Measuring impact can be difficult – especially when it comes to investing.
For clarification, it’s important to quickly share our definition of impact investing. Impact investing is investing with the intention of making a positive social or environmental difference.* Though there are various types of impact, this article will focus on decarbonisation as an example.
The goal of decarbonisation is achieving a target reduction in CO2 emissions within a set time horizon.
When it comes to equities we can use a range of key figures to measure decarbonisation. First, we can quantify a company’s current emissions, thus deriving a carbon intensity score. It’s important to note that this metric is only a snapshot in time and doesn’t provide a future projection…
Predicting future emissions in the private sector is difficult thanks to the fact that companies’ efforts to manage emissions can be heavily influenced by external factors (e.g. sector regulations and commodity prices).
With this in mind, one way of identifying positive-impact companies is what’s called the “Top-down and bottom-up approach”. Top-down identifies impactful businesses that center their activities around a product, service, or technology that creates a positive impact. Bottom-up acknowledges the extent to which a business conducts impactful activities, even if its business model is not necessarily focused on impactful initiatives.
There are two challenges in measuring assets with the top-down and bottom-up approach. The first is data availability, which is thankfully being remedied by the emerging trend of company transparency and data disclosure.
The second challenge is understanding the range of impactful activities companies can conduct. For this reason, investors do well to create a set of scoring criteria that they can use to objectively and systematically rate companies on their impact.
Measuring impact is more than just assigning companies a score. It is important to measure any the positive impact an invested company generates, for example, the tons of CO2 emissions avoided, GWh of green energy produced, or litres of water treated.
There are two ways to approach impact measurement
One way is to assess what each company discloses. Another is to approach impact measurement with a systematic top-down perspective. Regardless of the method chosen, any measurements must be linked to a baseline scenario in order to beinterpretable.
A combination of top-down and bottom-up impact scoring creates a systematic way of identifying positive impact investment opportunities. However, the score does not reveal the exact impact generated by the activities of the invested companies.
Measuring impact is more than just assigning companies a score. It is important to measure any positive impact an invested company generates, for example, the tons of CO2 emissions avoided, GWh of green energy produced, or liters of water treated.
To conclude, we can measure impact in two ways – either ad hoc line-by-line or systematically from a top-down perspective. The former is most useful for clearly defined projects, whereas the latter provides a solution for coherently measuring impact across a company’s entire supply chain.
*Source: Investopedia
