 245 Caisse des Depots et Consignations (France) 207 Japan Bank for International Cooperation 166 Other National Development Banks 679 Other Multilateral Development Banks 326 0 2,000 4,000 6,000 8,000 Sources: DFI Annual Reports. Assets of IFC and IBRD refer to fiscal years 2018. Dollar values may differ slightly from official figures, as they were calculated using exchange rates current at the time of publication. 5 In the United States, for instance, where the greatest value of individual foundations by assets appears to rest, foundations are subsidized through tax exemptions on investment income and property tax. The value of these subsidies increases with household income. Reich 2018. 6 2017 audited financial statements. See https://www.gatesfoundation.org/Who-We-Are/General-Information/Financials. 7 Converted from £11.8 at 1.28 $ per £. As of September 2018. See https://wellcome.ac.uk/news/value-wellcome-investments-passes-25- billion-pounds. 8 Mishra, Pankaj 2018. “Azim Premji quietly gives away more to charity.‚Äù Livemint, March 7. https://www.livemint.com/ Companies/6fd1boxRbPYAuRoeNk852L/Azim-Premji-quietly-gives-away-more-to-charity.html. 9 Fiscal Year 2018. See https://finance.harvard.edu/files/fad/files/harvard_annual_report_2018_final.pdf. 10 Converted from £11.8 at 1.28 $ per £. See https://www.theguardian.com/education/2018/may/28/oxford-and-cambridge-university- colleges-hold-21bn-in-riches. 3 ANNEXES Asset Owners’ Preferences There are two returns scenarios for the pool of capital among investors who might intend to invest for impact FOR IMPACT ACROSS THE RETURNS SPECTRUM: (Table B.1). These are based on the revealed preference of Understanding demand for impact investment is asset owners for managed investment products. Private difficult, given uncertainty over the return it delivers. institutions and households are assumed to invest 29 Investor surveys provide a starting point, with the percent, which corresponds to the share of professionally caveat that given the concentration of the dollar managed assets under socially responsible investing (SRI) value of wealth in a small number of households strategies, which can be understood to reflect taking and institutions, one should exercise caution in into account social or environmental considerations, extrapolating from a survey to preferences over alongside financial return.14 Under the scenario of aggregate asset allocations. When investors are sub-commercial returns, we assume that households offered a specific definition of impact, interest invest only 19 percent of assets for impact, or the share varies. Morgan Stanley asked whether investors were of managed assets under negative screening strategies, interested in “making investments […] to achieve which arguably indicates a willingness of asset owners market rate financial returns while pursuing positive to sacrifice returns.15 Institutional investors are assumed social and/or environmental impact?” Seventy-five only to operate on commercial terms. This is apparent percent were interested, though only 23 percent from the fact that they are often careful to emphasize the were “very” interested, suggesting, perhaps, bridled upsides as well as the downsides of negative screening enthusiasm.11 Of those that express interest, fewer and ESG integration strategies, suggesting discomfort may identify as impact investors. A survey by The with stating they have intentionally sacrificed return. Economist found that only 39 percent of women For instance, a recent report by Norway’s $1 trillion investors under 35 agree that “I align my investments Government Pension Fund Global, which is funded by with my giving goals (for example, through impact surplus oil income, found that, with regard to the funds’ investing).” The share is lower for men, at 26 percent, sustainable and responsible investment strategies, “both and for older women, at 24 percent.12 Of course, the the exclusion of tobacco companies and certain weapons survey’s use of the word “giving” may have prompted manufacturers have reduced returns. This effect has, to respondents to think of charitable returns, lowering some extent, been mitigated by the positive contribution response rates.13 of […] environmentally based exclusions of mining companies.”16 11 Morgan Stanley Institute for Sustainable Investing 2017. 12 EIU 2018. 13 The growth of impact investment, so far, may have been hindered by expectations of sub-commercial returns. In a UBS survey, of the 61 percent of respondents who had not engaged in sustainable or impact investing, 63 percent said that it was because they were worried about lower returns. Further, 67 percent said they would prefer to maximize returns on investment and focus on charitable donations for their giving, suggesting that many investors think in binary terms about the return of their portfolio. 14 This percentage is calculated as assets allocated to any SRI strategy, as reported by the Global Sustainable Investment Alliance (2016), divided by an estimate of total managed assets for the same year, based on data provided by PwC. 15 GSIA 2017. 16 Katz 2017. 4 CREATING IMPACT The Promise of Impact Investing TABLE B.1 Assumptions behind estimate of investor appetite for impact investment SHARE OF INVESTIBLE ASSETS ALLOCATED TO IMPACT INVESTMENT Commercial Return Sub-Commercial Return INSTITUTIONS Insurers, Pensions, and Sovereign Wealth Funds 29% 0% Development Finance Institutions 100% 0% HOUSEHOLDS High-net-worth Individuals 29% 19% Mass Affluent 29% 19% Source: Global Sustainable Investment Alliance. PwC. Notes: 29 percent corresponds to the share of assets professionally managed under any type of SRI strategy; 19 percent corresponds to the share under negative screening strategies—both are for year-end 2015. This assumes that asset owners invest for impact on their own account in equivalent proportion to asset managers, and that impact is possible in public markets, at all liquidities FOR PUBLIC AND PRIVATE MARKETS: Principles of asset and liability management also An investor’s asset allocation is typically immutable, requires institutions to hold more liquid and less due to liquidity needs. It is unlikely, for instance, that risky instruments, such as bonds and cash. In 2016, an asset owner would take assets allocated to cash or 67 percent of U.S. insurer assets were held in bonds, short-term bonds, and invest them in private equity, and just 12 percent in common stocks.18 Insurance which is typically illiquid for 5–7 years. Households companies have disproportionate demand for bonds hold a substantial amount of assets in liquid assets, because of regulatory requirements. Although there namely cash (24 percent of total household financial is substantial variation across countries, a pension assets).17 They may hold liquid assets as buffers against typically holds approximately 50 percent in bonds and expected shocks, or because investment opportunities liquid assets, with the remainder in public equities.19 are not available. There is substantial variation across Investment by pensions is concentrated in the United countries in the preference for cash, too: In the United States, where pensions invested $28.2 trillion in 2017, States, just 13 percent of household assets are held or 64.8 percent of the value invested by all OECD in liquid assets, whereas in Germany, the figure is 39 countries. Development finance institutions also hold percent, and in China, 53 percent. between 40 and 60 percent of assets in treasury, typically in bonds. 17 Credit Suisse 2018. 18 National Association of Insurance Commissioners and the Center for Insurance Policy and Research 2017. 19 OECD 2018. 