Impact measurement: a five-step guide for investment managers
Define and meet your sustainability goals while complying with regulatory requirements
Authors:
Don Gerritsen: Responsible Investment Leader, Deloitte EMEA
Bas van't Hooft: Manager, Deloitte
Jonathan Wiedeman: Manager, Deloitte
Performance Magazine Issue 44 - Article 2
To the point
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Impact measurement allows financial institutions to boost their sustainable investing maturity by quantifying a given investment's positive and negative sustainability impacts. Investors use impact measurement to assess realized versus intended impacts, enabling informed decision-making, risk mitigation, and potentially more stable returns.
A sound impact measurement system helps investment managers effectively communicate with stakeholders, attract clients prioritizing value-aligned investments, enhance their reputation, and foster loyalty. It also allows firms to comply with sustainability regulations, such as the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR).
The processes for quantifying the positive and negative sustainability impacts of investment decisions differ from the traditional quantification of financial returns. One significant challenge is determining which areas to focus on, which is where Deloitte’s five step investor impact cycle comes in.
The five-step investor impact cycle
Deloitte’s strategic process allows investment managers to determine their ambitions, measure their impact, and adapt in line with pre-determined sustainability goals by strategizing, planning, acting, reporting, and evaluating and iterating.
1. Strategize: What impact measurement ambitions suit my strategy?
The first step for investment managers is to strategize their sustainability ambitions. This involves aligning their financial goals with positive environmental and social impacts, and setting clear criteria and metrics aligned with regulatory standards like the EU Taxonomy, SFDR, and CSRD. There are several approaches to determining impact, including mandate-based, regulatory-based, strategy-based, or a combination of these.
For example, Deloitte recently helped a financial institution navigate upcoming regulatory updates regarding climate change, while investigating the impact of an external net-zero commitment. High-level estimates of the portfolio’s greenhouse gas (GHG) intensity helped strategize potential transition paths. The client decided to accelerate the growth of the portfolio’s “green” parts to reduce the average GHG, while monitoring additional opportunities to move towards net-zero.
2. Plan: How can I improve my impact as an investor?
Once the sustainability ambitions are determined, the next step is to create a plan. This includes performing a baseline analysis, setting impact ambitions for each asset class, and creating data models.
In today's environment, many organizations struggle to determine how sustainable they currently are. Although global standards and regulations provide some guidance, there isn't a single approach to this issue. Therefore, managers must establish their own baseline, identify relevant impact areas, set success measurement criteria, and formulate a specific plan for each area. Then, they should develop plans for each desired impact area, using the determined baseline to categorize assets.
It is essential to understand the data available and its sufficiency for guiding the business and performing external reporting. In some cases, qualitative or proxy data may be used internally. Once understood, managers should create their data model, data management plan, and investment principles.
For example, a European investment manager has developed a tool to understand the impact of assets on people and the planet, so they can quantify and price the negative and positive impacts of different investments. This allows them to show their clients the impact of their investments and align this impact with their clients’ ambitions. They can also use the tool to steer investment decisions and construct portfolios per their strategy and ambitions.
3. Act: What actions must I take to reach my sustainability goals?
In the third step, investment managers need to act on the plan developed in step 2. Depending on their strategies and goals, this may include stewardship, integrating environmental, social and governance (ESG) key performance indicators (KPIs) into the investment decision-making, and exclusions.
For example, one international asset manager practices active ownership through engagement, voting and stewardship. This involves exercising voting rights on stocks, maintaining a dialogue with the companies invested in the portfolio, and filing resolutions at investee companies. The asset manager also engages with portfolio companies on different levels, including value creation, minimal standards and sustainable development goals engagement. The outcomes of its active ownership are measured using the KPIs set in the plan phase.
4. Report: How can I incorporate my sustainability impact in my organizational reporting?
After incorporating new objectives into the firm's strategy, data collection methods and impact goals, investment managers should include them in their reports in line with SFDR and CSRD requirements. Given the evolving regulatory environment, early and frequent discussions with non-financial assurance providers are necessary to clarify reporting expectations and data quality standards. It’s also beneficial for organizations to develop internal capabilities to help them understand the legal interpretations.
For example, a leading European impact investor publishes an impact report for their investment funds and provides an overview of the progress achieved. The report considers the fund’s impact regarding GHG emissions, water consumed and landfill waste. It also explains the reasons for including and excluding certain companies from the portfolio based on the “do no significant harm” principle. Finally, the report details the portfolio’s impact broken down by SDG and sustainable transition themes it supports.
5. Evaluate and iterate: Did I reach my sustainability goals, and how can I improve?
Once the four steps are concluded, the ever-changing investment landscape requires managers to regularly review their progress. By comparing their outcomes with their set goals, they can identify areas of improvement and realign their impact measurement approach as needed.
Conclusion
Impact measurement is essential to boost investment managers’ sustainability and transparency, while complying with regulations like the CSRD and the SFDR. Deloitte's five-step impact cycle helps investors successfully navigate their impact measurement transformation journey and meet their sustainability ambitions. This leads to better strategy alignment, informed investment decisions, improved stakeholder communication, and easier regulatory compliance.
To find out more about how Deloitte’s Sustainable Investor Framework can help you, please get in touch.
