‘We have to understand the full picture’: why investor contribution is the new frontier

INTERVIEW: Investment firms can affect people and the planet in many ways – and not just through the businesses they back. The leaders of a new project seeking consensus on ‘investor contribution’ tell us why their work is breaking new ground – and why it's taken so long to get here.

When a social business takes on impact investment and it then reports positive outcomes, can the business’s investor claim the credit – or might this happy ending have occurred anyway? How do all the other decisions made by an investor – from the people it chooses to hire, to its governance, to the policies it tries to influence – affect the world? And how do we know what negative impacts the investor might have had?

These are hugely tricky questions, and there has so far been little consensus on how to answer them, with investors coming up with their own approaches. Now, though, “investor contribution” – a concept some also refer to as “additionality” – is under the spotlight, as part of the Investor Contribution 2.0 project.

Behind this “consensus-building” initiative are Impact Frontiers, a programme of the US-based Bridges Impact Foundation, and the Predistribution Initiative, a nonprofit that supports institutional investors. Together, they hope to get more specific on what investor contribution means and on how to manage it. They’re not trying to create standardised metrics for investor contribution – which by its nature is context-specific – but rather to standardise an expectation that investors carefully consider certain elements of investor contribution (see box below); even if they aren’t always able to answer these questions, they can then communicate what they do and do not know. (Some degree of standardised disclosures may be needed for negative impacts, since investors are not incentivised to self-report these.) 

Mike McCreless and Delilah RothenburgInvestor Contribution 2.0 is funded by Omidyar Network, and is currently focused on private capital asset classes. We spoke to Mike McCreless at Impact Frontiers – which picked up the work of the global consensus-building initiative Impact Management Project when it finished in 2021 – and Delilah Rothenburg at Predistribution Initiative. They told us why considering investor contribution goes beyond the work of an investor’s portfolio companies, why we still know so little about investors’ overall impact – and how some may be inadvertently driving up inequality.


Pioneers Post: What do we mean exactly by “investor contribution”?

Mike McCreless: Investor contribution was a central element in the Impact Measurement Project’s work and was referenced in the UK [Financial Conduct Authority’s Sustainability Disclosure Requirements] consultation paper. The new proposed definition goes further in explicitly linking investor contribution to changes in outcomes for stakeholders, and consideration of whether those changes would have happened but for the investor. It is: ‘investor actions that cause or are expected to cause a change in outcomes for end-stakeholders and/or the natural environment, that would not have likely occurred in the absence of those actions’.

We deliberately did not specify that the changes had to come through the portfolio company. It could be the investor’s engagement with regulators and policymakers, or the way that they hire and recruit their own staff. There are myriad ways in which investment firms can affect people and the planet – [an investor’s] portfolio companies are one of the main ones, but we didn’t want to limit ourselves to that.

Delilah Rothenburg: One of the big issues that came across our radar as we started the Predistribution Initiative was whether fund manager compensation… could be contributing to economic inequality… If you do the math on the pay ratios between [fund manager] executives and the mean or median worker on the portfolio companies, those pay ratios can often exceed the levels that cause alarm among civil society. 

Six elements of investor contribution via portfolio companies

  1. Investor actions (eg, capital allocation, non-financial engagement, investment structure, and governance) 
  2. Investor-level counterfactual (ie, what would the company likely otherwise have received from investors?)  
  3. Change in company activities (ie, what did the company do as a result?)  
  4. Company-level counterfactual (ie, what would the company likely otherwise have done?)  
  5. Change in outcomes for end-stakeholders and the natural environment  
  6. Stakeholder-level counterfactual (ie, what would stakeholders and/or the natural environment likely otherwise have experienced?)  


PP: Why is investor contribution important – why should we care?

DR: It feels like we’ve been starting in the middle for a long time with a focus just on the portfolio companies. If we want to take a holistic approach, it’s helpful to understand the overall system in which the portfolio companies sit and the full array of incentives that are set for them, not just by stewardship teams and impact teams and ESG teams, but also investment teams at the asset managers and asset owners and allocators.

MM: I would say that it matters for investors, because investor contribution is a necessary component of impact. Without investor contribution, we’re actually not causing impacts. And so in that sense it matters quite a lot. It also matters because I think that civil society and policy-makers and regulators are increasingly aware of that.

It feels like we've been starting in the middle for a long time with a focus just on the portfolio companies


PP: How much do investors know about their contribution at the moment, as a whole?

DR: I’d say we’re in the very early stages about what we know of how investors cause positive and negative impacts. And I think it’s very apropos that Impact Frontiers is named Impact Frontiers, and perhaps that this article is in Pioneers Post, because I feel often that we really are the pioneers on the frontier of exploring these issues. But they’re very important. People complain of incremental change from ESG and impact investing all the time. And if we really want to be more effective, we have to understand the full picture.


PP: So we don’t actually know how much impact, if any, many investors are having. Why are we still at this “frontier” stage? Why has it taken so long to get to this point?

MM: It’s very difficult to know the counterfactual of what would have happened in the investor’s absence. So you actually can never prove that – unless you're doing some sort of randomised trial which very few, if any, can do. 

