ImpactAlpha – “What impact investors should know about impact reporting”

ImpactAlpha – “What impact investors should know about impact reporting”

This piece was originally published in ImpactAlpha.

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.

To learn more about BlueMark’s research into best practices for impact reporting, please visit https://bluemarktideline.com/raising-the-bar-2/

 

Background on impact reporting

 

Q: What is the purpose of impact reporting?

  • 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.
BlueMark Publishes Framework to Bring More Clarity to Impact Reporting

BlueMark Publishes Framework to Bring More Clarity to Impact Reporting

BlueMark’s framework is designed to evaluate the completeness and reliability of impact reporting prepared by fund managers for their investors.

 

BlueMark, a leading provider of independent impact verification and intelligence for the impact and sustainable investing market, today published a framework for evaluating the completeness and reliability of fund managers’ impact reports. The framework is designed to help impact fund managers improve how they disclose their impact results to their investors and to make it easier for investors to assess the quality of the impact reports they receive. The framework, which also provides the basis for BlueMark’s approach to verifying impact reports, is available for download at www.bluemarktideline.com/raising-the-bar-2.

BlueMark’s reporting verification methodology was developed after more than 18 months of research, which included 19 verifications of client impact reports, analyses of 30+ other impact reports and interviews with more than 50 impact investing experts. The most recent phase of the research involved a pilot project with Impact Frontiers, a market-building collaborative for impact investors, and seven of its member-impact fund managers, each of whom paid to have their impact reports verified by BlueMark using the new framework. These seven firms – which work across diverse sectors, geographies, and asset classes – included Anthos Fund & Asset Management, Big Society Capital, Impact Engine, Rally Assets, Japan Social Innovation and Investment Foundation (SIIF), and TELUS.

“Impact reporting is an important part of how impact investors are held accountable for their impact claims,” said Christina Leijonhufvud, CEO of BlueMark. “With this new framework for evaluating impact reports, our goal is to improve transparency and credibility by driving stronger alignment around how we as a field define quality impact reporting, including the specific steps impact investors can take to level up their reports.”

“The impact fund managers we collaborate with have a shared desire for a clear and transparent approach to impact reporting that allows for a more holistic understanding of impact performance,” said Mike McCreless, Executive Director of Impact Frontiers. “BlueMark’s framework helps fill this critical gap in the impact investing market by clarifying the types of information that impact reports should include.”

 

BlueMark’s reporting verification framework

BlueMark’s research and stakeholder consultation on best practices in impact reporting revealed a great deal of agreement among market actors as to what constitutes quality and decision-useful reporting. Based on these insights, BlueMark designed a framework for verifying impact reporting that is anchored around two key pillars — Completeness and Reliability.

Under the Completeness pillar, BlueMark assesses the scope and relevance of reported information related to an investor’s impact strategy and results at both the portfolio- and investment-level.

Under the Reliability pillar, BlueMark assesses the clarity and quality of impact data presented in the report, including underlying data management practices and systems.

As part of the verification methodology, BlueMark assigns ratings to these criteria to help impact investors understand where they excel in their reporting and where they still have room for improvement. These ratings will be used to create industry benchmarks similar to the BlueMark Practice Benchmark, which was introduced in BlueMark’s “Making the Mark” research series on trends and best practices in impact management.

BlueMark’s methodology focuses on information that is essential for external stakeholders–in particular investors in impact funds–to gauge whether those funds are reporting on the right things and in the right way. It stops short of defining what “good” or “bad” impact performance looks like, which remains a challenge across the impact investing industry due to the limited availability of data on performance measures that would allow for appropriate comparisons across different types of impact funds and strategies.

To date, BlueMark has completed 100+ impact verifications for impact investors managing a combined $192 billion in impact AUM. Approximately 80% of these have been verifications of an investor’s impact management (IM) practices, while the remaining 20% have been impact reporting verifications. BlueMark plans to conduct additional research on the relationship between robust IM practice and quality impact reporting to help advance best practices across the field.

 

About BlueMark

BlueMark is the 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.” 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.

