This piece was originally published in ImpactAlpha.
Every commercial market that has successfully reached mainstream consumers and investors shares two qualities: First, a common set of standards and best practices. And second, a mechanism for holding market participants accountable to those standards.
This is true of the organic food market, which only took off when governments began regulating “organic” labeling to give consumers confidence in the quality and source of their produce. It’s also true of the automobile market, which didn’t become a dominant form of transportation until car manufacturers and industry associations agreed on fuel standards and safety protocols.
And it’s true of credit ratings, which gave investment professionals a reliable way to evaluate the creditworthiness of companies and governments, thereby unlocking capital to help businesses grow and countries prosper.
This story is now repeating itself in the impact investing market, which is poised to scale sustainably thanks to the introduction of new standards and impact verification requirements.
The lack of a reliable accountability mechanism has frequently been cited by impact investors as one of the biggest challenges facing the market. According to the GIIN’s ‘2020 Annual Impact Investor Survey,’ the top three industry challenges over the next five years are ‘impact-washing’ (66%), an inability to demonstrate impact results (35%) and an inability to compare impact results with peers (34%). Each of these challenges can be addressed through well-designed independent impact verification.
The evolution of impact investing
Impact investors have no shortage of standards, frameworks, and principles that provide guidance for navigating this rapidly growing industry.
Standard-setting started with impact measurement (i.e., measuring social, environmental and economic impacts according to industry frameworks like the U.N. Sustainable Development Goals). More recently, the focus has turned to the broader concept of impact management, the incorporation of impact considerations into each step of the investment process, from crafting a robust impact thesis to engaging with portfolio companies to help them maximize positive impact outcomes and mitigate negative ones.
There exists a literal alphabet soup of standard-setters in the impact investing field – B Lab, GRI, IMP, IRIS+, PRI, SASB, TCFD, and UNDP, to name a few. Each of these organizations has sought to fill a gap in the impact investing industry, with the over-arching goal of catalyzing the flow of private capital towards solutions to societal problems.
However, until April 2019, the market was missing a way to hold impact investors accountable to a single shared standard. That’s when the International Finance Corp., or IFC and 60 impact investors came together in to introduce the Operating Principles for Impact Management, or “OPIM” or, simply, “the Impact Principles.” These nine principles were created to “provide a framework for investors to ensure that impact considerations are purposefully integrated throughout the investment life cycle.”
One year later, more than 100 impact investing organizations representing more than $300 billion in impact assets under management—from private equity and wealth management firms to foundations and development finance institutions—have signed onto the Impact Principles and committed to manage any investments labeled as “impact” according to a shared set of best practices.
The Impact Principles are unique from previous industry standards in that they require all signatories to independently verify and disclose their alignment with each of the Principles. This verification requirement is a game-changer for the impact investing industry.
When designing our verification methodology, we saw the potential to bring three important benefits to the impact investment market:
- Accountability. Verification provides a mechanism for evaluating whether impact investors’ practices and performance are aligned to accepted market standards, ensuring greater transparency and credibility across the market;
- Discipline. Verification encourages impact investors to take steps to adopt industry best practices, continuously raising the bar for performance across the industry;
- Comparability. Verification establishes benchmarks and ratings that allow stakeholders, whether asset owners, intermediaries, or beneficiaries, to compare different approaches to impact investing on a consistent basis.
To maximize these benefits and help scale and mainstream the practice of impact investing, Tideline in 2020 launched BlueMark, an independent business providing impact verification services to investors and companies.
One of these services is a standardized methodology to assess the degree of investor alignment with these Principles. To date, we have completed 20 independent verifications for impact investors managing nearly $85 billion in combined impact assets, and recently published a report, Making the Mark, to share our initial findings.
We discovered that while each impact investor has a different strategy and impact management process, they all share a commitment to learning about best practices and common challenges. Verification is an essential part of that learning process, providing impact investors with an opportunity to self-reflect about where they excel and where they have room for improvement. At the same time, the public disclosure mandated by the Impact Principles provides a way for impact investors to benchmark their practices against others in the industry.
The power of impact verification
Independent verification is more important now than ever. The COVID-19 crisis has exposed and exacerbated the fragile, inequitable, and unsustainable nature of our social, economic, and environmental systems. The pandemic has provided a precious opportunity to rethink the role of private capital in shaping a better world and building a more sustainable and inclusive society.
Impact investing can and must play a part in this transformation. But we need more than good intentions. We need more than “impact” labels and philanthropic initiatives. We need a mechanism to give the market confidence that intentions are backed up by practices, outcomes are backed up by evidence, and impact labels actually mean something.
Verification represents the best defense against rampant impact-washing, and also the best weapon for scaling the impact investing industry with integrity. If we all work together and use this tool wisely, we can realize the ambitious vision to mainstream the use of private capital to meet the sustainability challenges of our time.
Christina Leijonhufvud became CEO of BlueMark, Tideline’s new verification business, in January 2020, leading all aspects of the business strategy, new product development, and external relations. Christina has directly led over 30 verification assignments across investor types and asset classes.