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As interest in responsible investing (RI) has grown, so too has interest in impact investment mandates. But how do you measure the impact of an impact investment?

According to the Global Impact Investing Network, two key components of impact investing are intentionality and measurability — i.e., an investment must be made with the intention to generate a positive social or environmental impact, and that impact must be measurable.

But measuring impact isn’t a straightforward task, and concerns about “impact washing” have grown as fund managers seek to cash in on RI’s popularity.

During a Thursday session at the Responsible Investment Association’s virtual conference, panellists discussed how investors can avoid impact washing. One strategy is to look for fund managers that have clearly stated objectives, said Sean Gilbert, director of member engagement with the Global Impact Investing Network.

“A fund manager has a responsibility to present clients with the strategy they’re offering and be clear about what the fund is intended to do,” Gilbert said, adding that managers must describe their investment process and “pursue that process with integrity.”

But impact investing is about more than what types of companies a fund invests in — it’s also about what a fund doesn’t invest in, said Monique Mathys-Graaff, senior advisor and public markets lead with the Impact Management Project.

“I would ask an asset manager: ‘Tell me about an investment you did not make because of a material ESG matter.’ If they couldn’t tell me, I would do a little more digging before I’d buy their marketing pitch,” Mathys-Graaff said.

Avoiding impact washing may be a simpler task in fixed income markets than in equities markets because it’s easier to see how the proceeds of an investment are being deployed in a green bond, said Diane Young, senior portfolio manager, fixed income and co-head, corporate bonds with Addenda Capital.

Young, who manages Addenda’s Fixed Income Impact Pooled Fund, said Addenda has its own impact framework based on the UN’s Sustainable Development Goals. Every bond held in the Addenda fund must meet one of the fund’s stated investment themes, she said.

“Even if a bond is labelled ‘green’ and that’s how it’s marketed to the investing public, we still have to be able to link it to a theme and a focus area in order for it to qualify as an impact security,” Young said. “If the issuer hasn’t made a strong enough commitment to report on impact metrics, we won’t qualify it as impact.”

As a growing number of investors seek to generate returns for the environment and society through their investments, fund managers will have to adopt innovative new products and processes, Gilbert suggested.

“I think the challenge for the industry is that if people want multiple kinds of returns — financial returns and returns for the real economy — how do we deliver the products that do that with authenticity?” he said.

Advisor’s Edge and Investment Executive are media sponsors of this year’s RIA virtual conference.