I am writing this comment letter on behalf of BlueMark, a specialist provider of impact verification services for investors and companies. BlueMark was founded in January 2020 to meet the market demand for reliable, independent verification of the impact in impact investments, brought on by the rapid growth in this segment of the capital markets. To date, BlueMark has completed over 35 verifications for institutional investors of varying types and sizes on both their impact management practices (their systems, processes, and capabilities to manage impact as an integral component of the investment process) and impact performance (their reported impact results).
My own background includes 15 years at JP Morgan where I ran several risk management groups, including for the credit portfolio and emerging markets trading businesses, as well as the firm’s sovereign credit ratings advisory business. This experience provided me a first-hand perspective regarding how capital allocation decisions are made and the critical building blocks supporting development of new markets, including smart regulation, adoption of robust voluntary industry standards, and a mechanism to hold actors accountable to both.
Our view on the SEC’s role in climate change disclosures
Like many other investors and investor groups, we support the SEC’s intention to improve the consistency, reliability and quality of climate change disclosures by corporate issuers – and a variety of standards and frameworks exists for the SEC to draw from. We believe such a move is consistent with the SEC’s mission to 1) protect investors; 2) ensure fair, orderly, and efficient markets; and 3) facilitate capital formation.
However, this mission cannot be fulfilled with disclosures alone. Third-party assurance also plays an important role in driving market discipline and accountability, while also increasing the efficiency of asset allocation decisions. We have written about the importance of robust thirdparty verification in previous comment letters about related regulatory efforts. As we wrote in our comment letter to the IFRS Foundation regarding their proposal to create a Sustainability Standards Board (SSB):
“It is imperative that the Foundation allows for a range of service providers – beyond the traditional accounting firms – to provide external assurance services to verify the accuracy and completeness of sustainability reporting. We strongly believe that specialized firms like BlueMark bring an expertise and perspective to third-party assurance that extends well beyond the typical sustainability metrics to include the full range of qualitative and quantitative information necessary to form a complete understanding of sustainability practices and performance.”
We are pleased to have this opportunity to also contribute to the SEC’s efforts on climate change disclosures.
Addressing question #10 on the auditing and assurance of climate change disclosures
The growing threat of greenwashing and impact-washing—whereby what investors and companies actually do to address sustainability issues contradicts or falls short of what they say they do—is a major barrier to market confidence and the efficient flow of capital. According to the 2020 Annual Impact Investor Survey from the Global Impact Investing Network (GIIN), the biggest challenge facing impact investors over the next five years is “concerns about impact washing” (66%), followed by the market’s “inability to demonstrate impact results” (35%) and the “inability to compare impact results with peers” (34%). The survey also found that “comparability and validation of impact performance can address investor’s concerns regarding impact washing.”
We believe that smart regulation—which leverages voluntary standards and specialized, thirdparty impact assurance in addition to direct government regulation and policy—will help to solve for these challenges by bringing increased transparency, accountability, and discipline to the impact investing market.
The impact investing industry has already made some progress in adopting both robust voluntary standards and engaging third-party verification providers like BlueMark. For example, the Operating Principles for Impact Management (“Impact Principles”) were introduced in April 2019 as a set of best practices for how to integrate impact considerations throughout the investment lifecycle, from strategy design to portfolio management to exit. These Principles also include a requirement that all signatories seek independent verification of their alignment. Today, about 130 impact investors of various types and sizes, representing nearly $400 billion in combined impact-labeled assets under management, have signed onto these Impact Principles.
CDP, which runs a disclosure system that investors, companies, cities, states and regions use to manage their environmental impacts, also encourages submissions to include a third-party verification completed in accordance with recognized verification standards. According to CDP, more than 590 investors with a combined $110 trillion in assets have requested that companies disclose through CDP.
Other standard-setters are working on instituting similar verification requirements, including the Principles for Responsible Investment (PRI) and the SDG Impact Standards recently introduced by the United Nations Development Programme (UNDP). The impact investing market has matured rapidly in recent years as more investment managers adopt these standards, thereby helping protect asset owners and ensuring more capital flows to best-in-class impact investors.
We believe the SEC can help catalyze the adoption of these standards and frameworks by issuing guidance that encourages companies and investors to seek third-party assurance as a way to hold themselves accountable and make markets more fair and efficient. Such guidance could include:
Information on the types of disclosures required, including on both practices (processes) and performance (results)
Clarification of the relevant standards to which disclosures should be aligned (e.g., CDP, GRI, SASB, TCFD, etc.)
