Measurement Process in Impact Investing: State of Practice in Europe

Abstract

This study addresses the state of impact investing practices and influence in selecting stock for an investment portfolio. It explores similarities between impact measurement practices currently used among impact investors in Europe. Impact investing is a fast developing investment strategy with a wide variety of measurement practices that set challenges for both investors and investees. Previous studies have indicated that the link between performance measurement practices of different impacts need to be further investigated. A quantitative study based on data gathered from a survey was sent to impact investors in Europe. The study was divided into two parts. The first part tested the strength of impact measurement processes of different groups under the main hypothesis and two sub-hypotheses. The main hypothesis argues that among investors in Europe, those investing in both social and sustainability projects have stronger impact measurement processes than those investing only in either social or sustainability projects. Sub-hypothesis 1 argues that among investors in Europe, those who manage a portfolio of more than 100 million euros have stronger impact measurement processes than those who manage a portfolio of less than 100 million euros. Sub-hypothesis 2 argues that among investors in Europe, fund managers have stronger impact measurement processes than other impact investors. The second part of the study provided a more detailed analysis over impact investors’ impact measurements processes. The results showed that the state of impact measurement practices in Europe is underdeveloped for three reasons. Firstly, hypotheses testing did not show statistically significant variance between different impact investors. The main hypothesis (t= 0.0009; p=0.9993), sub-hypothesis 1 (t=1.0224, p= 0.3182) and sub-hypothesis 2 (t= 0.5583, p= 0.5825) were all rejected. However, according to the cumulative distribution function, investors investing in both social and sustainability projects, investors managing over 100 million euros, and fund managers performed better on the survey than others. Secondly, the average impact measurement process uses all six process steps and 18 themes but less than half (47.4 percent) of all process parts. Thirdly, none of the respondents are using a comprehensive impact measurement process. The average score for the total impact measurement process totaled 8.936, representing 49.6 percent from the total score. In addition, the scores for the individual impact measurement processes varied from the highest 12.050 (66.9 percent) to the lowest 2.000 (11.1 percent). The study found four development themes that will increase transparency and trust in impact investment projects and thus accelerate growth for the whole impact investing field. These development themes are: decreasing the costs and resources required to measure impact, measuring additionality and attribution, increasing the level of communication between investors and investees and encouraging investors to use external auditors to verify impact data.