5 ANNEXES Annex C: Financial Performance of Realized IFC Investment Projects TABLE C.1 Financial Performance of Realized IFC Investment Projects By Vintage Year SIZE WEIGHTED F-test of EQUAL WEIGHTED F-test of A) EQUITY equality equality between between Full 1961- 1988- 2008- time Full 1961- 1988- 2008- time Sample 1987 2007 2016 periods Sample 1987 2007 2016 periods Public median 1.14 1.20 1.04 0.94 0.94 0.90 Market Equivalent mean 1.36 1.47 1.13 *** 2.03 2.22 1.16 ** Index Index (vs. MSCI std. dev. (1.64) does not (1.86) (0.98) (7.02) does not (7.69) (1.48) EM) exist exist [p25; p75] [0.62;1.62] [0.66;1.68] [0.39;1.46] [0.46;1.53] [0.50;1.57] [0.33;1.37] n 1,266 1,042 224 1,266 1,042 224 Internal median 7.94 13.57 10.22 1.85 5.05 6.35 5.66 0.00 Rate of Return mean 27.06 13.57 33.58 16.06 60.40 11.12 74.13 53.30 * std. dev. (251.85) (54.38) (266.2) (247.46) (442.6) (106.24) (491.61) (432.44) [p25; p75] [-2.9;21.1] [1.78;25.0] [-0.4;22.6] [-23.2;16.5] [-6.5;16.6] [-0.3;14.6] [-6.4;18.5] [-27.;13.3] n 1,622 344 1,052 224 1,622 344 1,052 224 SIZE WEIGHTED F-test of EQUAL WEIGHTED F-test of B) DEBT equality equality between between Full 1991- 2002- 2008- time Full 1991- 2002- 2008- time Sample 2001 2007 2015 periods Sample 2001 2007 2015 periods Public median 0.97 1.01 0.94 1.00 1.03 0.96 Market Equivalent mean 0.96 1.01 0.91 *** 0.98 1.03 0.94 *** Index Index (vs. JPM std. dev. (0.14) does not (0.13) (0.13) (0.14) does not (0.13) (0.13) CEMBI exist exist Broad [p25; p75] [0.89;1.04] [0.93;1.08] [0.84;0.99] [0.91;1.06] [0.96;1.09] [0.86;1.02] Diversified) n 1,109 562 547 1,109 562 547 Internal median 6.38 8.30 7.10 4.10 7.50 8.48 7.61 5.04 Rate of Return mean 5.70 7.66 7.03 3.29 *** 6.25 6.16 7.81 4.75 *** std. dev. (6.05) (5.49) (4.44) (6.8) (7.86) (10.22) (4.33) (6.05) [p25; p75] [4.06;8.54] [7.07;9.70] [5.48;8.83] [2.41;5.92] [4.91;9.42] [6.56;10.5] [6.06;9.20] [3.15;7.18] n 1,962 841 574 547 1,962 841 574 547 Source: IFC equity investments that have been fully sold (or written off) and senior loans that have been fully paid down (or written off). Projects are grouped by vintage year, so that a project in the data dated 2008 may have been closed as recently as June 2018. Note: PME is calculated following Kaplan and Schoar (2005), and may be understood as a market-adjusted multiple of invested capital, greater than 1.0 if the investment delivers return greater than an equivalently timed investment in the market index. A PME of 1.20, for example, implies that, at the end of the investment, an investor ended up with 20 percent more than they would have if they had invested in the public market. In this example, if $100 invested in public markets would have yielded $200 after seven years, the private investment yielded $240 over the same time. Asterisks indicate that one should reject the null hypothesis that average returns are constant across time periods, and the statistical significance level of the F-test: *p<0.1, **p<0.05, ***p<0.01 6 CREATING IMPACT The Promise of Impact Investing Annex D: Impact Measurement Within a result-oriented effective An investor’s impact measurement system may be designed to support this continual improvement management system process. The table below illustrates the overarching Impact measurement is a core component of an core questions any impact investor should be asking effective results-oriented management system and the themselves in managing for both financial returns and foundation for management that seeks to continuously impact (Table D.1). optimize outcomes. It is not a one-time documenting The answers to these questions will differ among or accountability-focused activity conducted at the investors, and their impact measurement systems beginning or end of an investment. Just as financial should reflect this. For example, what is suitable for considerations are integrated throughout the investment a large institutional investor investing across asset process, impact and measurement considerations should classes, impact mandates, industries, and geographies be embedded within an impact investor’s strategy, would look very different from what is suitable structuring, supervision, and, wherever possible, within for a small foundation looking to invest in a single investment exits. Throughout the investment cycle, both country. Just as each investor has his or her own financial and impact considerations can be thought of as investment strategy, a rationale for that strategy, and part of an iterative, four-step, continual improvement, ways for assessing performance of that strategy, each management process (Figure D.1).20 impact investor should look at impact considerations FIGURE D.1 Financial and Impact Management through the lenses of their specific answers to the Lifecycle questions above. The framework applied to address these key questions constitutes the investor’s impact measurement framework. The impact measurement framework thus forms the basis of an overall impact management system. Just Investment Investment as investors have a system to manage and measure lessons learned strategy financial performance throughout the investment and Impact and Impact process, impact investors should have a system to evidence ST P thesis JU measure and manage impact performance as part of an LA AD end-to-end process. The analytical model to understand N the impact measurement is defined through the core dimensions within an impact measurement framework, K as shown in Table D.1: EC DE SI CH GN • Impact thesis Investment Investment supervision structuring • Impact assessment and monitoring and Impact and Impact monitoring assessment • Impact evidence 20 Based on the Deming PDCA (Plan, Do, Check, Act) cycle for continuous quality improvement. Ishikawa 1985. 7 ANNEXES TABLE D.1 Core Questions That an Investor’s Management Systems Should Address PHASES Overarching question Financial view Impact view PLAN What is the investor’s mandate What is the financial thesis including What is the impact thesis including and strategy? risk/return profile and target returns? the intended social and environmental How will the investor’s strategy deliver outcome?21 How is the investor’s strategy these returns? linked to expected outcomes? DESIGN Who to invest in, allocation of What is the approach to origination What is the approach to ex-ante impact capital? and structuring of the investments and assessment, including risks and how it may what is the expected financial return affect decision making and approach to and risks? strengthen impact potential? CHECK How will success and progress What type of financial data should be What type of data and indicators should be be continuously measured? used during supervision to monitor used for impact monitoring against goals? performance against goals? ADJUST Where are improvements What are the corrective actions What are the corrective actions needed to possible? needed to secure best possible secure best possible outcomes? returns? What are the lessons learned and impact What are the lessons learned to evidence created that will enable improved improve returns and lower risk within ex-ante assessments and outcomes in future investments? future investments? FIGURE D.2 Impact Measurement’s Role in Measurement’s role in growing Shaping and Scaling the Impact Investment Market 22 the market In any market, limited use of standards is a formidable barrier to the effective and efficient allocation of resources. An agreed-upon set of principles, Y ARIT frameworks, and metrics can allow financial markets CL to scale. What distinguishes impact investing from traditional investing are data and information on CR social or environmental outcomes, alongside financial returns. For impact investing to truly scale, impact EDIBILITY measurement systems need to secure the following Impact three elements (3Cs): Clarity, Credibility, and Measurement Comparability, around this “impact” information. • Clarity. There is significant confusion on how to measure impact in the impact investment market, which is a critical barrier to scaling the market. 23,24 CO M Transparency on concepts and approaches to impact PA measurement will help increase the efficiency R AB ILIT Y of markets, reduce information asymmetries, support evidence-based decision making, and build trust in the industry among asset owners and asset allocators. Clarity also means recognizing uncertainties and risks. 21 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. Adapted from OECD-DAC. 22 IFC staff, International Finance Corporation, 2019. 