Past, Present & Future of Impact Investing: the True North Case

“Can investors achieve both positive impact for the planet and society while also outperforming the market? At True North, we believe Yes.”

By definition, impact investing should focus on areas where social or environmental needs, offer commercial growth opportunities for market returns.
Indeed, from day one of the investment lifecycle, both impact and financial soundness are the core of conversations and analysis. The main consideration when setting impact targets is to define an approach to measure and compare impact in a transparent way. Indeed, to achieve this, True North deploys the so-called impact ROI. Just as every dollar invested has a projected financial ROI, True North tries to quantify the impact of every dollar invested and to incorporate this into the due diligence process of all candidate companies. Hence, starting with the impact findings of the due diligence process, the goal is to focus not only on development of ESG strategies and plans, but also on how to realize, monitor, and report the progress. The rationale, of course, is that impact that is not effectively communicated loses its value as a growth driver for ventures.
It is crucial to note that a key element is disclosure: for an impact fund to succeed in its aim, it is essential that it provides transparency in measuring, monitoring, and reporting the impact achieved by its portfolio companies in the same way in which financial performance is disclosed. Indeed, once Peter Drucker said: “You can’t manage what you can’t measure” and True North accordingly fulfils such requirement through its proprietary impact scoring. The latter is used not only as a snapshot during the due diligence, but as a continuous monitoring tool with quarterly reporting, in order to flag trends early on and collaborate with ventures to course-correct as needed. At the same time, a complete and transparent approach is crucial to achieve a long-lasting impact on the environment and society.

Zoom in: Impact score at True North

The impact score measures the level of impact a company has on society, communities, and the environment, based on several different parameters. Regarding public equities, True North uses proprietary techniques while (at the same time) cooperating with major providers of ESG information on corporations and markets to calculate the score. However, when speaking about private equity, the process becomes more complex, and it is articulated in three main phases:

1. Vision completeness: True North looks at the completeness of the company’s vision, taking into consideration factors like employees’ impact, supply chain characteristics, and the founder’s motivations.
2. Ability to execute: how the company will operate according to its own mission & vision. This is a qualitative assessment which is conducted internally.
3. Impact IRR: True North expects to generate at least a minimum internal rate of return, both from a financial and “impact” point of view.

Concluding Remarks

Notwithstanding the disruptive consequences deriving from Covid-19, in addition to the preexisting problems affecting the global economy, achieving the SDGs set by the UN still represents a priority. In this regard, the increase in transparency and disclosure requirements fostered by entities such as S&P and IFRS in relation to societal and environmental impact, is transforming the business ecosystem. Hence, phenomena like ESG valuation, SRI, and Impact Investing will be the next normal. Indeed, large funds are already moving in this direction, requiring more and more from their portfolio companies to disclose data related to their ESG impact.
Finally, as digital transformed from being a niche investment area to representing a common denominator for funds’ strategies, the same is likely to happen when considering ESG principles. These will become a default factor to take into consideration when evaluating firms for potential investments.