An increasingly important question for impact investors is how to validate that their investments are having the intended impact on people or the planet.
The majority of impact investors are increasingly clear about the groups or populations they seek to benefit through their investment activities (often referred to as target stakeholders or beneficiaries) and how their investments will, in theory, bring value to those stakeholders. However, the practice of validating that the anticipated impact has actually occurred remains a work-in-progress sector wide.
Part of the challenge is determining who is best placed to judge the impact that has taken place. Is it the investor? The entrepreneur? An independent third party? Or the stakeholder who does (or does not) experience that impact themselves?
While each party has a view and role to play in assessing the nature of the resulting impact, it’s become clear that the most important voices – and currently the voice most often missing from impact analyses – are those of the beneficiaries. Absent their perspectives, it is much more difficult to assess the ultimate impact of an investor’s activities. Consequently, for investors seeking to validate their impact, strong stakeholder engagement practices are a critical part of impact management and measurement.
Another part of the challenge today is that engagement with end-stakeholders currently tends to be perceived as an aspirational “best practice” rather than an essential and core practice. According to BlueMark’s “Making the Mark” research on impact management practices, just 32% of verified impact investors directly engage with stakeholders and actively solicit their input to validate outcomes alongside investee data. Even within the three in 10 that do, the quality and comprehensiveness of that engagement can be markedly different.
Stakeholder engagement can sound hard, but in reality it really needn’t be. It takes a little time and budgeting for, but the essence of robust stakeholder engagement requires listening to a representative and statistically significant group while applying a high standard of data quality controls. Ideally, this stakeholder data should be collected on a regular basis (e.g., annually) to allow for continued validation. This is essentially the same standard applied to quality social research, making it a well-accepted practice among academics, NGOs, philanthropies, and many others.
As the impact investing industry continues to mature, this more rigorous approach to validating impact should also become a widely accepted best practice. In the meantime, impact investors should be transparent in their reporting about how they engage with stakeholders and what data they are able to collect, including details on how they plan to improve data availability and data quality in the future.
For investors ready to make a commitment to listening to their stakeholders, we hope this piece – which describes how three different investors engage with their target beneficiaries – can provide some practical guidance to inform their integration of deeper listening into their impact management activities.
Case 1: Leapfrog Investments
LeapFrog invests in healthcare, financial services and climate solutions businesses in high-growth global markets. Its companies deliver distinctive impact and robust returns, growing on average 27% per year. LeapFrog’s companies now reach 422 million people in 30 countries, providing essential products and services.
Talking to beneficiaries during due diligence to inform impact plans
As part of its process for evaluating prospective investments, LeapFrog conducts interviews with potential and existing customers to both strengthen and validate its understanding of a company’s potential impact (the outputs of which are a refined theory of change, including updated outputs and outcomes). As an example, before making an investment in an India-based company that finances affordable housing, LeapFrog interviewed existing customers to better understand how to refine the exact outputs and outcomes the firm could expect to see from the investment.
These interviews provided insights into positive outputs that may not have been otherwise captured in the due diligence process: for example, the ability to construct pillars and divisions to create separate rooms in an existing house led to increased capacity per home, and in some cases actually allowed formerly separated families to be reunited within the same home. For other families, these room separations allowed households to rent out extra rooms, leading to improved ability to manage financial shortfalls and pay for unexpected repairs, hospitalisations or medical treatments.
Using customer insights to expand an existing impact strategy
After making an investment, LeapFrog continues to harness customer insights as part of its ongoing monitoring activities. One of the ways it captures insights into customer experiences is through its partnership with 60 Decibels, a measurement company that specializes in collecting data from beneficiaries. LeapFrog’s portfolio company, Jumo, has a customer base that is strongly aligned with LeapFrog’s impact strategy but works across multiple different geographies. Insights obtained from listening to customers informed how Jumo tailored its product strategy between geographies and its approach to expansion.
For example, one insight 60 Decibels was able to draw out was that 41% of Ghanaian customers and 60% of Zambian customers live on less than $6 per day. When compared to national poverty levels, Jumo appeared to be serving a lower income customer population in Ghana than in Zambia. This suggested that the impact of Jumo’s financial services may be experienced more strongly in Ghana than in Zambia. Based on this insight, LeapFrog has been exploring whether customer acquisition strategies being executed in Ghana could be replicated in Zambia to improve Jumo’s poverty inclusivity in Zambia.
