The new wave of US ESG investing: Impact Capital Managers, the US association that is codifying impact investing principles

The group represents some of the most prominent US impact players

Part of the last year’s work of Impact Capital Managers (ICM), the membership association of some of the most prominent impact fund managers, has been to develop a set of four core impact management practices, the ICM fundamentals, to serve as the baseline expectation for all members. These were presented at the ICM Fall Members Convening last October, but are so new that they have not yet been posted on its website.

ICM’s members include investment funds ranging from around $30m (€25.2m) to over $2bn in assets; a group of 53 funds (soon to be 54), from small teams to funds that are impact arms of much larger, traditional private equity (PE) platforms such as KKR Global Impact and TPG’s The Rise Fund.

“The core impact management practices align closely with some of the Operating Principles of Impact Investment,” said Marieke Spence, executive director of ICM. “The first is ‘having an explicit impact thesis or objective’ – why do you think your investing activity is contributing to positive impact? The second is ‘having an impact process’ – walking through how you are tracking and measuring your impact and how you think that is going to drive your learning about investment performance over time. The third is ‘tracking KPIs [key performance indicators] and outcomes and figuring out how to do that consistently’. The fourth is about the ‘additionality concept’ – ‘understanding what the fund manager’s particular contribution is to the impact’.”

RI asked Spence to explain what the last principle might look like in practice: “An example might be where you have an impact minded venture capitalist help a company understand what the impact drivers of the business are,” she said. “Impact managers can also help portfolio companies source and compete for top talent. And then there’s identification of the right KPIs, course-correcting [adapting to failure, overcoming unexpected obstacles and setting a new course for the investment], and telling the impact story to consumers.”

RI asked for some specific examples. “For example, Vital Farms,” she replied, “the largest producer of pasture-raised eggs in the US, [which recently had a highly successful IPO] initially was counting the number of eggs to measure its impact. ICM fund managers – three of which were early investors in the company – helped them get much more sophisticated about measuring value, understanding the relationship of impact to the business model, and helping to ensure the impact stays intact even after IPO or different ownership.” Counting eggs was described as a ‘vanity metric’; metrics which can be misleading and don’t ultimately help stakeholders understand how impact can drive business value.

“Part of our impetus for naming these principles,” added Spence, “is that there has been such an explosion of interest from institutional investors and they want to know what the universe of investable opportunities is for them and how they separate the wheat from the chaff when it comes to credible impact and greenwashing.”

Like the rest of the ESG universe, with its Sustainable Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD), impact investment understands the need for its reporting and disclosure to be improved. According to Spence, there has been progress: the Operating Principles for Impact Management has had a lot of uptake from a range of ESG and impact investors and US impact investment consultant Tideline launched BlueMark in October this year. BlueMark, whose other investors include The Rockefeller Foundation, will operate as an independent impact investment verification firm.

“The Impact Management Project is used by a lot of managers, including ICM members,” added Spence. “The IMP+ACT Alliance’s Impact Classification Tool [both UK-based organisations] has also been helpful in understanding impact classes. But we are not yet at the level of a SASB for impact investing.

Two members of US President Elect Joe Biden’s task force were guest speakers at the Members Convening last October: Sonal Shah, executive director of the Beeck Center for Social Impact & Innovation and Javier Saade, managing partner of Impact Master Holdings. RI asked, what can Biden do, if he doesn’t have the majority in the US Senate, to move the needle on sustainable investing, apart from rejoining the Paris accord?

“I can’t speak for Sonal and Javier,” said Spence, “but there are a few things Biden can likely do via executive office authority, even if the Senate majority remains Republican. These include: blocking oil and gas drilling on federal lands and allowing states like California to set their own high standards for fuel economy and emissions; making it easier for highly skilled immigrants to obtain visas, which has historically been a great driver of US competitiveness and innovation; and using an executive order to extend the pause on student debt payments until Congress can develop a bipartisan plan that addresses the return on investment from higher education.

“There are myriad other things he can and should do,” she added, “but these are a handful of actions that directly affect many impact investors.”