Impact fund managers are increasingly expected to provide their investors (i.e., institutional investors and allocators) with reporting that offers visibility into their portfolio’s impact results. The general purpose of these impacts should be to provide LPs and other stakeholders with the information necessary to understand and evaluate impact performance.
But many impact investing practitioners are unsure of what information these reports should include and to what extent it should be integrated with financial reporting. This piece addresses some of the most common questions we receive from clients and our recommendations as to best practice.
Impact reports provide investors with the information they need to evaluate a fund’s progress in achieving the social and environmental impact outcomes targeted by the strategy, including insights into potential negative impacts and impact risks.
Q: Are there any established standards for impact reporting?
There are not currently generally accepted standards for impact reporting the way there are for financial reporting (see: IFRS Foundation and FASB). Impact reporting is inherently more context-dependent and therefore does not lend itself as readily to standardization of data in the way that financial reporting does.
This critical gap is widely recognized in the impact investing market and has been a focus of BlueMark’s recent research.
Market actors interested in contributing to the process of developing impact reporting standards should consider participating in an open consultation hosted by Impact Frontiers that is focused on building consensus around a common approach to verifying impact reporting.
Q: What types of investors should pursue impact reporting?
Impact reporting is important for investors managing funds of all sizes, strategies, and stages with an explicit intention to contribute to achieving positive societal outcomes. This includes impact investors as well as sustainability- or ESG-oriented investors that are expected to report progress towards their ESG or sustainability commitments and related impacts.
While the content in the impact report will depend on the nature of the fund strategy and the specific sector or thematic focus, providing investors with regular updates on activities and progress is an accepted best practice.
Q: Should new or smaller impact investors be held to a different standard or market expectation?
Preparing impact reports can be time and resource intensive. While new and smaller firms may have limited capacity to prepare these reports, it is important that all market actors are held accountable by providing their investors with visibility into their progress on a regular basis.
Managers can create more efficiency in the report creation process by using templates — whether created internally or adapted from an external resource (e.g., IMP’s 5 dimensions) — to document consistent and comparable information about each investment. This should help to standardize the overall structure of the report from year to year. Additionally, managers can save time by leveraging internal impact dashboards and reports in their communications with investors. Finally, maintaining up-to-date documentation about data sources, metric definitions, and model assumptions can save time when pulling together a report.
Q: How far along should a fund be in deploying capital and tracking impact results before reporting on impact performance?
Managers can and should report on investments in their portfolio prior to having collected any post-investment results. It is still valuable to disclose to investors the impact rationale for a given investment, the specific impact KPIs that will be tracked, and, where possible, information about the baseline values for those KPIs and forward-looking targets. Additionally, the report can include commentary about the manager’s plans to support the investment’s impact pursuits.
Q: How frequently should investors provide impact reports for their investors?
As a best practice, managers should include updates about impact-related activities whenever providing important financial updates to their investors. Most impact reports are typically prepared on an annual basis. This could be done in line with the common practice, especially among private markets investors, of the annual collection of ESG and impact data from portfolio companies.
Annual reporting allows for charting of changes and progress over time across a set of core measures. Some investments may generate more immediate and measurable outcomes that can be charted annually. However, in other cases, the outcomes being pursued will take time to materialize. In those cases, annual updates on progress towards interim milestones that signpost progress along the way to longer-term outcomes may be more appropriate to relay to investors.
Irrespective of the impact time horizon, annual reporting on impact progress provides a mechanism for managers and investors to stay aligned about the results being generated and managed (both positive and negative).
Additionally, many impact-focused LPs prefer to evaluate financial performance and impact performance together as part of a holistic performance assessment. While preferences vary, synchronized reporting of financial and non-financial reporting allows investors to see the full picture of performance being generated.
How to produce a high-quality impact report
Q: What information should an impact report contain?
Impact reports should be produced with the intention of providing LPs and other stakeholders with the information necessary to understand and evaluate impact performance. Just as financial reports provide a way for investors to analyze and manage financial performance, impact reports should be designed to allow for similar analysis and engagement.
