Arisaig Partners’ Investment Philosophy is founded on the belief that Purposeful Growth generates superior long-term investment returns in the emerging markets. To us, impact investing – investing with the intention of generating positive, measurable societal impact alongside a financial return – is a natural evolution of Purposeful Growth. In developing countries, a great deal of social progress is driven by private sector organisations. They can make significantly greater contributions to societal wellbeing than the patchy, low-quality coverage of many state entities. For such businesses, the scope for impact generation and long-term revenue growth opportunity are one and the same. As they scale, the benefits conferred by their core operations extend to potentially many millions.
While the philosophy of impact investing is well-aligned to our established investment approach, becoming impact investors required us to develop a new framework for impact measurement and management (IMM). We are not aware of any other IMM approaches for impact investors with an emerging markets listed equities focus, and therefore hope that by sharing our framework, this piece will provide valuable insights to this nascent community.
Principles behind our IMM approach
- Authenticity: We focus on real world outcomes with a rigorous bottom-up approach. This needs to navigate the real world constraints of assessing businesses in emerging markets with less well-developed approaches to reporting of impact and ESG.
- Reliability: Many aspects of impact are subjective and difficult to quantify. Our framework helps us to navigate this by providing a consistent structure so we can generate reliable conclusions on whether our investments meet stated impact objectives and to what extent.
- Integrate industry best practice: We believe greater standardisation of language and approach will benefit the impact industry as a goal. We therefore align our IMM with best practice from organisations such as the Impact Management Project[1] (IMP) and The Global Impact Investing Network[2]. We review and update our framework regularly to reflect relevant industry trends.
The due diligence process
We consider impact in parallel with financial considerations throughout the investment lifecycle. The focus of this piece is on due diligence, which for us consists of three phases. Initially, the questions asked are of screening nature, such as:
(1) do the company’s products & services contribute to one or more of our six impact themes: Education, Employment, Environment, Financial Inclusion, Gender Equality, Health?;
(2) does the company’s core business involve behaviours or products/services that contribute to significant societal harm?
In the second phase of impact due diligence, we employ a tool known as the ‘theory of change’. This is a visualisation of how an organisation’s core business activities generate a sequence of cause-and-effect events, ultimately leading to societal impact. We use a simplified version of the theory of change model, as shown in the figure below.
In addition to clearly articulating how an investment contributes to an impact goal, theories of change help us go beyond a superficial understanding of impact by identifying assumptions and dependencies. For example, a company lending to SMEs might be presumed to have positive impact. But the mere act of giving out loans (an ‘output’) does not in itself guarantee positive outcomes. Various factors, such as whether the business invests the loan wisely, and whether it can avoid over-indebtedness, influence the eventual outcomes. By understanding dependencies, we can identify what indicators to track to check whether intended impacts are occurring.
We dig into this further when we do a ‘full impact assessment’. This is a detailed analysis of impact we conduct on companies that make it towards the end of our research funnel. It is framed around the IMP’s Five Dimensions of Impact – Who, What, How Much, Contribution and Risk. In addition to identifying key impact performance indicators to track (which link back to the theory of change), at this stage we also score impact using Arisaig’s proprietary impact scorecard comes in (more on this below).
The final element we consider in the full impact assessment is engagement priorities. One of the tenets of our investment philosophy is that actively stewarding our engagements to improved sustainability and impact will ultimately benefit us as shareholders. Our relatively specialist focus allows us to maintain detailed knowledge of global best practices, which (we hope) makes us a valuable partner to investee companies. Identifying engagement priorities relating to enhancing positive impact, mitigating impact risk, or improving management of ESG issues at the outset helps us to leverage opportunities to influence an early stage of investment.
Impact scoring
Scoring impact translates our primarily qualitative impact analysis into a numerical measure, which can be used for comparisons between companies and over time. This doesn’t involve trying to scientifically quantify or monetise impact[3], which we do not believe can currently be done with sufficient accuracy or consistency to provide meaningful results. Instead, we use a common scorecard to score all investments in respect of three pillars of impact: Reach, Criticality, and Effectiveness. For each pillar, the scorecard sets out criteria that the company needs to meet to be given a score ranging between 0 and 6. The final impact score is therefore a total out of 18.
What we have learned so far
Our IMM framework has been vital in helping us to ensure we meet the dual mandate of our impact strategies to invest in companies that generate positive societal impact alongside financial returns, and evidence this appropriately. Our impact scorecard has improved internal consistency in judging what ‘good’ impact looks like. In identifying companies’ impact strengths and weaknesses, IMM has contributed to fruitful engagements with our holdings.
At the same time, we have sought to regularly improve the framework. For example, we recently added ‘depth of impact’ to the Effectiveness pillar of our scoring framework as we felt this was a missing critical component. We developed a new internal impact scoring and metrics database to streamline annual updates and to facilitate impact monitoring over time and between companies. As impact investors, we are committed to continuous learning and refinement of our IMM approach so that we can better assess, monitor, and contribute to enhancing impact.