In the absence of any sort of systematic or experimental study, you need to be able to look at the context in which your investment, your action, your engagement is occurring, and then form a reasoned view of the likelihood that another investor would have done the same in your absence,  causing a change in company actions that in turn resulted in a change in ‘real-world’ outcomes for people and the planet.

To date, a lot of the efforts have been focused on measuring investor actions, and taking it as a matter of faith that those actions would probably lead to better outcomes. What we’re trying to do here is to not necessarily assume that any particular action will intrinsically be positive or negative, rather, give investors more of the tools they need to map out that logic flow for their own context, because it is so context-dependent, and gather the evidence needed to make an informed view: for this company, in this context, with these other investors in the wings, did my action actually make a difference? 

It's very difficult to know the counterfactual of what would have happened in the investor’s absence

DR: To take another angle: companies are more tangible… they touch more people in society, so they’re more obvious to measure and manage. That’s changed over time as the financial services sector has become more dominant. And particularly as civil society stakeholders become more concerned about the financialisation of the economy [ie the increase in size and importance of a country’s financial sector, relative to its overall economy]. For instance, in private equity, stakeholders are concerned about leveraged buyout transactions, where the private equity firm puts too much debt at the portfolio company level, where the portfolio company can’t afford to offer quality jobs or quality and affordable goods and services any more… I think there’s more pressure on investors to self-reflect and consider their own positive and negative impacts as well.


PP: So what does your project aim to achieve?

DR: We hope to provide investors with tools to assess investor contribution. In this phase of the project, we’ve focused specifically on private capital markets, and within that, private equity, private debt and venture capital, and how LPs [limited partners, ie investors into private equity funds] can assess GPs [general partners, ie those managing the funds]. So it’s a slice of the overall pie when it comes to different asset classes and different types of investors.

MM: [It’s also about] going back to the baseline of a set of definitions and terms… so that we can all agree on the meaning of those terms and have the debate using comparable concepts. And then [create] templates by which investors can begin to more systematically measure and manage contributions.


PP: Is the project also about trying to find benchmarks – trying to establish what is expected of investors?

MM: We’re not standard-setters. So it isn’t part of our mandate to set standards for what’s disclosed or what levels of a certain outcome should be achieved. But the hope is that with greater disclosure and attention to these factors, there will be more information available for those organisations that are in a better position to set standards or set thresholds for acceptable outcomes.

There are vast swathes of the investing sector that are able to get decent salaries regardless... inertia is a pretty powerful force


PP: You’ve been running a series of consultations over the last months. What are the key findings that have come out of that? Is there anything that surprised you?

MM: I would have been concerned that investors would see it as too difficult or unrealistic. I've been pleased to see that, in the main, impact investors are excited about this new level of clarity and welcome the focus on outcomes. I think that the issue of counterfactuals will continue to be a difficult one. But there is at least a core of impact investors that I think are ready and eager to rise to that challenge. 

DR: One of the challenges we are working through is identifying how to capture positive impacts and negative impacts comparably, and understanding if it should be a similar approach for both; and if a different approach, then why. It feels easier to develop disclosures, if not metrics for measuring and managing negative investor contributions than positive. I think we're still working through why that might be. 

One of the other challenges is that there’s such a reporting burden already at the portfolio company level, that we don’t want to overly burden investors with additional requirements. But we also want to make sure – I think the investors themselves also want to make sure – that we’re really pursuing impact or sustainability or system-level investing with integrity. It’s a real delicate balance.


PP: The people who have been coming to these consultations are presumably the ones who are supportive of advancing this agenda. Are there many missing from the conversation? 

MM: From an impact investor perspective… there are definitely investors who’d say, I'm not worried about changing incomes for this or that individual person, or cutting emissions down at this individual plant, I want to change the system as a whole. But it’s very difficult to change the system as a whole; if you can actually change outcomes for an individual person, or support an individual person, that actually is impact. I think there’s a tension and one of the things we’re trying to do here is to move away from the normative view that any one action is intrinsically positive, or that any investor or all investors should be doing any particular action, or even focused on maximising their investor contribution … rather than say, this will be a set of tools that help them to achieve that.

DR: People are busy and this is a very frontier topic… I think it really requires a lot more socialisation to get people to think, ‘oh, I need to pay attention to this now’. And, of course, policy and regulation is always an incentive to focus on these kinds of issues. As policymakers and regulators become more interested, there will be a greater incentive for folks to say, ‘okay, I need to take time away from this transaction that’s right in front of me to do some field-building work’.

MM: There are vast swathes of the investing sector that are able to get decent salaries regardless... And I think that inertia is a pretty powerful force. Part of what we’re trying to do is to create the preconditions for two races: one would be a race away from the bottom, pertaining to some of the negative impacts and systemic risks. And then in parallel, a race to the top for those that are striving to achieve positive impacts. It’s definitely a matter of finding early first movers.

The last in the series of ‘huddles’ takes place as part of the Investor Contribution 2.0 project on 22 May. A final version of investor contribution definitions and strategies, and templates is expected by the end of the summer.

Answers edited for clarity and length. 


Top photo by Clay Banks on Unsplash

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