While there is no universal template for impact reporting, BlueMark has described the key elements of quality impact reports as agreed upon by a diverse group of industry stakeholders. BlueMark has also developed a framework for evaluating impact reporting that lays out the key criteria for quality reporting based on the Completeness and Reliability of the reported information. (Click here to download BlueMark’s framework.)
Completeness refers to the scope and relevance of reported information related to an investor’s impact strategy and results at both the portfolio- and investment-level.
Reliability refers to the clarity and quality of the data presented in the report, including underlying data management practices and systems.
Q: How short or long should an impact report be?
Impact reports tend to be highly variable in length. Some of this variability is due to differences in fund size and maturity, investment strategy, and the amount of impact data available. However, the length of the report isn’t as important as the relevance of the information contained therein. When preparing impact reports, managers should strive to be concise, focusing on the most pertinent information and presenting it in an accessible format.
Managers can also minimize report length by cross-referencing other documents that summarize key aspects of their impact management approach, impact strategy, and ESG framework.
Q: Who should receive an impact report?
The primary stakeholder of a fund’s impact report is its investors. While some managers also choose to create public impact reports, there may not be complete overlap in the information disclosed across the two reports. In particular, a report to an investor may contain a more complete set of information about an investment’s impact performance, especially for private companies that may be more sensitive to certain information being in the public domain.
When fund managers do produce two reports – one report just for LPs and one for the general public – the latter is often an abridged version of the former.
Funding includes a $2.25 million equity investment from Ford Foundation and Radicle Impact, $1.35 million in recoverable grants from The Rockefeller Foundation and an additional grant from the Tipping Point Fund on Impact Investing
BlueMark, a provider of impact verification services for investors and companies, today announced that it had raised $3.75 million in total funding from the Ford Foundation, Radicle Impact, The Rockefeller Foundation, and the Tipping Point Fund on Impact Investing, all organizations with a shared commitment and long-standing leadership in building the impact investing field. The funding will be used to help expand BlueMark’s verification services across different industries and geographies in continuation of the firm’s mission to strengthen trust in impact investing.
As part of the capital raise, BlueMark has now closed its seed round with $2.25 million in equity funding with the Ford Foundation as the lead investor and Radicle Impact as a co-investor. BlueMark has also received a combined $1.35 million in recoverable grants from The Rockefeller Foundation to advance the market’s understanding of best practices for impact management and impact performance reporting, such as through the publication of research reports based on completed verifications of client alignment with industry standards or frameworks.
In July 2021, BlueMark also received a grant from the Tipping Point Fund on Impact Investing, a donor collaborative with a mission of scaling the impact investing market with integrity, to support research and development around best practices for impact performance reporting.
BlueMark today also announced the appointment of Lauren Booker Allen and Shaun Mays as Independent Directors. Allen is Partner and Head of Impact Advisory at Jordan Park, which provides investment management and financial advice to a distinct community of individuals, families, and institutions. She was previously Senior Manager of Impact Investing at Omidyar Network and began her career at Goldman Sachs. Mays has over 30 years of experience as a Chief Executive and Chief Investment Officer in the investment industry for organizations around the world, including as Head of Aventicum Infrastructure Partners (a joint venture between Credit Suisse and Qatar Investment Authority) in Zurich, CEO of Deutsche Asset Management in Australia, Global Head of Infrastructure Investments for Deutsche Asset Management in New York, and CEO and CIO of Climate Change Capital in London.
The latest funding for BlueMark comes at a pivotal time in the maturation of the impact investing industry. In November 2021 at COP26, the International Financial Reporting Standards Foundation (IFRS Foundation) announced the formation of the International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards in an effort to harmonize different ESG and impact reporting practices. However, the market still lacks an accountability mechanism to ensure that reported sustainability and impact information is relevant, accurate, and useful for investment decision-making. The need for stronger accountability mechanisms was specifically highlighted in the December 2021 reports from the Impact Taskforce on “mobilising private capital at scale for people and planet,” which included the expansion of external verification and assurance of impact among the list of recommendations.