23 Hupp and Silva 2013. 24 OECD 2015. 8 CREATING IMPACT The Promise of Impact Investing • Credibility. Impact investors, particularly in • Comparability. Finally, comparing impact mainstream financial markets, need to show performance results, both internally and externally, stakeholders that they are managing (and delivering) allows asset owners, allocators, and managers to for positive impact. Robust impact measurement make informed decisions on the best allocation of practices (and resulting data) can help establish funds. Making results comparable requires that the credibility of investors and avoid accusations impact measurement practices are based on shared of “impact-washing,”25,26 where the investor uses fundamentals, principles, standardized indicators, impact jargon or marketing to raise money or and industry benchmarks. Comparability is perhaps burnish reputations without delivering real positive the greatest challenge, given the inherent subjectivity impact. Beyond clarifying approaches to impact, in assessing impact. the use of rigorous impact measurement based on evidence and performed free of undue political influence, 27 can help to generate trust. 25 Ethical Corporation 2018. 26 Rust 2018. 27 To ensure credibility and safeguard against undue political influence, responsibility for the design of impact measurement should be independent from operations. 9 ANNEXES Annex E: Designing a Measurement Framework Around An Impact Thesis The impact thesis articulates the overall intention of or “logic model.” This terminology has its roots in the the investors, and their contribution to achieving that evaluation of international development programs and intention. Designing an impact measurement framework projects;30 the components of these approaches include around an impact thesis ensures that investors collect inputs, activities, outputs, outcomes, and impacts. relevant information that will allow them to manage for Extensive literature exists on what falls under these the intended impact, as well as document, assess, and different components and how impact investors can communicate about impact performance success. This apply this thinking to their frameworks. Investors can thesis is thus crucial for deciding which data to collect also approach their impact thesis though the use of a and the level of rigor of evidence needed, as well as “line-of-sight”. Rather than distinguishing between how to go about actually collecting this information.28 outputs and outcomes (which can often be tricky), Explicitly stating an impact thesis enables investors (and a line-of-sight31 articulates the linear connection other stakeholders) to define the scope of the potential and linkages between an investor’s strategy and the impacts of their investments, and better understand and ultimate impact outcomes sought. strengthen the processes to maximize their results, as Depending on the number and complexity within well as to test the extent to which results align with the the sector targeted, the investors may utilize a single, expected theory of the intervention.29 overarching, impact thesis for their portfolio, while Notably, an impact thesis is based on the ultimate others may operate across several impact theses.32 impacts the investor seeks, and not necessarily what For example, an investor that invests in one sector in the recipients of this “impact” want and need. For similar types of companies, and in similar geographies, example, an investor may be focused on providing may be able to use one overarching thesis for all access to clean water for rural underserved populations investments. However, an investor who invests in in Uganda, but these individuals may prioritize access to sectors such as health, education, and energy could employment and education above access to clean water. have a high-level overarching thesis for the entire Incorporating the voice of the beneficiary is increasingly portfolio, but would need more specific theses to a key aspect of many investor’s approaches to impact establish the basis for what to measure and why. measurement, but is not specifically a focus here. Finally, some impact theses focus solely on achieving In developing (and updating) the impact thesis, project outcomes, while others may include the evidence should be used as the basis, as much as ambition to contribute to systemic effects. Systemic possible, to ensure a high level of credibility that effects are impacts beyond the direct/indirect the outcome may be achieved, and that it is aligned investment stakeholders, such as broader impacts with the investment strategy. The evidence applied on markets or regulation. Increasingly, contributing should represent a balanced perspective on the topic to systemic changes is considered critical to the addressed with a focus on the rigor, as well as the achievement of the SDGs and the Climate Goals. relevance. Sources of evidence can include: internally Investors that target these types of impacts as part of produced evidence derived from monitoring of previous their investment mandate, including many MDBs and investments, different forms of feedback from end- DFIs, should include them in their impact thesis, and beneficiaries or stakeholders, and/or evaluations. therefore what they measure and monitor. See Box An impact thesis can take many forms and is often E.1 below with a case that is an example of a shorter referred to as a “theory of change,” “results chain,” impact thesis from IFC. 28 Kazimirski and Pritchard 2014. 29 Jackson 2013. 30 Ebrahim and Rangan 2014. 31 See https://www.changefactory.com.au/our-thinking/articles/implementing-transformational-change-through-a-line-of-sight/. 32 Saltuk and Idrissi 2015. 10 CREATING IMPACT The Promise of Impact Investing BOX E.1 Case Example—IFC Power Sector Impact Thesis Enhancing access to power is a key priority for IFC and the World Bank Group. A significant number of developing countries face large power deficits, with important implications for economic growth and human development. An estimated 1.2 billion people, globally, live without electricity, almost all in developing countries and about half in Africa. Quality of electricity services is also the most frequently cited obstacle to doing business in developing countries where firms also rely on expensive back-up options to stabilize supply. Electricity access, quality, and costs have limited firms’ contribution to growth and job creation, through negative effects on firms’ productivity, cost-competitiveness, and investment decisions. IFC’s engagement in the power sector is designed to help client countries secure the affordable, reliable, and sustainable energy supply needed to end extreme poverty and promote shared prosperity. This strategy mirrors the objectives of the Sustainable Energy for All Initiative, and SDG7: achieving universal access, accelerating improvements in energy efficiency, and doubling the global share of renewable energy by 2030. Meeting these goals requires a concerted push toward sustainable options for energy access, including on-grid and off-grid, as well as other viable, low-carbon solutions that reflect every country’s unique endowments. Because energy-related activities are the largest emitters of greenhouse gases, accounting for more than a third of global CO2 emissions, there is strong overlap between SDG-7 and the climate change agenda embedded in SDG-13: take urgent action to combat climate change and its impacts. IFC’s power sector investments seek to catalyze changes in the market that are beyond the project’s direct and indirect effects. For example, IFC projects may support the power sector’s competitiveness through enabling improvements in the market structure and regulation, as well as via catalytical effects on the market through the introduction of innovative technologies and processes. IFC projects may support energy resilience through targeting systemic effects on diversification of the electricity generation mix, and improving resilience of electricity infrastructure to enhance the sector’s adaptability to potential shocks, including climate risks. FIGURE E.1 The Power Sector’s Project and Market Impact Channels PROJECT OUTCOMES 1. Increase access to more reliable and affordable power. 