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 and Morgan Lewis Publish Whitepaper for Sustainable Investors on Best Practices for Complying with Financial Regulations and Aligning with Industry Standards
Asset managers today must address an ever-growing list of rules and expectations from regulators, investors and other stakeholders about their approach to sustainable investing. From the passage of anti-greenwashing rules in Europe to the launch of new standards for sustainability reporting, it can be a daunting task for investment firms to keep up with the market’s rapidly evolving requirements.
WATCHa recording of a webinar introducing the report that inclues perspectives from two asset managers who have been working to adapt their policies and practices to keep apace with the market.
This article was originally published in FundFire and is co-authored by Tristan Hackett, Director, Europe for BlueMark, and Christina Leijonhufvud, CEO of BlueMark.
Private fund managers may know their investors are increasingly embracing sustainable, impact or environmental, social and governance investment approaches – and that regulators across the globe are boosting focus on these strategies.
But managers now face a daunting new regulatory standard – stricter definitions of what constitutes responsible investment strategies that not only exposes these firms to compliance scrutiny, but also lets investors quickly assess whether a private fund meets the mark or is merely wrapping itself in green offering documents.
The U.S. is still taking its first steps on this path, with the Securities and Exchange Commission this year issuing a new ‘Risk Alert’ on ESG investingoutlining the early stages of examining investment advisers for “greenwashing.” But the major shift has taken place in Europe, a market most private fund managers can’t ignore – and that historically has paved the way on ESG issues in the U.S.
The European Union made a gravity-shifting move earlier this year by introducing formal requirements for the Sustainable Finance Disclosure Regulation (SFDR) that represent one of the most direct anti-impact washing efforts to date.
Our recent public statement on the SEC and SFDR warns managers that the earth has moved: “Regardless of which label an investor chooses to use – ESG, responsible, sustainable, impact, etc. – the message from regulators is clear that investors must have the right policies and practices in place to back up what they claim to be doing or the results they claim to be achieving.”
But managers should also recognize that these new standards have the potential to push existing impact management concepts and best practices into the mainstream. SFDR aligns with and reinforces existing impact investing frameworks and standards, like the Impact Management Project (IMP) and the Operating Principles for Impact Management (the Impact Principles). And its activation represents an important inflection point for the financial community broadly – and for the sustainable finance community specifically – in the fight against greenwashing and impact-washing.
SFDR is at heart an anti-greenwashing rule that requires all investment firms operating in Europe to categorize their investment products according to how they approach sustainability risks and opportunities. Investment managers with responsible investing products can choose among three different categories, each with specific and increasingly stringent disclosure requirements. These categories also roughly align with the IMP’s ABC classification framework introduced in 2015, which encourages investors to think more holistically about the positive and negative impacts of their investment decisions.
The first category, Article 6, is the minimum standard, which requires all financial market participants to disclose their policy on integrating sustainability risks and, in doing so, show how they do (or do not) “avoid harm” in their investment decision-making processes.
The second bucket, Article 8, is a higher standard for investment products that are actively promoting environmental and social characteristics, and it requires investment managers to disclose how they seek to “avoid harm” as well as “benefit stakeholders.”
The last grouping, Article 9, constitutes the highest standard, and is generally applicable to funds that have sustainable investment as their core objective. Article 9 requires investment managers to go a step further and disclose how they are actively “contributing to solutions,” particularly as it relates to climate change and other sustainability issues.
The higher bar for Article 9 funds represents a significant nod to many of the existing industry best practices for impact management. But whether an investor aims for a low bar or a high bar, the entire market benefits when there is a shared understanding of who is doing what and why.
Private fund managers should be thoughtful regarding which category they choose. While many investors may opt for the slightly less onerous Article 8 designation, we believe any self-described impact investors should be prepared to be accountable for the Article 9 designation.
Picking a category is merely the first step. Private fund managers will need the right tools and frameworks to get into compliance with SFDR. A good starting point for managers still unfamiliar with IMP and the Impact Principles would be to ensure they have developed a robust thesis that articulates the fund’s concrete ESG or impact objectives (while drawing on industry standards), and that describes how the investment strategy helps to achieve those objectives.
SFDR will not only change the game for managers in their compliance function. Initial data on the European investment universe shows just how far SFDR’s reach could be across managed assets in the market. A recent Morningstar analysis of more than 150,000 investment products found that 20.9% of funds are classified as Article 8 and 2.7% are classified as Article 9, representing $2.5 trillion in combined assets under management. Several of Europe’s biggest asset managers – including Amundi, BNP Paribas and Robeco – are reportedly planning to have at least 75% of their assets aligned with either Article 8 or Article 9 by the end of the year.
The investment management industry’s current impact-washing and greenwashing problem is in large part caused by financial market participants identifying themselves as “impact” or “sustainable” without any concrete evidence to back up such claims. SFDR was specifically designed to confront this problem by increasing transparency and accountability in the marketplace for sustainable investments.
But perhaps just as important is the regulation’s potential to encourage more investors to take the critical next steps, such as signing onto the Impact Principles. The rollout of SFDR could emerge as a turning point in the history of sustainable finance – the moment in which a broad swath of the market agrees on what is or isn’t sustainable and gets to work addressing urgent sustainability challenges.