“BlueMark fills an important gap in the impact investment market as an expert, third-party that can look under the hood of investor practices and performance,” said Roy Swan, director of Mission Investments for the Ford Foundation. “At the Ford Foundation, we share their desire to improve accountability, discipline and comparability among impact investors so that the field delivers equitable and sustainable outcomes for all.”
“Even with the continued progress towards harmonization of standards, the impact investing industry still lacks consensus on what constitutes quality and complete impact performance reporting and needs an expert, third-party that can interpret what and how investors are reporting on both their positive and negative impacts,” said Maria Kozloski, Senior Vice President of Innovative Finance at The Rockefeller Foundation. “BlueMark fills a big gap in the market and the firm’s holistic approach to verification encourages impact investors to reach for a higher bar with their impact performance.”
“We are grateful for the support from both funders and clients as we continue to build out our verification services and share with the market our data and insights on market gaps and challenges,” said Christina Leijonhufvud, CEO of BlueMark. “This funding will allow us to reach a larger share of the impact investing market, which depends on third-party verification to accelerate the maturation of the industry and improve transparency, integrity and comparability among impact investors.”
BlueMark’s verification services are structured around two key pillars of accountability for impact:
Impact Management Practice, in which BlueMark verifies the systems and processes used by an investor or company to manage their impact
Impact Performance, in which BlueMark verifies the reporting approach used by an investor or company to communicate their impact strategy, goals and results
To date, BlueMark has completed more than 60 impact verifications for a wide range of investors, including asset managers (e.g., private equity, private credit, infrastructure, fixed income, public equity, and multi-asset managers) and asset owners (e.g., institutional investors, development finance institutions, foundations, and wealth management firms).
BlueMark’s verification services also extend to other key aspects of sustainable and impact investing, including impact labeling and classification—for example in alignment with the Sustainable Finance Disclosure Regulation (SFDR) requirements in Europe and the UN Sustainable Development Goals (SDGs)—as well as ESG practices and performance reporting by portfolio companies and fund managers.
BlueMark is a leading provider of impact verification with a mission to strengthen trust in impact investing and to increase accountability for impact. BlueMark is an independent subsidiary of Tideline, a certified women-owned advisory firm in impact investing. Learn more at www.BlueMarkTideline.com.
About the Ford Foundation
The Ford Foundation is an independent, nonprofit grant-making organization. For more than 85 years it has worked with courageous people on the frontlines of social change worldwide, guided by its mission to strengthen democratic values, reduce poverty and injustice, promote international cooperation, and advance human achievement. With headquarters in New York, the foundation has offices in Latin America, Africa, the Middle East, and Asia.
About The Rockefeller Foundation
The Rockefeller Foundation is a pioneering philanthropy built on collaborative partnerships at the frontiers of science, technology, and innovation to enable individuals, families, and communities to flourish. We work to promote the well-being of humanity and make opportunity universal. Our focus is on scaling renewable energy for all, stimulating economic mobility, and ensuring equitable access to healthy and nutritious food. For more information, sign up for our newsletter at rockefellerfoundation.org and follow us on Twitter @RockefellerFdn.
About Radicle Impact Partners
Radicle Impact is an impact venture fund focused on social justice, environmental resilience and economic sustainability. Radicle invests in early-stage businesses in Good Food, Good Money and Good Climate. The firm has a foundational emphasis on diversity, equity and inclusion. Radicle’s objective is strong social and environmental impact with attractive financial returns. Founded in 2013, the firm’s mission is to change the venture industry for good. http://www.radicleimpact.com
About the Tipping Point Fund on Impact Investing
The Tipping Point Fund on Impact Investing (TPF) is a donor collaborative vehicle developed with the mission of creating and supporting public goods that are critical to the continued growth and fidelity of the impact investing market. The TPF was launched in December 2019 with an initial $14 million in philanthropic capital, which will be used to develop the infrastructure that is needed to mobilize more private capital for impact. The funding will build on existing field building efforts by prioritizing the areas that are chronically underfunded, are best suited for collective action and require additional support beyond that provided by individual grantmakers. Learn more at www.tpfii.org.