2. Concomitant direct, indirect and induced effects on DEVELOPMENT GDP & employment. GAP ADDRESSED 3. Potentially significant positive (renewable energy, 1. Low electricity IFC INPUTS energy efficiency) and negative environmental and access rates social effects. Provides 2. Unreliable supply financing 3. High power and advisory MARKET CREATION generation costs support to 1. Increase number of market participants. and user tariffs firms in the 2. Improve sector resilience and quality of supply. 4. Growth and job power sector 3. Increase the spatial connectivity of the electricity creation system. 4. Adoption of new climate mitigation or adaptation 5. Large carbon technology/process that can be replicated by other footprint players 5. Introduce inclusive business models. 11 ANNEXES Annex F: Measurement Frameworks Applied to a Hypothetical Investment: Water Drip To provide a tangible example of how each framework Monitoring would focus on collecting data based on archetype can be applied, we have outlined a simplified these (and other relevant) indicators and monitored hypothetical investment example, described in Box against targets. F.1 below. Through this case we will illustrate an IMPACT RATING FRAMEWORK example of how each of the three impact measurement frameworks could be applied to assess the impact of Using a rating framework approach to this an investment ex-ante, and monitor impact as part of investment, an investor could combine investment management. multiple aspects of positive and negative impacts stemming from this investment. This could include: IMPACT TARGET FRAMEWORK (a) the potentially positive impact on smallholder Using a target framework approach, an farmers, (b) negative impacts through increased investor might assess the impact ex-ante and water usage, (c) the ripple effects on jobs and incomes set targets focused on the number of drip irrigation throughout the supply chain, and other factors. The systems expected to be sold to smallholder farmers. material outlined below focuses on the potentially Targets may or may not be set based additional positive impacts on farmers: indicators (for example, average increase in income • The number of expected smallholder farmer clients for smallholder farmers). Targets may also be set for during the investment period—assessed against a the multiple aspects of positive and negative impacts scale defined though similar types of investment: stemming from this investment. »» Reach: 500,000 = medium rating • The number of expected smallholder farmer clients • The amount of potential increase in income during the investment period: generated from the expected increase in yields— »» Reach: 500,000 benchmarked against the current level of • The average amount of the increase in income smallholder farmer income within the investors generated from the expected increase in yields: targeted geographies: »» Depth: $100/year »» Depth (people): $100/year = medium rating BOX F.1 Hypothetical Investment Example Investment description: An investor is looking to make a $25 million equity investment in Water Drip and expects to hold this investment for five years. Water Drip, a drip irrigation company, produces drip irrigation equipment that can increase the yields of smallholder farmers. The company sells to a variety of types of famers, but sees an opportunity to expand into a new geography. Impact thesis: Smallholder farmers within the new geography do not get optimal yields due, in part, to the negative impact of inconsistent rainfall. The investment in Water Drip will allow the company to expand its sales. As a result, smallholder farmers will be able to affordably access equipment that can lead to increased yields and increased incomes. Evidence: Macro studies have shown a significant relationship between increases in yields and overall farmer income. Micro evaluative evidence related to this product has documented increases in yields of up to 30 percent for a number of crops, with an ROI of less than two years for farmers that own more than a minimum number of hectares. Feedback collected from customers has been overall positive. 12 CREATING IMPACT The Promise of Impact Investing • The demonstration effect within the market— • The number of expected smallholder farmer clients considered against a market maturity typology: during the investment period: »» How much or how likely the investment is likely »» 500,000 to spur competition = high rating • The amount of potential increase in income generated • This can be combined into an overall score at the from the expected increase in yields (benchmarked investment level = high rating against the current level of smallholder farmers’ Building on the target framework, impact monitoring income within the investors’ targeted geographies): can be based on collecting data related to one or »» $100/year (for five years) more of the aspects highlighted above. For example, • This may then be discounted for various factors some investors may choose only to collect data as (such as the rigor of evidence, risk of famers being part of ongoing monitoring based on “reach” data, unable to sell increased yields, and so forth): while others may choose to collect data on all aspects »» Likelihood of realizing the potential impact = 75 that feed into the overall rating. Performance can be percent assessed relative to what was expected. • Some investors may also account for their IMPACT MONETIZATION FRAMEWORK percentage stake in the investment: »» Investment stake = 50 percent Using a monetization framework approach to this investment, an investor would look • Investors may also account for the size of the at multiple aspects of positive and negative externalities investment: stemming from this investment. This could include the »» Investment size = $25 million potentially positive impact on smallholder farmers, Final calculation: 500,000 farmers X $100/increase in negative impacts through increased water usage, the income per year X 5 years = $250 million in potential spillover effects on jobs and incomes throughout the impact generated. Discounted for the likelihood of supply chain, as well as other factors. What is outlined impact (75 percent) and the investment stake (50 percent) below is only focused on the potentially positive = $93.7 million. Divided by the investment size = $3.75 impacts on farmers: of social return on investment for every $1 investment. 13 ANNEXES Annex G: Standardized Indicators Used in the Impact Investment Industry B Impact Assessment (BIA) intelligence on where they stand against their peers, a roadmap with the actions they can take to improve The BIA assesses a company’s overall social and their ESG performance, and a communication environmental performance by measuring its impact platform to engage with investors. Investors use the on stakeholders, and therefore can be a useful tool ESG data and the GRESB’s analytical tools to improve to capture aspects of impact strategies within impact the sustainability performance of their investment investing. The BIA is a set of questions (based on portfolios, engage with managers, and prepare for underlying indicators) that differ based on the sector increasingly rigorous ESG obligations. and market in which the company operates. The BIA is the basis for the Global Impact Investing Rating See https://gresb.com. System (GIIRS), a tool that can be used to assesses companies and funds based on their social and Harmonized Indicators for Private environmental performance. The BIA and GIIRS are Sector Operations (HIPSO) managed by B-Lab. HIPSO is a list of 38 reporting indicators, across See https://bimpactassessment.net. 15 different sectors and industries, which have been agreed by 25 different development finance institutions Global Reporting Initiative (GRI) (DFIs). Fifteen of the HIPSO indicators are aligned Standards to the Impact Reporting and Investment Standards (IRIS) metrics. The indicators have been developed by The GRI Standards provide guidelines to help a working group whose goal is to reduce the reporting businesses, government, and other organizations burden of shared clients, aggregate and share data understand and communicate publicly on a range of among international financial institutions (IFIs), and economic, environmental, and social impacts. The facilitate learning. While designed by DFIs, many of GRI Standards provide lists of indicators/disclosures the indicators are applicable and useful for impact through the universal standards that can be used by investors, although they do not cover the full range of every organization as part of its sustainability reporting, possible effects sought by impact investment strategies. as well as sector-specific standards based on material topics. The GRI Standards are managed by the Global See https://indicators.ifipartnership.org/. Reporting Initiative. See https://www.globalreporting.org. Impact Reporting and Investment Standards (IRIS) GRESB IRIS is a catalog of over 400 generally accepted metrics Launched in 2009, the GRESB assesses the that can be used to measure social, environmental, and sustainability performance of real estate and financial performance. IRIS serves as the taxonomy, infrastructure portfolios and assets, worldwide. We or set of terms with standardized definitions, which offer ESG data, Scorecards, Benchmark Reports, and investors can use to pick metrics that align with their portfolio analysis tools. The assessments are guided objectives. IRIS metrics are aligned with the various by what investors and the industry consider to be aspects of impact investing, as outlined in this report, material issues in the sustainability performance of real and can provide many investors with a comprehensive asset investments and are aligned with international basis for indicator selection. The IRIS database is reporting frameworks such as the GRI and PRI. currently being re-designed to align with the shared Assessment participants receive comparative business fundamentals of the SDGs and the Impact Management 14 CREATING IMPACT The Promise of Impact Investing Project (IMP), which will further increase the database’s Sustainable Accounting Standard Board accessibility and utility. In total, 59 percent of the GIIN (SASB) Standards survey respondents are using metrics aligned with IRIS. IRIS is managed by the GIIN. These standards are focused on a small set of industry- specific disclosures (on average, five topics and 13 See https://iris.thegiin.org/. associated metrics per industry) that are deemed to be financially material (as defined by the U.S. Supreme Sustainable Development Goal (SDG) Court). The target audience is thus more limited than indicators the impact investing industry, but still useful, where The SDG indicators, which have been defined for each applicable. The SASB aims to integrate its standards SDG, comprise a total of 230 agreed-upon indicators. into the requirements for filing 10-Ks with the U.S. The target audience for reporting on these indicators is Securities and Exchange Commission and other government, not impact investors. However, a number financial regulatory bodies. The SASB Standards are of initiatives have translated/aligned these indicators to managed by the Sustainability Accounting Standards existing enterprise indicators, which can be useful for Board (SASB). investors. Once such initiative is the SDG Compass. See https://www.sasb.org/. See https://sdgcompass.org/business-indicators/. 15 ANNEXES Annex H: Process for Strengthening the Impact Evaluation Evidence Base FIGURE H.1 Process for Strengthening the Evaluation Evidence Base33 Evidence learning loop Develop/ Design and Better social Identify update execute Produce Impact causality Act outcomes sector evaluation and investor evidences based on alongside specific (use rapid share (industry) gap and evidence financial Theory of approaches evidence priorities returns Change if possible) Over the last decade, evaluations focusing on the establish the relationship between education and impact achieved from private sector engagements improved economic opportunities for women. have been produced;34 however, this is still a relatively Rather, within their thesis, they could reference and immature field, with room for improvement in link to external evidence, already conducted, which terms of better dissemination and application of establishes the basis for this linkage. By helping to robust knowledge, as well as identifying and closing anchor the impact thesis, it can also influence the knowledge gaps. Below is a simple evaluation evidence types of investments made (doing), the types of process (Theory of Change), which can guide both the impact data collected (checking), and feed this back individual impact investor, but more importantly, guide into what has been learned (adjusting). the impact investing community. There are multiple resources available that impact Box H.1 below is an example case about completed investors can tap into for existing evidence evaluations that illustrates the last part of the change including: the MDRC, a non-profit, social-policy pathway. Box H.2 provides an example of a Theory research organization; the Abdul Latif Jameel of Change that shows how evidence is mapped to Poverty Action Lab (J-PAL); and Innovations for illustrate the first half of the change pathway. Poverty Action (IPA). Additionally, initiatives Within the proposed evidence evaluation process like the GIIN’s Navigating Impact35 project, are illustrated in the figure above, we want to highlight pulling together examples of rigorous evidence, and four key considerations important for impact investing connecting these to the common impact objectives industry participants as they build the needed of impact investors. evaluative evidence base: Larger, established impact investors are playing a 1. Acknowledging the role of both evidence users critical role as evidence users, but also as producers. and producers. Producing (and using) rigorous The MDBs and DFIs, given their current majority impact evidence must not become a market entry share of impact investing in emerging markets, their barrier. Most private impact investors may find it long track record of investing for impact, and their easiest to use existing evaluation evidence when public ownership structures, are in a unique position developing their impact thesis/framework. For to collectively take the lead in developing and example, an investor in girls’ education would not sharing evaluation evidence to ensure the credibility need to conduct their own rigorous evaluation to and effectiveness of capital allocations, and also to help scale the market. Beyond the evidence 33 IFC, with inspiration from Shah et al. 2015. 34 IFC’s internal database for demand-driven self-evaluation contains more than 300 completed evaluations from the last 10 years. 