BlueMark Publishes Research Calling for Market Alignment on the Key Elements of Quality Impact Performance Reporting

BlueMark Publishes Research Calling for Market Alignment on the Key Elements of Quality Impact Performance Reporting

“Raising the Bar” report is first in a series aimed at improving the quality and usefulness of impact performance reports produced by impact investors

 

Apr. 19, 2022 – BlueMark, a specialist provider of impact verification services for investors and companies, today published a report calling for a stronger approach to impact performance reporting that would make it easier for the market to analyze and compare impact performance. The full report, “Raising the Bar: Aligning on the Key Elements of Impact Performance Reporting,” is available at https://bluemarktideline.com/raising-the-bar

The research was conducted with the support of grant funding from The Rockefeller Foundation and the Tipping Point Fund on Impact Investing.

“While impact reporting by private markets impact investors is a common practice, the lack of widely-accepted guidelines for reporting on impact performance has resulted in heterogeneous approaches and a perception by end readers that the reports are incomplete and insufficient to meaningfully interpret impact results,” said Christina Leijonhufvud, CEO of BlueMark. “Given the market imperative to improve the quality and usefulness of impact performance reports, we wanted to gain a deeper understanding of best practices in impact reporting and propose pathways to accelerate their adoption.”

A two-pronged approach was taken to the research project. First, BlueMark analyzed a sample of 31 recent impact reports by private market general partners (GPs) to identify trends and common practices. Second, BlueMark consulted with 57 diverse industry stakeholders–via both one-on-one interviews and focus groups–to gain insights into the challenges and opportunities related to producing and consuming impact reports.

These research activities surfaced several gaps and challenges that limit the utility of impact performance reports, including: lack of specificity about goals or targets, cherry-picking of data, missing stakeholder perspectives, and emphasis on successes as opposed to risks or underperformance.

However, the research also revealed a high degree of alignment around what constitutes a quality and decision-useful impact performance report. Building on these areas of consensus, BlueMark–in close consultation with industry stakeholders–composed the following proposed “Key Elements” of quality impact performance reports.

 

Overarching Elements:

  • Completeness: A quality report provides information about all portfolio holdings and addresses impact performance at the fund and holding level.
  • Clarity: A quality report presents impact information in a manner that is accessible and that facilitates interpretation, with clear definitions, assumptions and supporting calculations.

Specific Elements:

  • Well-defined objectives and expectations: A quality impact report is explicit about the fund’s intent and impact objectives, including clarity on investor contribution and expected results.
  • Relevant metrics: A quality impact report includes quantitative metrics that are drawn from industry standards wherever possible and that link to the articulated impact objectives.
  • Relative performance results: A quality impact report provides information that allows the reader to effectively interpret and contextualize measures of progress and performance against targets or expectations and against external benchmarks, as available. 
  • Integrated stakeholder perspectives: A quality impact report identifies affected stakeholders and incorporates their experiences and voices to the extent possible. 
  • Transparency about risks and lessons learned: A quality impact report is forthcoming about potential impact risks, failures, and lessons learned.

 

These elements were tested in focus groups of both GPs and LPs, including members of the BlueMark Allocator Working Group, a learning community of some of the leading institutional allocators with a shared commitment to impact investing.

To help increase adoption of these elements, BlueMark is collaborating with Impact Frontiers, an initiative of the Impact Management Project (IMP), to pilot an approach to verifying impact reports with a select group of firms from the Impact Frontiers community. The verification methodology will build on the research findings in the first “Raising the Bar” report. Key learnings from this pilot will be published in a second report in late 2022.

“The desire to advance beyond impact practice to impact performance is a common refrain among the investors participating in Impact Frontiers cohorts,” said Mike McCreless, Executive Director of Impact Frontiers. “The report launched today represents a great step in that direction and we look forward to collaborating with BlueMark and the Impact Frontiers community of investors to continue the momentum.” 

BlueMark’s current verification services are structured around the two key pillars of accountability for impact: Impact Management Practice (the extent to which an investor or company has the systems, processes, and capabilities to contribute to achieving the intended impact); and Impact Performance (the extent to which an investor or company has achieved the intended impact results). To date, BlueMark has completed over 65 verifications for organizations managing a combined $156+ billion in impact assets.

About BlueMark

BlueMark is a leading provider of impact verification services for investors and companies. Founded in 2020, BlueMark’s mission is to “strengthen trust in impact investing.” 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 (OPIM), 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

ImpactAlpha – “What impact investors should know about impact reporting”

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.

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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.