Case 2: Vox Capital
Vox Capital is an impact investing venture capital firm based in São Paulo, investing in businesses that deliver positive social impact in Brazil. Vox has recently begun working with its portfolio companies to undertake stakeholder-focused impact assessments.
Listening to customers to test impact hypotheses and derive new insights
One of Vox’s portfolio companies, Sanar, delivers online medical study resources to students in Brazil. Together, Vox and Sanar facilitated 5 focus groups of Sanar’s customers, followed by an online survey, to better understand how the students interacted with the technology – confirming that the intended impact was being delivered, but also highlighting exactly how the impact was being delivered. Learnings from these findings provided both Sanar and Vox with new and surprising insights about how people experience the impact of the service, far beyond what could be captured in quantitative impact monitoring data.
In part due to the learnings that emerged through the work with Sanar, Vox has decided to launch an internal evaluation unit that will be responsible for conducting one “impact study” each year with a portfolio company that will include listening to the company’s beneficiaries. For the Vox team, these studies are needed to confirm their hypotheses (given they don’t take for granted that any product or technology will deliver the intended impact in the exact ways and forms planned) as well as to help their portfolio companies refine their product offerings and adapt internal management strategies.
Case Study 3: Global Partnerships
Global Partnerships (GP) – a US-based investment fund manager dedicated to expanding opportunity for people living in poverty – has that name for a reason. An avowed ‘impact-first’ impact investor, they see their work as forming partnerships with stakeholders up and down the investing chain to enable investments that seek high levels of impact while preserving capital. The direct partners of GP-affiliated funds (GP Funds) may be social enterprises and investors, but the key constituent is always the end-stakeholder, the person who does, or potentially does not, experience the impact they aim to generate.
Before GP Funds invest a dollar, GP seeks to answer the question: what is the expected impact of the product or service delivered, and for whom? In practice, this means an approach that starts with research into each target investment area to establish a sector-specific, impact-first investment thesis. A dedicated impact team then conducts in-depth underwriting on each potential investment to evaluate the impact case, analyzing available data at the household, enterprise, country, and sector levels. Ultimately, the capital and investment terms offered to each investee take the results of this impact underwriting into account, and GP Funds do not pursue investments that do not meet impact requirements
Stakeholder engagement to drive greater accountability and value creation
When it comes to measuring performance against expected impact, GP once again places the end-stakeholder at the center. In addition to using any stakeholder-level evidence of impact that social enterprise investees already collect, each year GP supports a subset of investees with an impact performance assessment by 60 Decibels to enhance the investee’s impact measurement data and capacity. In each instance, GP uses that data to better understand the social enterprise’s impact performance – including how they compare to 60dB’s global benchmarks – and engages the enterprise’s senior leadership team in strategic discussion of how the company can increase the value it creates for end-stakeholders.
For example, Grooming Centre, a Nigerian MFI serving primarily low-income women, learned from 60dB’s survey that some clients were experiencing challenges making consistent loan repayments at a fixed group loan amount, meeting time, or location, and used the data to develop more flexible repayment policies so clients could better adjust repayments to their individual needs.
More transparency on impact creates systemic change
GP also believes that as stakeholder-based evidence becomes the norm for impact investing, it will generate its own flywheel of value creation. Investors will begin to expect data from stakeholders as a high-water mark for social impact performance. In turn this will inspire more such data to be captured and used by social enterprises (and their investors) to improve impact performance over time, thus creating more value from the data and greater incentives to optimise impact based on the direct lived experience of end-stakeholders.
The power of stakeholder engagement
The investors we’ve highlighted in these cases have all derived real benefits from hearing directly from those they seek to benefit – and have done so to varying degrees of scale and intensity.
All of these investors now view stakeholder engagement as core to their impact management and think the practice should be adopted by more asset managers and investors working to deliver impact.
Some even take the view that it’s their duty to the populations and communities they work with. But, moral obligation aside, having a greater understanding of the experiences and preferences of a company’s beneficiaries helps unearth ways to strengthen the company’s services and also uncovers potential risks, providing a strong commercial argument for doing this work alongside the impact imperative.
Sarah Gelfand is a Managing Director at BlueMark. Tom Adams is Chief Strategy Officer for 60 Decibels. Layla Varkey is an Analyst at BlueMark.
