BlueMark Practice Leaderboard expands to 10 leading impact investors with additions of AgDevCo, BlueEarth Capital, Calvert Impact Capital, and Nuveen Fixed Income Impact
BlueMark, a leading provider of independent impact verification and intelligence for the impact and sustainable investing market, today published its fourth annual “Making the Mark” report with data and insights on best practices in impact management. This year’s report, available at https://bluemarktideline.com/making-the-mark-2023, is based on 84 practice verifications for investors managing a combined $206 billion in impact AUM, making it BlueMark’s largest research sample to date. Leveraging its expanded dataset, BlueMark has for the first time published custom benchmarks by asset class and thematic focus.
BlueMark also announced the addition of four more investors – AgDevCo, BlueEarth Capital, Calvert Impact Capital, and Nuveen Fixed Income Impact – to the BlueMark Practice Leaderboard, joining Bain Capital Double Impact, British International Investment, Finance in Motion, LeapFrog Investments, Nuveen Private Equity Impact, and Trill Impact. The Practice Leaderboard was first launched in the 2022 edition of “Making the Mark” to spotlight those investors who scored in the top quartile based on their alignment with the Operating Principles for Impact Management (or Impact Principles), a leading market standard for impact management practices that forms the foundation for BlueMark’s practice verification service.
Other key data and insights from the 2023 edition of “Making the Mark” include:
The adoption of staff-incentive systems linked to impact remains limited, with only 31% of verified investors explicitly integrating impact considerations into staff incentives. The most common approach at 25% is through annual staff performance reviews related to impact, including a subset of 15% that make the link explicit through variable pay and bonus structures. However, only 7% of the market has linked their impact performance to carried interest, a mechanism that is only relevant for private equity and venture capital investors.
55% of investors include an analysis of impact risk in due diligence, however investors tend to focus their assessments on the likelihood of impact occurring (“execution risk”) rather than assessing potential negative impacts (“unexpected impact risk”). In fact, only 24% of investors include a standardized assessment of negative impacts as part of their processes, which suggests the market has more work to do when accounting for potential negative outcomes in due diligence.
Less than a third of investors (32%) are engaging with target stakeholders and actively soliciting their input to validate outcomes alongside investee data. While still a minority practice, a slight increase compared to last year’s research sample shows that soliciting input from end-stakeholders (e.g., workers, customers, or affected community members) experiencing the impact outcomes will become a key part of effective impact management and monitoring.
27% of investors are taking consistent actions to ensure sustainability of impact creation, while just more than half of investors (60%) have a policy or approach in place to consider the sustainability of impact at and beyond exit. This suggests there is a long way to go before impact considerations take equal precedence to financial considerations and investors proactively identify actions to preserve impact as part of exit strategies. Given exit practices range broadly across asset class contexts, additional norms and consensus best practice across investment strategies will be required for this market practice to continue to improve.
The report also includes case studies on innovations in impact investing, featuring Adams Street Partners, Franklin Templeton, FullCycle Climate Partners, Schroders Asset Management, and Summa Equity.
“The expanded dataset in this year’s ‘Making the Mark’ report reveals an increasingly diverse range of impact investors across asset classes and strategies, reflecting growing adoption of impact management standards across investor types,” said Christina Leijonhufvud, CEO of BlueMark. “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.”
As part of this year’s “Making the Mark” report, BlueMark also updated its analysis of signatories to the Impact Principles. Out of 170+ signatories, 119 had published a verifier statement as of May 2023, of which 15 were internal verifications. BlueMark was responsible for 42, or 40%, of all third-party verifications. In addition, BlueMark conducted 40 practice verifications for investors who are not (yet) signatories to the Impact Principles, signaling the growing demand for impact verification beyond the use case of satisfying the requirements of voluntary standards.
Overall, across all its verification services, BlueMark has completed more than 130 verifications for 95 clients across the investment management industry, which collectively manage more than $214 billion in impact AUM. This is equivalent to about 20 percent of the total impact investing market, based on the latest estimates from the Global Impact Investing Network (GIIN).
BlueMark is a leading provider of independent impact verification and intelligence for the impact and sustainable investing market. As a certified B Corp, BlueMark’s mission is to “strengthen trust in impact investing” by providing investors with market-leading impact verification services, benchmarks, and analytics. BlueMark’s verification methodologies draw on a range of industry standards, frameworks, and regulations, including the Impact Management Project (IMP), the Operating Principles for Impact Management (Impact Principles), the Principles for Responsible Investment (PRI), SDG Impact, and the Sustainable Finance Disclosure Regulation (SFDR). Learn more about BlueMark and impact verification at www.bluemarktideline.com.
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.