The past few years have seen major strides in how investors measure social and environmental performance. Frameworks like the Impact Management Project (IMP) and the International Sustainability Standards Board (ISSB) have given investors a more structured approach to impact reporting, while regulatory changes like the EU’s Sustainable Finance Disclosure Regulation (SFDR) hold investors to higher levels of disclosure. This is progress.

However, cost is a meaningful barrier to the widespread implementation of robust impact measurement and reporting. Because investment funds have not historically been structured to incorporate rigorous impact measurement, such activities don’t have a natural “home” in budgets. This not only limits the resources available to undertake these increasingly important activities, but each general partner must therefore engage—both internally and with their limited partners—in one-off discussions about how their fund will solve this problem in piecemeal fashion. The result has been to produce a significant mismatch between current fund practices and the rising expectations for high-quality social and environmental impact data. Because most funds were created in an environment of lower expectations, the ground has shifted beneath the feet of fund managers, who—often in the middle of a 10-year fund life—find themselves saddled with a fund LP agreement that did not anticipate today’s reality.

Without a clear path forward, investors raising new funds have no playbook to follow around how to tackle this problem.

Current approaches typically fall within two broad categories, with funding coming either out of the fund’s Management Fees, or from a separately financed Technical Assistance fund set up outside the main fund structure to pay for impact measurement. Neither is wholly satisfactory.

Broader socialization of these approaches starts with an honest conversation between Limited Partners and General Partners about the purpose of the fund and what data are needed to see if a fund is on track or not. Beyond that, we propose a structural change in how the LP agreements for “impact” funds, broadly defined, are written. The default should be to name gathering and reporting data on social and environmental performance as an allowed and expected fund expense so that we can begin to trust these data from funds as much as we trust the financial data shared by their auditors.

Beyond this, we should ask what funds mean by “underwriting for impact” and free investors to allocate resources during the diligence process to meaningfully understand the impact thesis—whether that is impact on the environment, if that is the core of a deal, or impact on people, which requires listening to them directly to hear their perspective.

Read the full article about impact investing by Sasha Dichter and Aaron Bourke at Stanford Social Innovation Review.