Measurement of impact investment needs to be independent – EU report

New report commissioned by Directorate-General Environment

It’s vital that the measurement of impact investment is independent to ensure trust in the data, according to a paper commissioned by the European Commission.

The paper, Future Brief: Environmental impact investment, is commissioned by the European Commission’s Directorate-General Environment and is written by the Science Communication Unit at the University of the West of England, Bristol.

The report cites Eurosif figures that impact investment – with a 385% growth rate between 2013 and 2015 – is the fastest growing socially responsible investment sector in Europe.

It describes impact investment as the fast growing strategy for socially responsible investment in Europe and says policymakers are looking at ways of enhancing socially responsible investment’s potential to increase the sustainability of society and business practices.

It says measurement of impact is central to impact investment to understand the ‘additionnality’ of an investment but says a major issue is ensuring trust in data on the environmental performance of investees or funds.

“These factors,” it says, “may limit the transparency and accountability of investment.”

Focusing on impact bonds, where private investors can gain a financial return if measured outcomes (such as reducing reoffending) are met, the report says there is a strong incentive for positive evaluation results.Though the impact bonds model have to date focused on social issues, the paper says there is strong potential for ‘environmental impact bonds’.

But the report also notes: “To date, there appear to be few evaluations of social impact bonds’ impact, but those that have been evaluated have been ‘somewhat successful’.”

Speaking to Responsible Investor, Andreas Hoepner, associate professor of finance at the CMA Centre of Henley Business School in the UK, who contributed to the report, said it was the start of a debate around the nascent impact measurement world on conflicts of interest. In the report he says: “assessment of investment impact will be more reliable if it has not been paid for by the organisation being assessed, as well as independent.”

He added that the report was part of a trend of different Directorate-Generals in the European Commission looking at sustainable investment issues. Most recently, the Commission has set up a High Level Expert Group on Sustainable Finance, tasked with helping “hardwire sustainability into EU financial policy”.

The report also says policy makers have a key role in creating a more conducive environment for impact investment to thrive, by supporting market infrastructure and mechanisms. It gives examples such as commissioning social/environmental impact bonds, supporting transparent and reliable sources of impact data and supporting the set-up of social stock exchanges and secondary markets for impact investments.