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Responsible Investing

Quantifying impact: measuring and managing effects on people and the planet

Hannah Schiff
Director, Responsible Investing
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Highlights
  • Impact investing is growing rapidly, with rising demand for strategies that go beyond traditional responsible investing to produce positive environmental and societal benefits while generating market-rate returns.
  • Measuring and managing impact is important to better understand the effect of these investments, but data on impact is inconsistently reported and can be hard to find.
  • Implementing effective impact measurement and management strategies yields greater insight and may produce better results for investors, communities and the environment.

Key terms
  • Impact: Long-term positive and negative social and environmental results. Examples of impact objectives include improved health outcomes and preservation of natural resources.
  • Impact investing: The intentional pursuit of positive, measurable social and/or environmental impact alongside a financial return.
  • Impact measurement and management (IMM): The process of setting objectives, establishing targets and using data to assess and manage progress towards those goals.
 

As responsible investing (RI) moves into the mainstream, investors are increasingly looking for strategies that go beyond traditional environmental, social and governance (ESG) principles to produce measurable benefits for people and the planet. In response, many RI programs are now expanding to embrace what are known as “impact investing” strategies. While traditional responsible investing aims to integrate a range of ESG factors that can mitigate risk and improve performance, impact investing is a distinct approach that seeks specific positive environmental and social benefits in addition to market-rate returns.

While assessing financial returns is relatively straightforward, measuring the social and environmental benefits of an investment is not as clear-cut. Assessing whether the desired outcomes were achieved is critical to managing toward investment and impact objectives.

Although there is no universal process for impact measurement and management, standards are improving, and there are industry best practices that have emerged through organizations such as the Global Impact Investing Network (GIIN).

According to the 2019 GIIN Annual Impact Investor Survey, 83% of impact investors agree that measuring and managing impact is very important for better understanding the impact of their investments (see Figure 1). But data on impact is inconsistently reported and can be hard to find. The first step to tackling this challenge is determining what information is needed. For example, investors seeking to make an impact with their investments by expanding access to basic services such as health care, education and financial services must determine which populations need access and how they will know if their investments are reaching those populations. This might require a combination of individual metrics to create a key performance indicator (KPI), such as “number of underserved customers provided access to financial services.” Useful starting points for identifying metrics and KPIs include the targets of the UN Sustainable Development Goals (SDGs)and industry tools such as IRIS+, which is one generally accepted system for measuring and managing impact.

Figure 1: Reasons for measuring and managing impact

The specific KPIs chosen depend on the investment strategy, but good impact indicators tend to have a few characteristics in common. First, they are relevant to the core business of the issuer or investee. This ensures that impact measurement will yield useful information for managing investments and increases the likelihood that the data will be available. For example,socioeconomic and location information about customers not only sheds light on the impact of goods and services sold, it can also aid in market segmentation and pricing. Second,indicators should provide meaningful insight into the various dimensions of impact — such as the key benefit, who benefits, to what extent and for how long. Multiple metrics may be required to achieve this — such as how long a product lasts in addition to the number sold. And lastly, aligning metric definitions with industry standards reduces reporting burdens and enables comparability across investments and portfolios.


Measuring impact across asset classes

Determining the type of information to be measured is only part of the equation. Methods of measuring impact must be appropriate for the investment strategy and asset class. For example,in private equity or debt investments,investors may obtain impact information through private reports and ongoing engagement, which may involve a board seat. Investment managers may also negotiate to include impact KPIs as part of the investment documentation. Meanwhile, in public fixed income, impact can be generated by purchasing bonds that finance projects benefiting people and the environment. Issuers of such bonds include government agencies, international development banks and corporations undertaking green or social projects. Investment managers interact with these bond issuers primarily at the time of purchase and must often rely on issuers’ publicly available reports for impact information post-investment.

Integrating impact considerations in listed equities investments has been a subject of debate in the impact investing industry for some time.Listed companies are often involved in a wide range of business activities — some of which may have positive impact while others create negative effects. Furthermore, the challenges of efficiently obtaining consistently reported information are heightened by the large number of listed companies in most investor’s portfolios. Yet given the scale and importance of listed equities within investment portfolios, ignoring the potential impact opportunities is not a viable option. Emerging technology and data services may be able to help alleviate the currently labour-intensive process of studying the positive and negative impact of public corporations.

Regardless of the asset class, impact measurement and management is an ongoing effort throughout all phases of the investment process. Effective impact measurement and management yields greater insight and may produce better results for investors,communities and the environment.

Nuveen’s approach

Every investment affects communities and the environment, in both positive and negative ways. This belief guides our approach to pursuing and managing the social and environmental impact of our investments. At Nuveen, we have two approaches to impact investing:

  1. Through impact investments, we intentionally pursue specific and direct positive social and environmental impact alongside competitive financial returns. With $4.75 billion in impact investing assets under management across public and private markets, Nuveen is among the largest active impact investors globally.1
  2. We also seek to manage impact across all types of investments by avoiding or mitigating negative effects and promoting benefits wherever possible. Our holistic view extends the concept from impact-focused portfolios to broader consideration across all the assets we manage.
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Our impact measurement and management approach is grounded in credible data and aligned with industry best practices. We rely on the five dimensions of impact designated by the Impact Management Project — a practitioner community defining best practices for measuring and managing impact — to help establish robust impact objectives, and we use the resources in IRIS+ to select appropriate evidence-based metrics. We also align our investments with the UN SDGs, which provide a clear, globally recognized framework that helps define the scale and nature of global problems and identify specific objectives. In addition, we leverage new technology and our big-data proprietary platform to process unstructured data and build new impact datasets. Combined, these practices result in greater insight into impact through analysis that is actionable, useful, and meaningful to our investment teams and our clients.

What are the United Nations Sustainable Development Goals (SDGs)?

The SDGs are a set of objectives for global progress established by the United Nations in 2015 and adopted by 193 countries as a plan of action to achieve a better and more sustainable future for all. Each goal has underlying targets and indicators to track achievement.

Learn more about the goals by visiting: 
un.org/sustainabledevelopment/sustainable-development-goals/

 

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1 As of March 31, 2019.
2 The Nuveen Responsible Investing team developed this report to provide an indication of the aggregate social and environmental impact created by the projects and organizations
financed in part by the funds. Given the difficulty of attributing impact in proportion to the size of the funds’ share of each bond issuance (which ranges from 0.001% to 100%),
the data reflect total impact generated by the project, program, or issuer rather than the funds’ share alone. The report represents bonds that are classified under the funds’
impact framework and for which relevant data are available. All impact data are sourced from publicly available issuer disclosures at the bond or project level when possible,
or the program or issuer level if not. Metrics selected for each impact theme reflect the information most commonly reported by issuers, and each metric includes data from
between 2 and 34 bonds. In cases where the funds has a large position in a certain issuer, we prioritize selecting metrics reported by that issuer.

Risks and other important considerations
This material is provided for informational or educational purposes only and does not constitute a solicitation of any securities in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. 

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen may be included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Nuveen to be reliable, and not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Company name is only for explanatory purposes and does not constitute as investment advice and is subject to change. Any investments named within this material may not necessarily be held in any funds/accounts managed by Nuveen. Reliance upon information in this material is at the sole discretion of the reader. Views of the author may not necessarily reflect the view s of Nuveen as a whole or any part thereof. 

Past performance is not a guide to future performance
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This information does not constitute investment research as defined under MiFID.

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