Encouragement for issuers and investment managers to engage third-party assurance providers rather than an internal audit approach to enable standardization and avoid conflicts of interest
Regular reviews of assurance processes and statements to ensure quality control, spotlight industry trends and proactively address any issues
While the immediate focus is on climate change disclosures, we believe it is imperative that the SEC cast a wider lens to encourage greater transparency and disclosure of other relevant ESG issues beyond climate change. Such issues may include diversity of board, management, and staff; pay ratios; political spending; etc. The SEC can also play an important role in signaling corporate responsibility to consider issues relevant to a broader set of stakeholders than shareholders alone, especially given the interconnectedness between climate change and other urgent social and economic issues.
Indeed, BlueMark’s verification services are designed with this broader stakeholder perspective in mind, directly responding to the needs of impact investors. Other types of investors–whether employing an ESG, sustainable or impact investment strategy–are also increasingly demanding this information as an input into investment decision-making. The number of investors that now seek company disclosures in alignment with SASB or TCFD are proof of this demand, and a sign of the growing importance of consistent and comparable disclosures in the years ahead.
We welcome any questions on the contents of this letter, and we look forward to working with both regulators and standard-setters to bring increased transparency and stability to financial markets.
The impact investing industry has matured over the past couple of years, especially when it comes to aligning investors around common standards for disciplined impact management practices.
The Operating Principles for Impact Management (OPIM) and the forthcoming SDG Impact Standards from UNDP, in particular, have created both clarity around the practices required to authentically integrate impact into each stage of the investment process and accountability for those practices through the encouragement or requirement of independent verification.
Impact performance reports today come in all sizes and flavors, reflecting a lack of clarity and consensus on what constitutes quality impact reporting as well as efforts by individual investors to convey their own “secret sauce.” The state of play makes it difficult for asset owners and allocators to interpret the impact performance of their investments, much less to compare one impact fund to another.
Investors are in search of a better approach to impact reporting that incorporates relevant impact goals and metrics along with the qualitative information needed to communicate a holistic, yet digestible, portrayal of the impact of their portfolios.
While we collectively strive for more consistency and standardization, it’s important to keep in mind that robust reporting—whether on impact or financial performance—is both an art and a science, a balance of both qualitative and quantitative information. Impact reporting will always involve a degree of subjectivity, which makes the role of expert, third-party evaluation and verification critical to ensuring accountability, discipline, and comparability, three core pillars of BlueMark’s approach.
Introducing a way to verify impact reporting
In the absence of a universal or harmonized set of impact reporting standards, BlueMark has stepped up to introduce an impact reporting verification service to respond to market demand. We welcome feedback and comments from market practitioners as we seek to continue to refine our methodology to best meet the market’s needs.
BlueMark’s approach is organized around five key characteristics of high-quality impact reporting. We can think about these elements as divided between two categories: the reporting framework, on the one hand, and the impact performance report, on the other. While an investor’s actual impact report may focus most heavily on the latter, both levels of information are needed for completeness.
Context – Impact reporting should be supported by robust and clearly articulated portfolio-level and investment-level impact theories of change, including an analysis of the evidence base for the linkages between stated impact goals, assumptions, target outputs, and outcomes. The investor’s particular contribution to achieving impact should also be clearly developed.
Relevance – The relevance of impact goals to the SDGs and underlying SDG Targets should be clearly established, drawing on industry frameworks such as the Impact Management Project’s A, B, C classification scheme. In addition, the reporting should take care to identify the stakeholders – including customers, the environment, local communities, and workers – who experience the positive and negative impacts of the investment strategy.
Comparability – An impact report should use objective and transparent impact indicators, drawn wherever possible from industry standards, that allow for the analysis of impact performance over time, relative to expectations, and relative to other organizations. The proportionality of reported impact results to the scale of the investment should also be considered.
Balance – An impact report should feature a discussion of both positive and negative impacts as well as impact and ESG risks. To achieve true balance, the report should also discuss instances of impact underperformance and unintended impacts and what lessons were learned as a result.
Reliability – Impact data, which may come from both primary and secondary sources, should be collected and tracked in a way that drives data quality. Quality control practices should help to ensure that reported impact data is free of manipulation or errors and consistently defined and calculated.
We believe that impact reporting that incorporates these elements is worthy of a high mark, and we look forward to sharing specific examples in future articles.
Given the lack of common standards and dearth of historical impact performance reporting, even the most experienced impact investors are likely to have gaps or shortcomings in their reporting processes. Independent verification of these reports and the underlying systems can help spotlight areas of strength and where there is room for improvement, thereby providing LPs and other stakeholders with the assurance they need while also encouraging investors’ continued advancement towards best practices.
