Interest in sustainable investing has never been higher. Read on to find out how we’re making quality impact reporting available to all – and how you could get involved.
‘Socially Responsible Investing’ or ‘Sustainable Investing’ made up $30.7 trillion worldwide in early 2018, having increased by 34% over the previous two years. Within that total, the global ‘Impact Investment’ market was sized at $715 billion in assets globally by the Global Impact Investing Network’s 2020 survey.
However, despite this huge and growing pool of capital, it is difficult for investors and lenders to fully embed impact-related considerations into their decisions. There is a clear gap between the types of information being provided by companies and the types of information needed by investors to make data-driven investment decisions. To begin with, today’s ESG (Environmental, Social and Governance) initiatives don’t define what it means to be truly sustainable – and therefore do not clearly identify what ‘positive’ and ‘negative’ impact really means.
To help address this need, Future-Fit Foundation partnered with Shell Foundation to test the hypothesis that the Future-Fit Business Benchmark – a science-based methodology identifying what it actually means for companies to be ‘truly sustainable’ – could help SMEs understand their holistic set of positive and negative impacts, and explain those impacts in the context of the UN Sustainable Development Goals (SDGs) in a concise, comparable, assurable way.
This case study outlines our approach and findings. It also sets up our further plans for exploring the needs of impact investors, in order to help them better align their capital allocation decisions to maximize beneficial outcomes for people and planet. Our long-term aim is to combine all of these requirements into a universal Impact Benchmarking Tool openly available for any member of the global impact investing community.
The need: Bridging the data gap between impact investors and companies
The difficulties investors face in consistently understanding, comparing and pricing impact and ESG performance mean that capital too often flows to companies with the loudest or most compelling pitch. Impact investors and donors lack the transparent, assurance-ready insight they need on the positive and negative impacts of potential investments, and a way to consistently tie impact and ESG performance to the SDGs.
At the same time, some of the most progressive companies struggle to adequately highlight the societal value of their work, impeding their access to vital investment. SMEs are often resource-constrained, which means that tracking and reporting impact understandably takes a back seat to delivering impact and ensuring their own financial viability. Additionally, social enterprises often face even greater demand for information around their impacts, making them victims of their own success.
Developing a solution: The Impact Benchmarking Tool
The Impact Benchmarking tool (IBT) was developed as part of an ongoing partnership between Future-Fit Foundation and Shell Foundation, following four years of development, two phases of pilot testing and input from numerous mission-driven companies and investors. The goal was to create a beta-version self-assessment tool which companies could use with minimal external support, enabling high-quality and consistently framed impact reporting to be generated in a manner which could, in due course, be scaled. The project saw the development of an end-to-end online system for small and medium-sized enterprises (SMEs) to understand, organize and report ESG data in a concise and comparable way.
In addition to general information about the company, the IBT collected data from two main perspectives: Positive Impacts (“doing good”) and ESG Risks (“avoiding harm”). Companies were guided through an easy-to-understand questionnaire that helped them identify their impacts, enter data to quantify those impacts, and automatically visualize their contribution to the SDGs in an impact report that would be easily digestible for impact investors.
Empowering purpose-driven SMEs
An initial user group of Shell Foundation’s portfolio companies, made up of a mix of SMEs focused on providing access to energy and sustainable mobility, were given access to the IBT to trial the process, create impact reports and provide feedback. The feedback from this testing phase showed that the tool provided an easy and efficient way for SMEs to understand, organize and report their ESG and positive impact data in a consistent and comparable manner. Moreover, many of these companies considered that the ability to clearly communicate their advantages in regard to these topics was a key success component when raising capital.
The IBT guided company users through a Q&A-based approach, which required no prior impact expertise. In fact, 57% of the users had limited or no prior impact experience, but were able, on average, to complete the report in just nine hours. This was due in part to a streamlined process which only prompts users for more detail when relevant to their company. The resulting information was presented via a series of tables and graphs, which could be converted into a PDF report to share with investors at the click of a button.