This article was originally published in ImpactAlpha and is jointly authored by BlueMark (Christina Leijonhufvud & Sarah Gelfand) and the Global Impact Investing Network (Kelly McCarthy & Dean Hand).
“You can’t manage what you can’t measure” is a now familiar trope in sustainable investing circles, reflecting the belief held by some that the answer to our sustainability challenges is a universal ESG metrics set.
With growing scrutiny over whether sustainable and impact investments are actually contributing to achieving the Sustainable Development Goals, the need for more reliable and verifiable performance reporting on sustainability and impact results is undisputable. A standardized, consistent set of metrics is undoubtedly a helpful tool for achieving comparability across investors against a baseline set of ESG considerations but is distinct from what is needed to achieve accountability for impact outcomes.
Acting on impact data is not about tracking a handful of universal metrics, but rather about evaluating how and which investment decisions can lead to better and longer-lasting outcomes for society and the planet. Investors and other stakeholders need access to information about the intentionality, context and distinct contribution to impact associated with impact investments.
Clarity about the intentionality of an investment is key to understanding and evaluating the relevance of an investor’s goals and KPIs.
Contextual information is key to interpreting the results. The scale of impact at a point in time, versus the pace of change over time, can tell an investor two very different stories of impact. Context also helps account for the qualitative aspects of pursuing impact, such as the scale of the sustainability challenge in a given market.
Further, information about an investor’s engagement with their underlying portfolio is key to understanding their role in enabling impact, including the relative contribution of their capital and expertise.
To put it another way, investors need access to a more complete set of information about impact. They also need tools to be able to interpret and confidently act on the information, especially if they are going to be able to make and manage investments in accordance with sustainability and impact goals and be accountable to the stakeholders they seek to benefit.
Private Markets ESG
Several initiatives are underway to harmonize measurement and reporting of ESG data, efforts that reflect the market’s thirst for more widely available, standardized and comparable information. While these initiatives could help establish a baseline requirement for ESG transparency, understanding progress towards and achievement of sustainability goals requires significant additional effort.
Two recent announcements aimed at improving the use of ESG data in the private markets signal progress, but also how much further we still have to go.
In the first announcement, a group of leading GPs and LPs with more than $4 trillion in combined AUM launched the ESG Data Convergence Project to “advance an initial standardized set of ESG metrics and mechanism for comparative reporting.”
As part of the initiative, several GPs have agreed to track and report to LPs on six metrics across their investment portfolios, including: Scopes 1 and 2 greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires, and employee engagement. These metrics borrow from existing ESG measurement frameworks created by CDP, CDSB, GRI, SASB, TCFD, and others, and broadly align with the ‘Stakeholder Capitalism Metrics’ introduced in September 2020 by the World Economic Forum’s International Business Council (IBC).
As Marcie Frost, CEO of CalPERS, put it: “We have found it challenging to effectively measure impact in our private equity portfolio because of the multitude of frameworks and definitions used by GPs and LPs. This initiative simplifies sustainability reporting by using comparable metrics which allow us to gain insight into the investment risks and opportunities in our private markets portfolio.”
The second announcement (less than a week later) was the launch of Novata, an ESG data hub designed to “enable private companies to collect, analyze, benchmark, and report relevant ESG information,” which was backed by a consortium of non-profit and for-profit leaders including the Ford Foundation, Omidyar Network, S&P Global, and Hamilton Lane. The 10 metrics chosen by Novata include a combination of Environmental issues (e.g., GHG emissions, water and wastewater management), Social issues (e.g., employee safety, data security), and Governance issues (e.g., board diversity, business ethics), all of which align to various established ESG frameworks.