35 GIIN. https://navigatingimpact.thegiin.org. 16 CREATING IMPACT The Promise of Impact Investing produced within the impact investment industry, Improved understanding of how changes occur, and public institutions, philanthropy foundations, and what role the investor plays, are critical to increase academia can also play a role in the producing and effectiveness within impact investing. Applying a sole sharing of evidence as a public good, which will versus partial attribution37 criterion to determine the facilitate private impact investors achieving greater value of the evidence is, for most impact investors, of positive outcomes. little practical value and thus not in demand,38 and 2. Causality is key, and investors should focus for good reasons. Most impact investors do not work on partial,36 rather than sole, attribution. in solitude with the investee enterprise, and many Impact was defined as causality in Section 1, and key influencers are engaged within an open complex contribution was established as a key attribute of dynamic context, making attribution analysis impact investing and should thus be a clear focus challenging, time consuming, and often costly. It point in creating the evidence base at a micro level. is excellent if sole attribution can be established, BOX H.1 Case Example: Increasing Women-owned Business Banking in Pakistan In Pakistan, in 2011, only 3 percent of the female population had access to a bank account, and women- owned businesses faced a credit gap of $179 million. Pakistan was ranked 135 in the Global Gender Gap report of 2013, the lowest in the region, and second-lowest among all ranked countries (136). Since 2006, IFC has partnered with Habib Bank Limited (HBL), the largest commercial bank in Pakistan. The relationship with HBL has been growing through several IFC investment and advisory engagements— the latest being an equity investment and a senior loan (both in 2015). This was the first investment IFC made with the explicit impact thesis to support finance for women-owned businesses. IFC’s additionality included, for example, the provision of long-term U.S. dollar loan funding, as well as capacity building and knowledge transfer through an advisory services program. To date, the financial returns have been very satisfactory, and the equity share was successfully reduced in 2017. Since then, HBL has launched a sub-brand called “HBL Nisa” to target women. At the same time, HBL has set up a women’s business unit, increased key performance indicators (KPIs) for women’s deposits, appointed a diversity manager, and trained HBL staff on gender intelligence. Using quasi-experimental methods, IFC conducted a rapid evaluation to gauge the cause and effect of the gender intelligence program. The evaluation examined the differences between employees who have undergone training compared to untrained employees. Over 13,000 HBL employees were surveyed, with branch level data analyzed for the years 2014–16. This study showed that branches whose managers have been trained in gender intelligence demonstrated a 10 percent increase in the volume of deposits from women-owned accounts when compared to branches with untrained branch managers. This supports IFC’s decision to continue strengthening its initiative within HBL. Source: Hamm, Kathrin; Joseph, Roshin Mathai; Veit, Sebastian; Singh, Sandeep. 2017. Gender Intelligence for Banks—Moving the Needle on Gender Equality. International Finance Corporation Washington, DC. 36 To avoid confusion between investor contribution, as discussed earlier in this flagship report, partial attribution is used here in the same manner as evaluation contribution terminology. 37 Pritchett 2017. 38 Vosmer and de Bruijn 2017. 17 ANNEXES but it should not be a requirement within building To be fit for purpose, more rapid decision-focused, the evidence base for impact investing. In applying cost-effective evaluations need to be prioritized partial attribution, the investor should ensure not to and undertaken. These evaluations can be based overstate claims of impact by making their small or on structured rigorous analysis using, for example, large contribution clear. a process tracing approach;43 a qualitative A range of approaches39 can be used to robustly comparative approach;44 end-beneficiary direct address the question of causality from (quasi) feed-back/experiences; consumer preference/ experimental approaches involving in-depth data behavioral insights; or econometric in-output collection, through to more qualitative theory-based statistical analysis, focusing on jobs and GPD studies.40 growth.45 The traditional multi-annual impact evaluations should still be conducted, where 3. Investors should design fit-for-purpose appropriate, and fit for purpose, based on the approaches to evidence, combining direct, objectives and resources of the investor. These are decision-focused, and more knowledge- of particular value when performed within larger focused evidence methods. There are strategic, selected, and global knowledge-producing fundamental differences between engagement in and sharing programs.46 public sector reform and private sector investments, with implications for the design of impact evidence 4. Evidence from evaluations should prioritize a approaches. Within impact investing, the relatively learning focus. Evaluations have traditionally had shorter management decision timeframe, the the dual purpose of accountability and learning.47 investment time horizon, and the often smaller Within private impact investing, accountability investment value, limit the value of often- to the end beneficiaries and society is clearly an costly, multi-annual, larger (quasi) experimental important aspect, but it is inherently different from impact evaluations. These statistically compare a public sector accountability.48 In private impact “treatment” group to a control group with similar investing, it should largely be addressed by the characteristics, based on baseline (at entry) and end clarity and credibility of the operational impact line data (ex-post) for both groups, and they have management systems and the processes adopted by risen to prominence as part of a global learning the impact investor. At this early stage of exploring agenda.41 Beyond the high cost of these evaluations, the impact investment market, risk taking and there is the risk that the business and market have innovation are important, and the choice of evidence, moved on before evidence is produced, and its study design, as well as the finding formulations and lessons are no longer relevant.42 dissemination, should prioritize delivering on this critical market learning imperative. 39 Picciotto 2017. 40 Jackson 2013. 41 Shah et al. 2015. 42 However the impact investor and business also has to balance the need for rapid evidence and the time it takes to achieve long-term sustainable impact. 43 Bennett 2010. 44 Ragin 1987. 45 In/output modelling analysis focusing on jobs and GDP growth have gained momentum across DFIs in recent years. 46 Examples of programs: Mastercard Foundation/IFC: Financial Inclusion Africa; and GAFSP (Global Agriculture and Food Security Program) a multilateral financial intermediary fund. 47 See World Bank Group Evaluation Principles. Forthcoming April 2019. 48 Simon 2014. 18 CREATING IMPACT The Promise of Impact Investing BOX H.2 Case Example: Theory of Change with Evidence Mapped— Linking SME Banking to Poverty Reduction and Shared Prosperity This Theory of Change (ToC) with evidence mapped for SME banking was undertaken through collaboration between IFC’s Sector Economics & Development Impact Unit and an external consulting firm; and the Financial Institutions Group (FIG), an industry association. The two main objectives were to: (a) strengthen the ex-ante impact potential assessment, and (b) guide the IFC evaluation agenda in SME Banking. FIGURE H.2 The Power Sector’s Project and Market Impact Channels CLIENT FI OUTPUT CLIENT FI & CUSTOMER (BORROWER) MACROECONOMIC IFC INPUT MARKET IMPACT TWIN GOALS WITH IFC SUPPORT OUTCOME IMPACT The development of the above ToC was based on: (a) a review of key IFC FIG strategy documents and board papers; (b) consultation with FIG industry specialists, investment officers, and advisory experts engaged with SME banking interventions; and (c) a scan of the existing literature. This included IFC Rapid Evidence Mapping (REM), which is based on an adapted guideline from the U.K. Government Social Research Unit’s Rapid Evidence Assessment Toolkit. This research aimed to map, assess, and communicate the evidence about what works and what is required for it to work. The evidence mapping suggests that many studies show supportive evidence for the impact that SME lending has on SME growth and wider macro-economic outcomes; however, the evidence base is not, by and large, comprised of studies with credible approaches to identifying causal relationships. Furthermore, the hypothesis that SME lending improves client outcomes would benefit from better definition and more testing across multiple contexts. Source: IFC 2019. Unpublished material. 