• Measuring impact and impact of the measure: new frontiers for social and solidarity investors�
• Intervention at 2023 Annual Meeting of
• SPTF Social Investor Working Group (SIWG) et Financial Inclusion Equity Council (FIEC)
• Luxembourg, 9 Juin 2023

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• Jean-Michel Severino
• President, I&P, senior fellow, FERDI, membre de l’académie des technologies

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• WHY BOTHER?

FIEC LUXEMBURG 9 th JUNE 2023

A new impact narrative is spreading in the corporate world�

• Even with a great diversity of sincerity and reality, a social demand for meaning appears in the business world (consumers, employees, candidates, investors)�General sensitivity to risk, reputation, eco-anxiety and formal climate objectives, are gradually bringing impact into the fiduciary responsibility of senior management and corporate governance.�An increasingly restrictive regulatory framework is implemented: (i) extra-financial accounting standards (CSRD, IFRS, SEC) (ii) ESRS (iii) NFRD�The whole of this new normalization aims to (i) better understand societal and extra-financial risks (ii) by measuring them and giving them a financial value, direct investments towards more sustainable activities

FIEC LUXEMBURG 9 th JUNE 2023

The line between impact investors and traditional investors could become blurred�

• Impact is going to be more and more measured and in a normalized way in the corporate world, while impact investors have a non-normalized and very uneven capacity to report on impact
• Intentionnality is not going to remain a strong barrier for long, with the growth of mission-led corporations, the generalization of mission statements, and formal environmental commitments
• Better measuring and forecasting impact, creating a strong link between impact and financial performance, establishing norms and linking investment compagnies remuneration to impact results is the way forward
• One direction: stay ahead of the impact curve!

FIEC LUXEMBURG 9 th JUNE 2023

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Our purpose is to make sustainable living commonplace.

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To enrich and extend the lives of every person on earth.

Bringing health through food to as many people as possible.

• FROM LOST IN IMPACT TO REALLY IMPACTING SOCIETY

FIEC LUXEMBURG 9 th JUNE 2023

What is the value of a business?

• What is a business?
• An economic organization intended to generate direct and indirect net tangible and intangible benefits for its stakeholders (customers, employees, suppliers, investors, communities, etc.
• Why is this definition useful?
• It allows us to define the value of a company by the sum of its impacts
• It is neutral to the question of property, monopoly or market, profit, morality and meaning
• It distinguishes a company from non-economic activities�

FIEC LUXEMBURG 9 th JUNE 2023

• NEGATIVE IMPACTS�

FIEC LUXEMBURG 9 th JUNE 2023

POSITIVE IMPACTS�

Impact investors tend to focus only on positive impacts and miss current trends

The value of any company, sum of its positive and negative impacts�

Impact: tangible and intangible effect, gross or net, of a company's activities on its stakeholders�

• IMPACTS BY MISSION�

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• IMPACTS BY MODALITIES
• (ESG PERFORMANCE )

FIEC LUXEMBURG 9 th JUNE 2023

Impact investors tend to focus only on mission

• INDIRECT

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• DIRECT

FIEC LUXEMBURG 9 th JUNE 2023

Impact investors tend to focus on direct internalities

INTERNALITY

EXTERNALITY

Internality: positive or negative impact voluntarily produced by a company on a stakeholder due to monetary and contractual transactions generated by its activity (sales, purchases, remuneration, dividends, etc.)�Externality: positive or negative impact unintentionally produced by a company on a stakeholder, without monetary counterpart and without compensation unless there is external intervention or negotiation (pollution, formalization, training, etc.)�

Measurement and balance as a key for effective impact assessment…

• Most of the metrics of impact actors stop at a few direct internalities�Indirect internalities considerably modify the assessment of the social performance of the company and require sometimes sophisticated instruments or methodologies (example: Leontieff matrices)�Direct or indirect externalities sometimes require a significant effort to understand contexts and deepen social situations.�Indirect externalities are sometimes the most powerful of the impacts generated by the company and less detectable�= A COMPLETE AND "TRUE" APPRECIATION OF THE IMPACT OF AN ECONOMIC ORGANIZATION PRESUPPOSES A COMPREHENSIVE APPROACH THAT CAN BE EVOLUTIVE, LIMITED BY A PARTIAL STATE OF KNOWLEDGE AS WELL AS BY THE DIFFICULTY OF QUANTIFICATION, SUMMATION AND ATTRIBUTION

FIEC LUXEMBURG 9 th JUNE 2023

• INTENDED IMPACT�

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• NET POSITIVE IMPACT

FIEC LUXEMBURG 9 th JUNE 2023

Intentionality remains key

Moving from simple on-the-fly measurement to proactive action on parameters� that will maximize the net impact of a company fundamentally characterizes� the impact approach –

and is linked to the question of the mission and meaning of the company or the fund

FIEC LUXEMBURG 9 th JUNE 2023

PROFITABILITY�

NET TOTAL IMPACT

Now, is impact linked to profitability?

FIEC LUXEMBURG 9 th JUNE 2023

STRUCTURAL PROFITABILITY�

FRICTION COSTS

How to classify impact funds?

• EX ANTE SYNTHETIC INDEXES AS TOTAL PERFORMANCE INDICATORS (TPIs)?

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• OUR WAY FORWARD FOR TOTAL IMPACT RETURN ASSEMENT�

FIEC LUXEMBURG 9 th JUNE 2023

SROIs or IMMs, a new frontier for TPIs

• We can measure in most cases direct added values, and hence address most of the direct internalities issues
• Standard macro instruments can be used to address the challenge of indirect internalities
• Positive intended externalities can be in most cases addressed with parametric terms, drawing from academic evaluation work

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• Negative externalities can be captured by incorporating taxes in impact calculation, and selective key new ones (CO2 emissions, biodiversity destruction, ressources depletion)
• A beta index can be calculated comparing financial profitability to impact profitability
• Investment team remuneration can be linked to (i) financial profitability (ii) impact profitability (iii) social beta index (ratio between social and financial performance)

FIEC LUXEMBURG 9 th JUNE 2023

Promises and limits of TPIs

• An ex ante SROI or IMM, linked to team remuneration, gives the opportunity of an in-depth discussion between investors and management teams and allows concentration on all parameters of impact
• An ex ante SROI or IMM focuses the investment team at investment team decision, portfolio management and exit decisions on the key impact parameters, which include financial sustainability
• An ex post and ex ante SROI should allow comparison between impact funds, at least between specific categories
• BUT conventions underlying SROI or IMMs and their heterogeneity will always limit comparability
• BUT even comparable SROIs may not lead to chosing the « best » ones and cannot scrap the intrinsic challenge of the mission
• SROIs and IMMs are above all political tools allowing the policy focus of a management team on a specific set of performance targets, dreamed by it and its investors

FIEC LUXEMBURG 9 th JUNE 2023

A few final suggestions

• Establish norms and standards for SROIs or IMMs at the level of umbrella organisations
• Create links between the key measured impacts, and IFRS and EFRAG extrafinancial accounting standards so as to create consistency and continuity
• Generate training among both investors and funds on innnovative total performance indicators
• Generalize investment teams incentivization based on total impact returns and total performance indicators

FIEC LUXEMBURG 9 th JUNE 2023

STAY AHEAD!!!

FIEC LUXEMBURG 9 th JUNE 2023