Meanwhile, in the broader financial markets, the IFRS Foundation announced the much-anticipated launch of the International Sustainability Standards Board (ISSB) to develop “a comprehensive global baseline of high-quality sustainability disclosure standards.” The ISSB will build on the work of existing investor-focused reporting initiatives, with the IFRS Foundation committing to consolidate the teams and expertise of the Climate Disclosure Standards Board (CDSB) and Value Reporting Foundation (VRF) under a new board.
The inspiration behind this effort, according to Erkki Liikanen, Chair of the IFRS Foundation Trustees, is that “to properly assess related opportunities and risks, investors require high-quality, transparent and globally comparable sustainability disclosures that are compatible with the financial statements.”
Impact performance reporting
If only the answer to decision-useful impact performance reporting were as simple as aligning on a universal, standardized set of metrics.
Harmonized metrics, data aggregation platforms, and widely accepted disclosure standards are all foundational elements of a marketplace that supports greater ease of comparison, benchmarking, and investment decision-making. But the question remains: will such data contribute to better understanding of achievement of sustainability and impact outcomes and improved capital allocation towards investments that steward human and natural capital?
It’s one thing for investors to report on a universal set of ESG datapoints, based primarily on their relevance to financial performance. But it’s quite another to provide reliable and balanced information about the contribution of investments to broader social and environmental outcomes.
This higher bar for impact performance reporting is the north star for the impact investing industry, and a prerequisite for unlocking capital at a scale large enough to address today’s urgent climate and social inequity crises.
To address the information gap that limits flows of capital to and contributes to skepticism of sustainable investing, the market needs reporting and disclosure standards that reflect the broader set of factors required to assess impact results (positive and negative) and risks.
Clearly, more work remains to be done to harmonize impact performance reporting, including agreeing on the scope of content to be included, the desired frequency and format of reports, and a market-acceptable mechanism for independently verifying the completeness and quality of these reports. Several organizations are actively working to address this challenge, including the GIIN, B Lab, BlueMark and UNDP’s SDG Impact team, each of which is committed to a stakeholder-centered approach that goes beyond the financial materiality prism still governing much of the sustainable investing market in the U.S. and other jurisdictions.
In May 2021, after a lengthy public comment period, the GIIN released COMPASS: The Methodology for Comparing and Assessing Impact to provide impact investors and service providers with a “methodology to assess and, most critically, compare impact results.” This work builds on the GIIN’s IRIS+ system, and several years of gathering real-world impact performance data at the investment level, to provide guidance on calculations and approaches for interpreting change in impact over time as well as for assessing impact performance relative to the size of specific social and environmental solutions gaps. The COMPASS methodology reflects aspects of several industry-wide efforts designed to bring more rigor and meaning to analysis and comparisons of impact performance data.
In July 2021, BlueMark and the GIIN each received funding from the Tipping Point Fund on Impact Investing to conduct separate yet complementary research, in consultation with market actors, to clarify needs and opportunities related to the verification of impact performance data. These research efforts build on the recognition that independent assurance is key to increasing confidence in the quality and objectivity of reported information as well as to facilitating impact performance benchmarks that are built from a base of relevant and reliable data. For the industry, this work is foundational to evaluating impact performance at scale, and essential to driving the market upward toward ever improved impact yardsticks (disclosure: BlueMark is a sponsor of ImpactAlpha).
Ultimately, the emergence and market adoption of robust impact performance reporting standards and verification services, and the public availability of data about industry performance will contribute to enhanced accountability and confidence in impact investing and its role in helping to achieve our shared sustainability goals. These additional pieces of the puzzle are critically needed for a marketplace to effectively allocate capital for transformative impact.
Christina Leijonhufvud is CEO and Sarah Gelfand is managing director at BlueMark. Kelly McCarthy is director of Iris and impact measurement and management and Dean Hand is research director at the Global Impact Investing Network.