The process of testing the tool demonstrated several key benefits to companies:
1. Additional insights into impact measurement and management
- The IBT generated both a summary listing all of a company’s impact generating activities and a deep-dive view on each individual impact, which helped companies to understand the connection between their business model and their SDG contributions.
The report links our performance to the SDGs and shows how we are performing in that context. Just showing that we did the work to figure out our contribution to such a global objective reinforces our legitimacy. – Wilhelmina Diop, Customer Care and Marketing Director at HelloSolar
- The Q&A-based approach helped prompt companies to discover positive impacts they had previously overlooked, and effectively communicate these impacts to investors.
One of the things that this tool has helped us to do is actually figure out some of the impacts which we don’t measure now… and that we have more impacts we can add to our impact metrics. – Finance Manager at Shell Foundation portfolio company
- Recognizing the impact report and data gaps provided management with opportunities for stronger tracking of impact data.
This hits three key points: Impact management, succinct reporting, and the ability for investors to track data – this report provides a baseline to track companies’ performance against what they have said they will deliver. Typically, ESG and impact reporting is very unstructured, but this gives a structure for non-financial reporting. – Impact Reporting Specialist
- The tool aligns with the Future-Fit Business Benchmark, which includes publicly available resources and guidance to help companies improve their ESG performance.
2. Improved access to additional and/or lower cost capital
- The reports enable companies to better communicate their positive impacts and engage in conversations with potential investors on their ESG risks. This has proven to be helpful to several SMEs during their fundraising process, demonstrating that the reports generated could open doors to additional capital, such as impact-oriented funds or preferential terms based on ESG impacts and improvement.
I think it’s absolutely brilliant, and look forward to using it in our conversations with investors and funders. – Chief Financial Officer at Shell Foundation portfolio company
3. Reduced reporting effort
- The IBT offered a holistic reporting process, which could save companies time by addressing overlapping data requests from investors.
- The existence of a third-party tool can save companies the effort and uncertainty of designing a proprietary approach, while helping increase report credibility.
- The web-based tool made it easy for companies to access and edit reports and could be used to view improvements year on year.
[The CSV and pdf report] is super helpful, just to be able to put that in a data room, because everyone asks. It’s a very robust way to communicate that we take that data seriously. – Jeff Schnurr, CEO at Jaza Energy
How could this approach serve investors?
The project established that a web-based tool, based on the Future-Fit Business Benchmark, can help companies to generate impact reports for investors which provide an in-depth, holistic understanding of a company’s environmental and social positive impacts and risks.
Our aim now is to further explore the needs of impact investors, to identify what additional capabilities they would need. Work to date has identified two key areas of value which warrant further investigation:
1. Facilitating due diligence of potential impact
- The impact reports highlight the type of positive impacts and SDG contributions a company generates, which could be used by investors to identify target companies aligned with impact goals.
- The report could be used as a high-level ESG screening tool, to help investors identify how a company’s operational systems help them to avoid causing negative impacts, as well as flag data gaps.
- The low-touch financial integration and analysis incorporated into the tool (see Figure 5) could help investors understand how much positive impact a company generates and what is the potential impact of their investment.
- Although the data-inputting process relies on self-reporting, it includes features which help create an “audit trail” to facilitate third-party assurance.
2. Enabling portfolio- or fund-level impact and ESG monitoring
- The self-reporting approach trialled so far would enable the process to scale.
- The underlying methodology, grounded in the Future-Fit Business Benchmark, is applicable to any industrial sector or stage of company development.
- The individual company view generated could be aggregated, allowing investors to view and monitor portfolio- or fund-level impact performance.
- The detailed, built-in SDG mapping could enable like-for-like comparisons and portfolio-level views of SDG contributions.
- The incorporation of the Future-Fit Business Benchmark’s definition of a sustainable society would help investors benchmark portfolio performance against scientific thresholds.
This project has given us an in-depth understanding of how to translate the
Future-Fit Business Benchmark into a tool to transform how SMEs think about,
manage, and explain their impacts – with the ultimate aim of ensuring that capital flows more effectively to those organisations doing most to respond to today’s global challenges. To learn more about our work so far, or to help us make quality impact reporting available to all, please get in touch at email@example.com.