ImpactAlpha – “Adopting impact performance standards to hold sustainable investing accountable for real-world outcomes”
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.
This piece was originally published in ImpactAlpha.
Most of us were taught growing up that the ends don’t justify the means. It matters how you go about achieving your goals. The same is true when it comes to impact investing – the process by which investors achieve their results matters as much as the results themselves. Just as an athlete or musician can only master their craft through disciplined practice, an impact investor will be better-positioned to achieve impact results if they have high-quality and rigorous impact management practices.
The good news is that the impact investing industry is advancing standards for both practices and performance, with recent progress particularly on practice standards. These standards and frameworks – notably including the Operating Principles for Impact Management (Impact Principles), Impact Management Project (IMP) and the SDG Impact Standards – describe how investors can integrate impact considerations throughout the investment process, from goal-setting to due diligence to exit.
Still, many practitioners are unsatisfied with the focus on process and practice, and believe that impact performance results and outcomes (e.g., carbon emissions reduced, quality jobs created, lives saved or improved, etc) speak for themselves. While it is hard to debate that results matter, the standards for impact performance reporting are still in development.
Certainly, encouraging progress is underway on this front thanks to the leadership of organizations like the Global Impact Investing Network (GIIN), which recently published its “Compass: Methodology for Comparing and Assessing Impact”, and the IFRS Foundation, which is working on creating an International Sustainability Standards Board (ISSB) to harmonize various sustainability reporting standards, an initiative led by Clara Barby from the IMP.
However, in the meantime, most investors and companies lack the information needed to effectively compare one firm’s impact performance results to another’s.
While efforts to establish unifying standards for impact performance measurement and reporting continue, rigorous evaluation of investors’ impact management practices can tell us a great deal about the authenticity of an investor’s stated impact objectives and their chances for achieving those objectives.
Consider a scenario where two fund managers specializing in real estate both claim to deliver similar levels of impact and financial performance – for example, providing 10,000 affordable housing units to communities in need while earning risk-adjusted returns of 6-8% per annum. An expert, third-party verification of those managers’ impact management practices by a firm like BlueMark would provide insight as to how each manager:
- Defines and evaluates expected impact for each potential investment property;
- Tracks and monitors whether the properties are achieving the impact expected; and
- Works with property managers to solicit input from community members and other stakeholders in the evaluation of impact and to address instances of impact underperformance;
These are among the kinds of practices that the impact investing community considers proper impact management. Naturally, it’s fair to expect that the manager with the more thoughtful and disciplined approach to impact management would be more likely to realize optimal impact results.
This is why independent verification is an important enabler for allocators to efficiently “look under the hood” of managers’ investment practices to understand how effectively impact considerations are integrated throughout the lifecycle of the investment. A well-designed verification methodology that’s grounded in impact management expertise can be an important due diligence tool for allocators looking to compare the practices (as well as the performance) of various fund managers.
The standardization of best practices in impact management
The rapid rise of standards like the Impact Principles and SDG Impact Standards shows that impact management practices will remain an important piece of the impact investing puzzle. Already, there is a growing expectation that impact investors be aligned to one or more of these standards, with third-party verification emerging as an important accountability mechanism to assure that investors have the right systems, processes, and capabilities to contribute to achieving the intended impact.
BlueMark’s ‘Making the Mark’ research report, which was based on 30+ verifications of impact management systems, showed significant differences in how investors approach impact investing, with some investors earning top scores on their alignment with the Impact Principles while other investors had significant gaps or shortcomings in their approach. To take our research a step further we created the BlueMark Practice Benchmark, which functions both as a resource for investors to be able to see how they stack up against their peers and as a tool for asset allocators and other market participants to differentiate between Practice Leaders (those in the top quartile) and Practice Learners (those in the bottom quartile).
While impact investors shouldn’t lose sight of the importance of delivering impact performance in line with stated goals, the process by which those outcomes are achieved is just as important. Impact investors should be able to show, for example, that they are contributing to the achievement of reported impact results, engaging with investees to minimize negative consequences, risks, or side-effects, and taking measures to ensure impact is sustained beyond the life of the investment.
One day the impact investing industry may find a way to integrate both practices and results into a comprehensive disclosure and reporting framework. Until that day arrives, it’s imperative that impact investors back up their impact claims by adopting standards for impact management practices in addition to reporting out on their results.
Christina Leijonhufvud is the CEO of BlueMark, where she manages all aspects of business strategy, new product development, and external relations. To date, BlueMark has completed 40+ impact verification assignments across investor types and asset classes.
BlueMark, a Tideline company, submitted a comment letter in response to the IFRS Foundation’s Consultion Paper on Sustainability Reporting. The full text of the letter is available below and can also be downloaded from the IFRS Foundation’s website here. More information on this effort can be found on the IFRS Foundation’s sustainability reporting project page.
Dear IFRS Foundation Trustees,
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.
CEO, BlueMark, A Tideline Company
Managing Partner, Tideline