19 ANNEXES Annex I: Legal Disclosure Relevant to Section 2.3 The following notice pertains to the disclosure of by a fund; auditing and financial reporting; possible the Partners Group PG Life impact measurement lack of diversification; control issues; financial framework. market fluctuations; illiquid investments; mezzanine This information contained herein is for discussion investments; real estate; hedging risk and adjustment of purposes only and is not an offer to sell or solicit an the relative value weights by the general partner. offer to buy an interest in a fund. It is not intended In the event an investor in a fund defaults on its that it be relied on to make any investment decision. obligation, a fund might be unable to pay its funding The information is not to be published, reproduced obligations to one or more of the investment funds and and redistributed in any form by recipients without thus be deemed to be in default. In such an event, a fund, the prior consent of Partners Group AG or its relevant and therefore all investors in a fund (including those not affiliate (generally, “Partners Group”). Each person in default), could become subject to consequences that accepting this presentation thereby agrees not to may result in significant penalties that could materially distribute it to any other party and to return it adversely affect the returns to investors. promptly upon request. A private offering of interests An investment in the fund shall not grant any investor in a fund will be made only pursuant to a confidential rights (including voting rights) with respect to the private placement memorandum (PPM) and the investments made by the fund. A fund’s investments, applicable fund’s subscription documents, which will or institutions related to a fund’s investment, may have be furnished to a limited number of qualified investors other business relationships with the general partner of on a confidential basis at their request in connection such fund or its affiliates. with such offering. The information contained herein Investors will not have an opportunity to evaluate the will be superseded by, and is qualified in its entirety terms of a potential investment by the fund prior to by reference to, the PPM, which contains information the fund making such investment. 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An investment is not a deposit and is not insured by the federal deposit insurance corporation or investors and, in any event, an investment in a fund should constitute only a limited part of an investor’s any other government agency or by Partners Group. total portfolio. Investments in any fund are speculative and will Partners Group and its affiliates do not provide tax involve significant risks, including loss of the entire advice. Nevertheless, to ensure compliance with investment and lack of transparency. Before deciding requirements imposed by the U.S. Internal Revenue to invest in a fund, prospective investors should pay Service, we inform you that, unless specifically particular attention to the risk factors contained in indicated otherwise, any US federal tax advice the PPM. Investors should have the financial ability contained in this communication (including any and willingness to accept the risks inherent in a fund’s attachments) is not intended or written to be used, investment. and cannot be used, for the purpose of (a) avoiding Certain significant risks include, but are not limited penalties under the Internal Revenue Code or (b) to: lack of operating history; economic, political and promoting, marketing or recommending to another legal risks; currency risk; leverage risk of borrowing party any transaction or matter addressed herein. 20 CREATING IMPACT The Promise of Impact Investing Certain information contained herein has been assurance that any fund will achieve its targeted obtained from sources Partners Group believes to be results. Certain information contained herein reliable. Partners Group does not undertake to update constitutes forward-looking statements. Due to various any information contained in this presentation. Any risks and uncertainties, actual events or results or forecasts provided herein are based upon Partners actual performance of a fund may differ materially Group’s opinion of the market and are subject to from those reflected or contemplated in such forward- change at any time. looking statements. As a result, investors should not Investors should bear in mind that past performance rely on such forward-looking statements in making is not indicative of future results. There can be no their investment decisions. 21 ANNEXES Annex J: Regulatory Environment for Impact Investing in Select Jurisdictions This annex reviews the regulatory environment in from 100 companies, previously). By 2020, the China select jurisdictions as it pertains to allowing fiduciaries Securities Regulatory Commission (CSRC) will require to pursue additional objectives, such as social and all listed companies to disclose the environmental risks environmental impact, alongside financial return. These associated with their operations.50 regulations are typically related to the consideration of ESG risk factors in the investment decision. Such European Union regulations are relevant to the extent that impact The European Union has embarked on a comprehensive investors use ESG criteria to select investments. program to integrate ESG considerations into pension fund investment policy and reporting requirements Asia for all member states. These policies are addressed in Responsible investment in Asia is addressed by various the 2016 update to the Institutions for Occupational Stewardship Codes, which introduce principles of Retirement Provision Directive (IORP II). IORP II responsible investment, and also specific initiatives of requires member states to allow IORPs to (a) consider regional stock exchanges. Over the past four years, ESG factors and invest for the long term; (b) consider six Asian economies—Hong Kong SAR (China), ESG factors in their governance and risk management; India, Malaysia, Singapore, South Korea and Taiwan and (c) disclose in the statement of investment (China)—revised or introduced Stewardship Codes principles how ESG factors are considered and reported regarding responsible investment by institutional to beneficiaries. Note, however, that according to IORP investors, including recommendations on voting policy, II, member states do not have to require pension funds engagement, and reporting requirements.49 to consider ESG factors.51 National stock exchanges have also recently clarified The 2017 proposal on Pan-European Personal Pensions reporting requirements regarding material ESG Products (PEPP), a plan to create unified standards factors. The Singapore Stock Exchange (SGX), the for member states’ smaller pension plans, encourages Hong Kong Stock Exchange (HKEX, Located in Hong PEPP providers to consider ESG factors in investment Kong SAR, China) and the Taiwan Stock Exchange decisions and risk management systems, but does not (Located in Taiwan, China) have published disclosure require that they do so.52 However, regulators are and reporting requirements on ESG factors for all considering taking this additional step: a report issued listed companies. The Financial Services Authority of by the EU High Level Expert Group in January 2018, Indonesia (OJK) is requiring all financial institutions, recommended that regulators clarify “that fiduciary issuers, and public companies to prepare an annual duties of asset owners should include integrating sustainability report starting in 2019. The Securities environmental, social, and governance (ESG) and Exchange Board of India (SEBI) recently extended considerations into decision-making” and that EU its mandatory reporting requirements on ethics, human directives “should link investor duties to the investment rights, and environmental protection, to the top 500 horizon of the individuals they serve and to their largest listed companies by market capitalization (up ethical preferences.”53 49 See “Singapore Stewardship Principles for Responsible Investors,” November 2016; “Stewardship Principles for Responsible Investors,” Taiwan (China), July 2016; “South Korea Stewardship Code: Principles on the Stewardship Responsibilities of Institutional Investors,” December 2016; “Hong Kong Stewardship Code: Principles of Responsible Ownership,” March 2016; “Insurance Regulatory & Development Authority (IRDA) Stewardship Code for Insurers,” March 2017; Malaysia Code for Institutional Investors, March 2014. 