It goes without saying, for investors looking to make smart decisions about their portfolio companies, the importance of accurate, quality, and easily comparable corporate data cannot be overstated.
Which is why the new set of globals standards (the Standards)—issued on June 26, 2023 by the International Sustainability Standards Board (ISSB) for financial and climate-related disclosures, establishing baseline requirements for how corporate entities should disclose sustainability-related information to investors—merits thorough exploration.
The Standards are an important step towards easing frustration for companies and investors navigating a disparate reporting landscape. At the same time, the ongoing implementation and creation of voluntary disclosure initiatives like the Global Reporting Initiative (GRI) and the Taskforce for Nature-related Financial Disclosures (TNFD) indicates that investors have an appetite for information that goes beyond the baseline. Launched in 1997, the GRI Standards provide a framework for corporate disclosures that includes topic-specific guidance on issues ranging from biodiversity to human rights. Unlike the ISSB, which focuses on the impact of sustainability issues on a company’s bottom line, GRI also considers corporate impacts on people, the environment, and the economy. More recently in September 2023, the TNFD introduced its final recommendations for how organizations should approach assessment and disclosure on nature-related topics, with the goal of generating clear, comparable and consistent information by companies to investors and other providers of capital.
Our work with impact investors has reinforced that their specialized needs are not likely to be fully met through these existing disclosure frameworks. One reason for this is that impact investors often target cross-cutting impacts, such as affordable housing, financial inclusion, or environmental justice, that require customized targets and outcome-focused metrics. Moreover, they are particularly interested in the longer-term positive and negative outcomes of investments on people and the planet. Although existing standards begin to address these issues, there are disparities in their approaches to determining the impact materiality of topics, data collection and governance, and accountability mechanisms that result in reporting that is not consistently comparable and decision-useful. This leaves information gaps that impact investors must fill on their own.
Moving towards reporting norms for the impact sector
For these reasons, BlueMark and our partners in the impact management (IM) field have been working towards establishing reporting standards specifically for the impact investing sector. Impact Frontiers, an investor-focused, peer-learning and market-building collaborative, recently introduced its proposed Norms for Impact Performance Reporting. The proposed Norms draw on the “qualitative characteristics of useful information” described in the IFRS’ Conceptual Framework for Financial Reporting, including two fundamental characteristics – Relevance and Faithful Representation (i.e., completeness, neutrality, accuracy) – and four enhancing characteristics (Verifiability, Timeliness, Comparability, and Understandability). Notably, the Norms are principles-based and focus on the fundamental qualities of useful reporting, not on topic-specific disclosures. This approach allows impact investors flexibility in choosing metrics and targets, which is necessary for ensuring relevance and completeness in the context of their customized investment strategies.
This consensus-building initiative shares many similarities with BlueMark’s own research on the topic of impact performance reporting. While our research specifically focused on impact reporting by general partners (GPs) to their limited partners (LPs), the takeaways offer further evidence of the need to move beyond a baseline of standardized sustainability metrics for reporting.
For our insights on the Norms and BlueMark’s research to support their recommendations, please refer to a blog post from Dec 7, 2023: What makes a meaningful impact report?
Best practices for impact reporting
For investors with an impact or sustainability lens, we offer these best practices for ensuring the integrity of impact reporting:
- Ensure the investment thesis is supported by data and evidence (not the other way around) and is constantly re-assessed throughout the IM process
- Engage with companies directly to understand how sustainability data is collected/reported, including questions about the quality, balance of data across positive and negative impacts, and representation of affected stakeholders
- Report/share data with allocators using tools/frameworks like the Impact Performance Reporting Norms to ensure information is relevant and faithfully represented
- Obtain an independent assessment, review, or verification of the information reported to enhance its understandability and external credibility
The advantage of these approaches to reporting advocated by organizations like Impact Frontiers and BlueMark is that they provide the recipients with the kind of contextualized and qualitative information necessary to interpret performance.
After all, financial reporting is about more than simply disclosing a set of numbers – it’s a way for investors to understand how companies are navigating risks and opportunities in both the short-term and long-term. The same should be true of sustainability and impact reporting.
Quantitative metrics alone will never tell the full story of how the climate is changing and what companies are doing about it. Investors and other stakeholders require a broader set of information to understand whether to invest in a particular company as well as how best to help investees improve both financial performance and sustainability outcomes. Without this higher standard of corporate reporting, investors will be left trying to fill the gaps with incomplete and potentially irrelevant information, possibly compromising both their financial returns and impact outcomes.
Recent efforts by ISSB and others represent an important step towards establishing a minimum baseline that will broadly improve upon the current state of corporate sustainability reporting. While this guidance will likely increase the consistency and accuracy of sustainability-related information going to investors, those investors with a commitment to impact will be looking for corporations to go above and beyond this soon-to-be-established precedent to allow for the reliable evaluation of real social, environmental, and economic impacts (i.e., positive or negative outcomes). Ultimately, a combination of tools, taxonomies, standards, and accountability mechanisms will need to be created and adopted to help ensure corporate disclosures are providing meaningful impact information to investors.
To learn more about our perspective on impact reporting, please visit our published research page.
The new Impact Performance Reporting Norms, published for consultation last month by Impact Frontiers, signal an important milestone for the impact investing industry – providing much needed guidance as to what useful impact reports should include, as well as a structure for organizing the content therein.
Which is good timing, as the demand for reports that can be used to effectively gauge impact performance have become more pronounced. Impact investing skeptics are hungry to know if this fast-growing industry is living up to the hype. Those on the inside–practitioners, investors, and their beneficiaries–seek guidance to more credibly show the results of their work.
Many of the recommendations outlined in the Norms build on research BlueMark previously conducted to better understand the key information required to interpret and draw conclusions about impact performance. Our research surfaced the need for several distinct types of information, including:
- Information about an investor’s impact thesis and objectives
- A combination of qualitative and quantitative results data that is relevant to the thesis and presented in relative terms (i.e in relation to a baseline, prior result, and/or external threshold)
- Transparency into risks, negative impacts, and lessons learned
- Clearly cited data definitions, sources, and assumptions
These concepts (among others) are accounted for in the Norms and accompanied by detailed guidance as to how report preparers should organize and structure this information.
At the same time, the Norms are flexible, allowing different types of impact investors to apply them in the context of their specific strategies and goals. While this flexibility may be vexing for those seeking more uniform and templatized impact reporting, it is precisely the approach needed as practitioners begin to disclose this rich mosaic of data more consistently. It is certain, as the Norms are tested and adopted, that more structured and prescriptive reporting templates will emerge. But, in their current form, the Norms offer fertile ground for practitioners to experiment and work out how best to disclose their impact data across a common set of information categories.
The Norms also recognize the critical role that external reviewers play in strengthening the credibility and usability of impact reports. They are supplemented by a set of key questions and tests that independent parties should use when developing opinions or conclusions about the quality of an impact report and its alignment with the Norms. As our market matures and as independent verification of impact reports becomes more commonplace, ensuring consistency in the rigor underpinning the interpretation and validation provided by third parties will be essential.
We strongly encourage investors to pilot the Norms and openly share their experiences with others in the market. Together, we can all work to deepen our understanding of impact performance, and hopefully, show the skeptics that the delta between what impact investors are claiming and creating is smaller than they think.