Asset allocators may have different risk appetites, thematic interests, and investment resources. But when it comes to evaluating an impact fund manager, there are some universal best practices that allocators expect.
BlueMark, together with CASE at Duke University, recently collaborated to develop guidance aimed at driving more rigor and consistency in how asset allocators evaluate and manage impact-focused private market funds. This work included interviewing more than 50 leading Limited Partners (LPs) and General Partners (GPs) to better understand what allocators consider table stakes when evaluating an impact fund.
According to the research, asset allocators expect fund managers to demonstrate impact capabilities across four key areas: impact strategy, impact management, impact capabilities & resourcing, and impact reporting & disclosure.
How a manager measures up across these four areas could mean the difference between the decision to invest (or not). Read on to discover what leading practitioners had to say about each of these categories.
Impact strategy
A manager’s impact investment strategy should include a clear set of measurable impact objectives (i.e., how a GP defines success) and an impact thesis that links the investment strategy with those objectives.
According to Anna Snider of Bank of America, it’s critical that a GP can easily describe their sustainability or impact objectives, and further describe the actions they will take to demonstrate they are committed to meeting those objectives. Kaisa Alavuotunki of Finnfund expressed a similar sentiment, saying that she looks at the centrality of impact in the GP’s investment strategy.
Meanwhile, as part of the due diligence process at Big Society Capital (BSC), the team breaks down the impact thesis provided by the GP across the Impact Management Project’s Five Dimensions of Impact, and then provides funds with instruction and guidance on how to strengthen their thesis. BSC also looks at the fund’s approach to systems change, their financial thesis, and their impact thesis simultaneously to determine where alignment can be strengthened.
Beth Bafford of Calvert Impact Capital said the more context the GP can give using data and evidence of both the problem and the likely investable solution set, the more confidence she has in their impact strategy.
Impact management
Asset allocators also want to understand how well a GP has integrated r impact considerations into their operational processes across the investment lifecycle. This includes everything from how rigorously the fund assesses prospective investments for impact to how they establish and monitor impact KPIs to how they engage with companies to drive results.
Leah Nguyen of InBC Investment Corp shared that her idea of a “gold star GP” is one that has established very clear, measurable KPIs that align with their impact thesis. Caprock’s Mark Berryman looks for similar qualities in a GP, including evidence of data collection processes and healthy communication between an asset manager and its portfolio companies around impact objectives and performance.
Several LPs also said that seeing a GP using market-accepted resources for ESG and impact management —like the ESG Data Convergence Initiative (EDCI) or the Operating Principles for Impact Management (Impact Principles)—as a framework for their process is a “green flag.” Tom Mitchell of Cambridge Associates said seeing funds using industry best-practice tools can serve as a proxy for good management.
Team capabilities and resourcing
Naturally, asset allocators want to know that a GP has the right team with the right capabilities to successfully execute on an impact strategy. After all, investing for impact can be challenging for even the most experienced and sophisticated of managers.
Mark Berryman of Caprock said it’s advisable to look for people on the GP’s team with experience in impact. Another LP often asks if the GP is hiring specialists, and explores how the team has evolved over time. Several LPs mentioned the GP should not have just a dedicated resource focused on impact, but also involvement from the top down.
Allocators aim to hold managers accountable, although their approaches to doing so vary. Azalea Investment Management expressed a strong preference for the GP to have a team and management incentive structure linked to the achievement of specific impact targets. Stefan Luegstenmann of LGT Capital Partners encourages GPs to establish impact-linked incentives, but noted that GPs must be careful in how they structure them. In his view, if an impact fund pursues both impact and financial targets, impact-linked incentives should aim to optimize both, rather than maximize one or the other. If the impact incentives are too strong, it could lead to too much risk taking on the financial side, and vice versa.
Impact reporting and disclosure
As the impact investing industry has grown and matured, many allocators expect managers to routinely report on impact performance and to disclose any challenges or lessons learned in the pursuit of impact results.
Anna Snider of Bank of America said they don’t prescribe the types of reports a GP must produce or the voluntary disclosure frameworks they must use (i.e., SASB, GRI, etc.), but they will advise GPs as to which metrics might be helpful complements to those they are already using, especially drawing on the reporting they’ve seen from other GPs.
Alisa Chhoa of Azalea Investment Management explained that while they require all GPs to report on a set of common metrics (e.g., GHG metrics), they also allow GPs to determine and report on their own metrics for other issues. Mark Berryman of Caprock said his firm uses a similar process; while they don’t insist that all GPs adopt a common reporting framework, they find it works to pre-agree on a set of metrics and a cadence for reporting while remaining flexible with the forms those can take. The reporting framework needs to work for the GP and its portfolio first and foremost. Hopefully, it can then be comparable through the usage of the same or similar metrics of other GPs investing in the same industry.
Leslie Kapin of Astanor Ventures stated that it is really important for LPs to remember that collaboration is key instead of individually pushing for their preferred impact reporting requirements. Just as Astanor [as a GP] is reaching out to co-investors to align on data requests so as to not burden their portfolio companies, she said it would be great to see LPs doing the same.