Independent impact investing verification firm BlueMark recently closed its Series A funding round with US$10 million in capital commitments from a diverse group of seven investors that included Singapore-based Tsao Family Office and Temasek Trust Capital.
With significant growth opportunities for impact investing in Asia, the support of independent impact verification experts is seen as a vital component in assessing and assuring that investors are delivering on their impact claims and commitments.
BlueMark was founded in January 2020, to date it has completed 125 verifications for investors with a combined US$206 billion in impact assets under management.
The Asset TA spoke with BlueMark BM CEO Christina Leijonhufvud on the growing demand for impact verification services in Asia, a potential new Asian office, and just how an impact investing verification firm goes about its business
TA: Can you elucidate on exactly what the challenge is that BlueMark is tackling?
BM: The dramatic growth in sustainable and impact investing over the past decade brought with it growing concerns about “impact-washing” – the possibility that investors were making false or exaggerated claims about their impact intentions and results. At the heart of this problem was a lack of a reliable mechanism for holding investors accountable to their claims.
Impact investors had access to a robust set of standards, frameworks and tools for each aspect of impact investing, but there wasn’t an expert third party assessing alignment against these standards or whether they were using the tools effectively.
BlueMark was founded to address this problem, with a mission to strengthen trust in impact investing. The founders had decades of combined experience in impact investing, and had worked with many leading investors in the field to help design and build their impact management and measurement systems.
Impact investing verification addresses the impact-washing problem by verifying investors’ impact management practices and their impact reporting. Our verifications generate data and insights that allow asset managers to see how they compare against their peers and where they have room for improvement.
Meanwhile, the benchmarking that results from these verifications make it easier for asset allocators to identify the right managers for their investment portfolios and to engage with those managers to encourage continuous improvement. The net effect of all these verifications is a market with better-informed decision makers and, therefore, more trust and accountability.
TA: Some engaged investors might say is it more important that sustainable and impact investors demonstrate the tangible results of their investment activities, rather than be concerned about their rating? Can there be one without the other?
BM: We agree that investors should focus on delivering tangible impact performance. After all, that’s what impact investing is all about. The issue is that the market lacks a mechanism for defining what good or bad performance looks like.
Several organizations, such as the Global Impact Investing Network, are working towards developing benchmarks based on impact outputs and outcomes within specific sectors or thematic areas, but it will take a much deeper time series of impact results before these benchmarks provide a way to rigorously evaluate impact performance.
The point of a rating is not to give investors a gold star (or a silver or bronze one), but to offer investors a pathway towards aligning with industry best practices. We firmly believe those investors with the strongest impact management practices and a sophisticated approach to impact reporting are ultimately best-positioned to deliver consistent impact performance.
TA: As a region that creates huge wealth for institutions, families and individuals, is there enough impact investing activity in Asia?
BM: We see huge potential for impact investing in many parts of Asia. The amount of wealth flowing to places like Singapore is only part of that. There’s also a long history here of collaboration between the private and public sectors, especially for critical industries and infrastructure.
As sustainability challenges become more apparent, particularly as climate change increases, many local leaders are beginning to explore the potential of impact investing to address these challenges. We are excited about the future of the impact investing market in Asia but acknowledge that there is a long way to go.
TA: Outsiders might say the problem with impact investing is that a lot of the judgements are subjective?
BM: We see the subjectiveness of impact investing as a feature rather than a flaw. All investment decision-making is subjective as each investor tries to generate financial returns within an acceptable amount of risk, depending on that investor’s strategy and mandate.
Impact investing adds a third element to that risk-return framework. And just like traditional investing, being an effective impact investor requires a strong understanding of best practices in everything from designing an impact strategy to implementing an impact management system to engaging with portfolio companies.
Our verification methodology was designed to bring more rigour to some of these value judgements about what is or isn’t impact, and what steps can be taken to optimize for impact.
TA: With pressure growing on institutions to be green and sustainable, how worried are you about greenwashing and or green-hushing?
BM: Greenwashing and impact-washing is always going to be a concern in this market. But we see scepticism over impact claims and pledges as evidence of growing pains in what is still a maturing market.
Every new market, whether electric vehicles or solar panels, have gone through some version of this as market participants attempt to develop standards and accountability mechanisms. The good news for the impact investing industry is that we now have many of those industry standards, like the Operating Principles for Impact Management and the Impact Management Project.
