This article reviews how Verda approaches measuring positive impact and the scope of our efforts thereto. Verda believes positive externalities should be systematically considered in investment decisions. We also believe considering these positive externalities is not mutually exclusive with a positive return, indeed, we look for situations where it’s additive. Thus, in conjunction with assessments of industries and markets as well as the core team, we closely consider and measure the impact of the solutions being built.
At a high-level, the impact management consists of (i) Verda’s impact thesis supported by evidence; (ii) an evidence based assessment prior to investment and (iii) monitoring of impact-creating evidence (IFC 2019a). We believe that decentralized ledger technology (“blockchain”) can and should be used to avoid “greenwashing.” As a distributed database technology, blockchain can reduce fraud and enhance transparency and auditability.
Using the GIIP’s IRIS+ taxonomy, Verda is primarily focused on Climate, Air, Pollution, and Financial Services categories. We’re not attempting to measure impact outside of our focus domains, but we do look out for and avoid any general negative externalities resulting from a portfolio company’s product or service.
From selection to optimization, Verda’s approach is data-driven, and measuring the impact of products and services is no different. Verda focuses on impact measurement at the macro level (industry or sector) rather than the micro level (individual or a project level) or Meso level (community or organizational level). We’re also currently relatively less focused on quantifying all dimensions of the Global Impact Investing Ratings System (GIIRS), which include governance, workers, community, environment, and social. Rather, using off-chain and proprietary on-chain analytics, we’re focused on quantifying the macro impact of the product or service being delivered as a part of an evidence based assessment prior to investment. As an example,
Over 37 billion metric tons of carbon are emitted worldwide each year (source: Statista). Paris Climate agreement targets cutting emissions by 50% by 2030 and becoming net-zero by 2050. Achieving this 2030 goal implies a 15x scale-up in sequestration and removal up to 5 Gt/year (Source IIF). Project A de-risks and diversifies forward financing through carbon pools on-chain with 0.1 Gt of demand driven through its platforms from institutions. Their goal is to scale to 0.5 Gt of demand in the next 5 years. This implies up to 10% of the global goals along with Project A’s 5% platform fee. Sequestration carbon credits have +30% YoY for the last 5 years from $5 and could reach up to $100 by 2030 (source EM). Thus, there is both a positive environmental externality, measured by Verda’s data-driven impact management framework, and potential financial gain.
Where possible, we try to standardize by aligning definitions with global standards and harmonizing reporting across projects. Using the definitions of the Impact Management Project (2018), we utilize five key dimensions of impact performance: (1) What types of effects are being achieved? (2) Who is experiencing these effects? (3) How much of the intended effect has been achieved? (4) Contribution that would have happened without intervention? (5) Risk (likelihood) that effects will cause negative externalities.
We use the following steps to explain how a given investment will lead to specific changes using quantitative evidence.
Source: Jackson 2013, Theory of Change
It starts with what are the financial, human, and material resources needed (“Inputs”) and ends with what are the long-term widespread improvements (“Impacts”). Activities are what tasks are undertaken to transform inputs to outputs. Outputs are the products and services produced and outcomes are the intermedia effects. Each chain of events is unique to the company, but the same framework can be applied. We’re also looking at the increase in quantity or quality of the positive benefit beyond what would otherwise have occurred (attribution analysis). ESG disclosures are connected to higher revenues, lower costs, and lower capital costs and constraints (Amel-Zadeh and Serafeim 2018).
Before Verda makes an investment, we look to quantify the positive impact. The relevant benchmark and measure depend on each business, but positive externalities should be additive to the overall investment’s value proposition. Our focus is on measuring the macro-level impact in our key focus verticals. Where possible we try to standardize our taxonomy (GIIP’s IRIS) and approaches to align with international standards for comparability and efficiency purposes.
Sources not mentioned in-line above: Impactcapitalmanagers.com, thegiin.org, Global Handbook for Impact Investing (Chapter 16 and 17)
