This report explores strategies for institutional asset owners to engage with asset managers, and better manage impact expectations and outcomes. Impact outcomes that use standardised metrics can ultimately help asset owners drive toward deeper integration of impact within investment processes. This research collects quantitative and qualitative data from institutional asset owners and asset managers, across 28 organisations. 

This research highlights barriers to partnerships between asset owners and managers for incorporating impact into investment strategies. 1) Asset owners often set broad impact objectives that lack specificity and clarity. Less than half of respondents set quantitative impact targets, and most asset owners do not set impact targets beyond the climate context. 2) Established fund structures limit asset owners’ ability to exert influence and asset managers’ ability to incorporate impact. 3) Lock-in effect is prevalent as investment and legal terms are challenging to amend once they have been established. 4) Strong desire to adhere to existing role structures and values. Several asset owners indicate they select asset managers based on ability to generate financial returns, and do not want to influence that existing strategy. 5) Difficult for asset owners to gauge their impact. Several asset owners are unclear on how to align impact reporting standards across their large portfolio of asset managers and capture meaningful impact data on real-world outcomes. 

This report outlines four strategies to enable stronger impact alignment between asset owners and managers.

1) Articulate specific impact objectives or priorities. Asset managers express interest in asset owners providing specific impact targets instead of broad impact themes. Asset owners expressed hesitancy, stemming from fear around potentially constraining an asset manager’s scope to achieve financial performance. There exists a clear opportunity for asset owners to set impact targets that are quantitative, well-defined, time-bound, and driven by evidence. 

2) Codify impact in formal investment and legal documents. Before selecting an asset manager, there is opportunity to document impact objectives formally. However, when engaging with existing asset managers, formal documentation of impact objectives becomes more challenging. Strategies to align impact include; building internal infrastructure that formally incorporates impact, comparing asset managers across standardised impact metrics, fee-based structures for impact to account for the cost of managing impact, and incentivise strong impact performance.

3) Identify and use existing standardised impact reporting systems. Some asset managers use existing standardised frameworks (e.g. UN Sustainable Development Goals), data provided by companies applying the Global Reporting Initiative and the Sustainability Accounting Standards Board or their own proprietary impact measurement tools. Asset owners are looking for standardised outcomes reporting, which may be useful for differentiating between asset managers and informing selection and management approaches. 

4) Establish expectations for rigorous impact reporting to enhance alignment. Once a standardised reporting framework has been mutually agreed upon, continuously monitoring progress is critical. Asset owners can establish formal processes for alignment on impact incentives, engage in ongoing dialogue to gauge progress toward real-world outcomes, and leverage existing industry associations to align processes and expectations across their various external managers.

1. Asset owners are keen to achieve more impact and to engage with asset managers as partners in the process.
2. This research highlights five key barriers to effective partnerships between asset owners and managers in incorporating impact. 1) Institutional asset owners often set broad impact objectives. 2) Established fund structures limit asset owner influence. 3) Lock-in effect is prevalent once investment and legal terms have been established. 4) Strong desire to adhere to existing role structures and values. 5) Difficult for asset owners to gauge impact associated with their portfolio.
3. Expertise in impact measurement and management often sits with asset managers, as acknowledged by both asset owner and manager interviewees. Nearly all institutional asset owners in the sample expressed uncertainty around identifying the relevant impact metrics.
4. Four key strategies emerged in this report to increase alignment between asset owners and managers when incorporating impact into investment decisions. 1) Articulate specific impact objectives or priorities. 2) Codify impact in formal investment and legal documents. 3) Identify and use existing standardised impact reporting systems. 4) Establish expectations for rigorous impact reporting to enhance alignment.
5. Asset owners can establish formal processes for alignment on impact incentives, engage in on-going dialogue (both formally and informally) to gauge progress toward real-world outcomes, and leverage existing industry associations to align processes and expectations across their various external managers.
6. There exists a clear opportunity for asset owners to set impact targets that are quantitative, well-defined, time-bound, and driven by evidence.
7. Regulatory shifts across the world, primarily the establishment of sustainability taxonomies and ESG disclosure requirements, are placing increased pressure on asset owners to demonstrate achievement of claimed impact.
8. Significant opportunity exists for pension funds and insurance companies to deepen engagement with their external asset managers at each stage of the investment process, ultimately enabling investors to better use their portfolios in a way that integrates real-world outcomes alongside risk and return and serve their beneficiaries to build a world where all can thrive.