Impact investing in private markets is not that same as ESG in general. Impact’s focus is in helping investors to understand specific environmental and social effects they can have via the companies they invest, and is not in and of itself concerned with broader associated outcomes. When working in private markets, this distinction is particularly true.
There are three key elements to impact investing: intentionality, or how the investment creates a positive social or environmental impact; the potential financial returns; and, finally, measuring the impact.
An outcomes-focused approach
One of the big differences between an ESG approach and impact investing is that the latter is more focused on outcomes and having a positive impact on the world around us. But to help us understand that better, we must set KPIs or objectives. We do this by collaborating with our clients to build the right framework and find the best ideas.
Judging a company’s progress against objectives can be difficult with the data available to us, particularly when compared with public markets. However, we are seeing some positive developments.
For private markets, we take a two-step approach when it comes to manager selection. First, we take a deep dive into how the manager measures impact, work out who is going to benefit from it and find out what risks accompany it. The second part requires impact mapping. This means looking at the impact at every level, including on a sector-wide basis and country level. We want to capture the positive and the negative effects that managers are having through their investment.
The outlook for impact investing
Impact investing is an exciting journey. We are helping clients achieve their impact targets and deliver better investment outcomes. And we are doing this by working with them to frame their investment targets and objectives in a global context and measure the wider impact they are having.
At the same time, we are engaging with the management of companies to help drive a more positive contribution to society and the environment. The collaboration between our clients and private markets’ managers, facilitated by us, is helping to develop and set standards that have a meaningful impact.
Mercer’s private markets approach is designed to help our clients to define the impact of ambitions and identify opportunities that align with their goals, to help build a robust strategy tailored to quality or emissions, source opportunities and establish a diversified portfolio.
, Global Head of Impact Investing & Europe (ex UK) Strategic Research Director