We see the future of impact reporting evolving in much the same way as financial reporting, with third-party verifiers such as BlueMark playing an important role in bringing greater accountability, discipline, and comparability to the market. As impact investors become more comfortable with reporting on a variety of both quantitative and qualitative inputs, the bar of ‘performance’ and best practices will rise across the industry.
Christina Leijonhufvud is the CEO of BlueMark, Tideline’s new verification business. She manages all aspects of business strategy, new product development, and external relations, and has directly led over 20 impact verification assignments across investor types and asset classes.
Thank you for the opportunity to comment on the IFRS Foundation’s Consultation Paper on Sustainability Reporting. I am providing input on behalf of Tideline, a specialist impact investment consultancy established in 2014, and its sister company BlueMark, a dedicated provider of impact verification services for investors and companies. These comments also draw on my 15+ years of experience in traditional finance and risk management, which includes creating and launching JP Morgan’s Social Finance business in 2007.
We are very encouraged about initiatives underway to establish alignment around a global set of corporate sustainability and ESG reporting standards, two in particular: the first co-led by the five leading voluntary framework- and standard-setters (CDP, CDSB, GRI, IIRC and SASB) and facilitated by the Impact Management Project (IMP) as reflected in their recent Statement of Intent; and the second led by the World Economic Forum’s International Business Council as summarized in their September 2020 White Paper.
In this context, we welcome the entry of the IFRS Foundation and the proposal for a sustainability standards board (SSB) that could help contribute to the development of standards that benefit from the Foundation’s role and experience in defining and overseeing international financial reporting standards. The Foundation’s mission to promote transparency, accountability and efficiency in financial markets reflects squarely the fundamentals necessary to build trust and scale the market for impact and sustainable investments.
We also believe that, to contribute to development of a robust and comprehensive set of sustainability reporting standards that serve the public interest, the SSB should consider the following:
The Foundation should avoid the temptation to assume that sustainability reporting will either lend itself to the same level of numerical precision as, or integrate seamlessly with, financial reporting. In addition to applying the characteristics of useful qualitative information spelled out in the Foundation’s Conceptual Framework for Financial Reporting, we believe the SSB will need to look beyond information that only directly affects an entity’s prospects for future net cash inflows and stewardship of the entity’s economic resources. (See related point #3 below).
We urge the Foundation to engage formally with and draw on the deep expertise of specialized, voluntary market standard-setters that have worked for many years to advance sustainability reporting practices, starting with the group of five mentioned above and including IMP. This engagement should include significant representation on the SSB itself.
The Foundation should adopt a broader definition of materiality beyond the IFRS Standards’ core financial materiality concept, recognizing the “nested” and “dynamic materiality” concepts laid out recently in the Statement of Intent referenced above, which necessitate the consideration of stakeholder interests beyond those of investors. The GRI Standards offer a good model for how such a multi-stakeholder approach can work.
We urge the Foundation to develop upfront a comprehensive set of domain or thematic areas that should be covered by sustainability reporting, ideally before kicking off at the natural starting point of climate-related sustainability reporting. Given that climaterelated reporting offers potential for more quantitative precision and focus than other domain areas, it will be important that the SSB has the broader perspective on the kinds of information required to assure sustainability practices and performance in other themes, such as biodiversity, water scarcity, gender and racial diversity, and social and economic inequality.
It is imperative that the Foundation allows for a range of service providers – beyond the traditional accounting firms – to provide external assurance services to verify the accuracy and completeness of sustainability reporting. We strongly believe that specialized firms like BlueMark bring an expertise and perspective to third-party assurance that extends well beyond the typical sustainability metrics to include the full range of qualitative and quantitative information necessary to form a complete understanding of sustainability practices and performance.
Finally, we encourage the Foundation to continue to solicit the opinions of service providers and industry networks beyond the accounting firms to ensure the inclusion of specialist firms like Tideline. We bring deep sector knowledge and a valuable outside perspective, built on our experience advising many of the world’s largest asset managers and asset allocators on impact management and measurement, as well as industry groups like the B Lab, the Global Impact Investing Network, and 60 Decibels, among others.
We wholeheartedly welcome the opportunity to share our knowledge and experience with the Foundation and others to help ensure the SSB is a success. Thank you again for taking on this initiative and the opportunity for consultation. We would be delighted to discuss any of these issues in more detail if helpful.