Green-hushing is a relatively new phenomenon in the US, largely in response to regulatory pressure and the increased politicization of all things ESG [environmental, social and governance] and sustainable investing. We think it’s important that investors continue to be transparent about what they are or aren’t doing, and why or why not.
The investors we work with are all committed to transparency, even if some of them have a long way to go in their impact investing journey. We need more initiatives to encourage transparency, like the Sustainable Finance Disclosure Regulation in the European Union.
TA: What do you do if clients cannot meet your standards?
BM: We specifically designed our verification services to accommodate investors, regardless of where they are in their impact investing journey. This doesn’t mean that we tone down the level of analysis for investors that are smaller or newer.
Instead, we offer diagnostics to assess where investors are now and where they may have room for improvement. These diagnostics create a learning opportunity in which investors have a chance to ask questions and better understand what steps they need to take.
We’ve had clients decide not to publicize their ratings, which is of course their prerogative. We have also advised certain clients to drop the impact label from certain strategies. But by and large, most of the investors we’ve worked with are eager to have an expert third party that can look under the hood of their impact investing systems and processes and offer constructive feedback.
TA: Do you perceive any cultural sensitivities or differences in working with Asian impact investment principals compared with, for example, those in the US?
BM: It’s too early to say what the main differences are going to be between the Asian and US markets. Every market we operate in is slightly different, depending on local regulations and the expectations of investors in that region.
In Europe, there is a greater degree of social consensus around the role of sustainable and impact investing. In the US market, there are a wide variety of approaches to impact investing and significant variance among different investors’ understanding of impact investing. Some might care more about climate-focused investments, while others might prioritize social-focused ones.
The market for impact investing in Asia is still relatively young, but appears poised to develop rapidly with early public sector investments in the market ecosystem and a growing source of next generation wealth. More education and advisory services may be needed at this stage of the market’s development in Asia.
TA: Following the recent investment what are your plans for Asia?
BM: We have plans to expand BlueMark’s presence in Asia, including by opening an office in Singapore and hiring a director in Asia to lead our client engagements in the region.
We have heard firsthand from many of our contacts in and around Singapore about the strong demand for impact verification services, which we see as a signal of the market’s long-term potential. We think it’s important for us to be on the ground where our clients are, and to collaborate in educating the overall market.
LeapFrog Investments, Bain Capital and Calvert Impact Capital are among the impact investors leading the way in impact management, according to verification specialist BlueMark.
Ten investors were revealed this month as part of BlueMark’s latest ‘best practice leaderboard’.
The list is published in BlueMark’s fourth annual edition of Making the Mark, which gives data and insights on best practices in impact management in the impact and sustainable investing market. The report is based on 84 verifications for 75 investors (there may be more than one verification per firm, focusing on different strategies or funds) managing a combined US$209bn in impact assets under management.
BlueMark’s research reveals significant areas for improvement remain
The BlueMark Practice Leaderboard was first published in 2022 and included six investors. This year’s leaderboard contains those six investors (participants are eligible to stay on the leaderboard within two years of BlueMark verification) plus four more.
The impact investors named on the leaderboard are (in alphabetical order):
Bain Capital Double Impact
British International Investment
Calvert Impact Capital
Finance in Motion
Nuveen Private Equity Impact
Nuveen Fixed Income Impact
To earn a place in the leaderboard, investors must score in the top quartile, based on their alignment with the Impact Principles (fully named the Operating Principles for Impact Management). The Impact Principles were launched in April 2019 in an attempt to combat impact-washing and provide a framework to ensure that impact is integrated throughout an investment’s lifecycle. There are more than 170 signatories to the principles across 39 countries. Being in the top quartile means that the investor incorporates all the core elements of impact management as well as going beyond the requirements of the Impact Principles.
The 2023 edition of Making the Mark highlights that less than one third (32%) of investors engage with their target stakeholders such as workers, customers and community members. This is a slight increase on the 28% identified in last year’s sample.
It also points out that the adoption of staff incentive systems linked to impact remains limited; that nearly half of investors do not include an analysis of impact risk in due diligence; and that just 27% of investors are taking consistent actions to ensure that impact can be sustained.
Christina Leijonhufvud (pictured), CEO of BlueMark, which was founded in January 2020 and is a certified B Corp, said: “While we are encouraged by how many more investors are committed to aligning with industry best practices, BlueMark’s research reveals significant areas for improvement remain across key practice areas critical to achieving both impact and financial performance.”