50 Sustainable Stock Exchanges Initiative 2018. 51 E.U. 2016. 52 Eatock 2018. 53 EU High-Level Expert Group on Sustainable Finance 2018. 22 CREATING IMPACT The Promise of Impact Investing The EU also requires companies to report on ESG Netherlands factors material to their businesses, which may aide Regulations on pension funds in the Netherlands asset managers and pensions in measuring the impact include a duty to report on responsible investing performance in their funds. In 2017, the European practices, and to collaborate with beneficiaries in Commission released non-binding guidelines shaping investment policy. The “Code of the Dutch on “methodologies for reporting non-financial Pension Funds” includes three standards, numbers 27, information” for companies with 500 employees or 28, and 29, aimed specifically at outlining the role of more. 54 In principle, such regulation will make it fiduciaries on responsible investing. The provisions easier for impact investors to select investments in state that pension funds must consider long-term large companies. liabilities, acceptable levels of risk, and mission characteristics when seeking to optimize returns; Japan must document and report to stakeholders their Japan issued a number of new regulations relevant to considerations with respect to responsible investing; responsible investment in 2017. The Stewardship Code and must engage with stakeholders to ensure input and was revised and published in May 2017, promoting support for responsible investment policies.57 engagement between institutional investors and The Pension Act also contains a provision on reporting portfolio companies to “enhance medium- to long-term requirements for responsible investing, stating “pension returns and improve investee companies’ sustainable funds must explain in their annual report how their growth prospects.” Material ESG factors are investment policy takes account of issues relating to considered an essential part of this engagement process. the environment, climate, human rights and social The Stewardship Code further clarifies the relationship relations.” In addition, Dutch law prohibits pension between asset owners and asset managers regarding funds from investing in businesses that produce responsible investing, noting that “asset owners have a cluster munitions, use child labor, or violate human duty to make clear their intentions and to assess asset rights, and the government has empowered the Dutch manager performance without placing undue emphasis Pension Fund association to produce guidelines for on short-term performance.” Asset managers are implementing, monitoring, reporting, and evaluating required to “provide services as expected,” and report responsible investing policies.58 in clear and concise terms to their clients.55 Some Dutch pension and sovereign funds have been In addition, the Ministry of Economy, Trade and leaders in responsible investment. For example, in Industry released the “Ito Review 2.0” in May 2017, December 2018, 70 Dutch pension funds, with assets of including recommendations on environmental and social $1.2 trillion, signed a covenant with non-governmental issues.56 Finally, a significant development occurred in organizations (NGOs), trade unions, and the Dutch July 2017, when Japan’s Government Pension Investment government, pledging worldwide co-operation on Fund (GPIF), the world’s largest pension fund with sustainable investment, specifically to exert worldwide assets of $1.6 trillion, executed its first ESG-compliant influence on policies and outcomes related to human investment with a $10 billion allocation to three passive rights, labor conditions, and the environment.59 ESG indices in Japanese equities. 54 European Commission 2017. 55 Financial Services Agency and Tokyo Stock Exchange 2017. 56 Ministry of Economy, Trade and Industry 2017. 57 Federation of the Dutch Pension Funds and the Labour Foundation 2014. 58 De Nederlandsche Bank N.V. 2016. 59 Preesman and Van Alphen 2018. 23 ANNEXES United Kingdom An April 2018 bulletin also reiterated a longstanding view that, “because every investment necessarily The United Kingdom has introduced new regulation causes a plan to forego other investment opportunities, regarding responsible investment over the last few plan fiduciaries are not permitted to sacrifice years. In June 2018, the U.K. government issued a investment return or take on additional investment report responding to recommendations from the risk as a means of using plan investments to promote Law Commission regarding pension funds and social collateral social policy goals.” By cautioning against investing. The report codified into law several concepts, investments that might “sacrifice” returns or that may including a requirement to consider long-term returns promote “collateral social policy goals,” the guidance and risks, rather than short-term performance; appears to prohibit fiduciaries from pursuing impact clarification that material ESG factors should be investment strategies that seek anything less than considered as financial, rather than non-financial risks; commercial return. requirements that social concerns of beneficiaries be incorporated into investment policy; and an edict The 2018 bulletin also recognizes a key finding in the that trustees make a statement and report on social literature, that many ESG factors may not be predictive investing policy.60 of financial return, suggesting that “fiduciaries must not too readily treat ESG factors as economically The government also agreed to support pension relevant to the particular investment choices at issue providers, academics, government agencies, and when making a decision…. Rather, […] fiduciaries must industry participants to work toward a common always put first the economic interests of the plan.” terminology for social investments in order to develop Another provision of the 2018 bulletin, regarding examples of good practice for impact reporting.61 publishing a statement on responsible investing practices, says that “investment policy statements United States are permitted, but not required, to include such Guidance from US regulators on responsible investment guidelines,” and if the investment policy does include permits fiduciaries to consider material ESG risks, but such guidelines “it does not imply that fiduciaries cautions them against the sacrifice of return in the managing plan assets always have to adhere to them.” pursuit of social or environmental goals. While this Finally, the 2018 bulletin notes that shareholder action guidance does not, as a consequence, prohibit impact (which may be used to pursue impact goals) may be investment, which may seek to achieve commercial costly, and “warrants a documented analysis of the cost returns commensurate with traditional investment of the shareholder activity compared to the expected strategies, such guidance does make the pursuit of economic benefit (gain) over an appropriate investment impact investment strategies seeking sub-commercial horizon.”63 return more challenging. In October 2015, the key regulatory body for U.S. public pension funds, the U.S. Department of Labor, issued a bulletin clearing a path for pension funds to consider ESG risk factors, stating that “environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment” and in such instances are “proper components of the fiduciaries primary analysis of the economic merits of compelling investment choices.”62 60 The Law Commission 2017. 61 Department for Digital, Culture, Media & Sport and Department for Work and Pensions 2018. 62 Department of Labor, Employee Benefits Security Administration 2015. 63 U.S. Department of Labor, Employee Benefits Security Administration 2018. 24