ESG Investing: Measuring Social Impact

Taking a consumer goods company, whether it’s a shampoo or beauty product that has better raw materials and focuses on the social good. You’ve made the investment and you’ve got five years of performance. How would you measure impact?

It depends on how much money you have to spend on it. My preference, best case scenario, would be to product a longitudinal survey. Work with an appropriate sample size, at the outset of your investment and really survey the individuals, or whoever the customers are, across a range of factors. Follow that same group, over the five years. I think that’s, by far, the most meaningful, but it’s expensive and time consuming.

You get some really interesting data and developments from that. If you know Vestergaard Frandsen, it’s a company based here in Switzerland, but run by a Danish gentleman, who manufactures the LifeStraw. He actually started working in Kenya, looking at, I believe, HIV data and doing a huge household survey and it turned out that the data that he was collecting revealed this huge need for clean water. So it really led to the founding of his business. The business is doing extremely well. He has become a spokesperson for impact investing and it’s really changed both his life and his business. Ultimately, it was reliant on data and he was collecting it, in real time, with smartphones, with people on the ground, so a huge expense to do this. But he collected really valuable data on diseases, as well as issues like water and livelihoods.

I think, in a best-case scenario, let’s do a longitudinal survey, let’s actually talk to people. If we can’t do that, and I know it’s not usually not realistic for an asset manager, then at least set the baseline in year one, and try to follow it a minimum of once a year. I really prefer twice, if not four times, just to check in with the portfolio companies or the customers. Use the same set of questions to follow throughout the life cycle of the investment. Then you really see the evolution of the factors, whether it’s on wage equity or energy efficiency, or even something like the traceability of the raw materials. Maybe they weren’t even considering this in the beginning, but by the third year they had a system in place where they actually knew where all their raw materials were coming from. I think it’s very subjective, but I think it’s quite meaningful.

So this is a list of questions that the asset manager has, they ask them at a certain frequency, throughout the year and you see those trends and those results, to really understand the impact?

Yes; ideally you would align it to your financial monitoring and reporting cycle, so when you are checking in with the companies about their credit needs, then you’re also asking these impact questions, at the same time. You’re not randomly bombarding them with questions at different times of the year.