ImpactAlpha – “Why independent verification should be part of every investor’s impact management journey”
This piece was originally published in ImpactAlpha.
It is widely accepted that third-party assurance plays a critical role in increasing external trust and confidence in financial reporting. However, the learning benefits of the assurance process for the entity being assured are not as well understood. A good financial audit can help firms spot unknown risks, identify areas for improvement, and offer other insights to strengthen systems and processes for the future. The same is true for impact assurance.
BlueMark, a provider of impact verification services for investors and companies, was founded in January 2020 with this spirit of continuous learning in mind. While some might wonder whether it’s worth engaging an external assurance provider to verify their approach to achieving impact and question the value of paying for what could be perceived as a ‘check-the-box’ exercise, our experience shows that impact verification is emerging as a key tool for best-in-class impact investors.
Over the past year we have completed more than 30 impact verifications across a wide range of investor types and asset classes. The institutions we’ve verified have had differing levels of impact management (IM) sophistication – some have been making impact investments for decades while others are in the process of launching their first impact funds. But what they all have in common is a recognition that achieving best practice IM is a journey that benefits from a willingness to learn and evolve. Further, they recognize that the insights gleaned from an independent impact verification are an indispensable part of that journey.
Best practices at each step of the impact management journey
At earlier stages in the journey, firms are often focused on establishing and implementing a set of baseline practices. In this phase, most investors are seeking to understand the extent to which they “meet the bar” so they can create an action plan to improve their IM systems accordingly. This might involve strengthening an impact thesis, standardizing the use of impact criteria with Investment Committees, or refining the metrics used to track impact results over time.
During later stages in the journey, firms are more focused on optimizing their approach. At this phase, many seek to understand what improvements or innovations could enhance an already sophisticated IM system. This might involve aligning employee incentives with impact, engaging more consistently with community stakeholders, or formalizing processes for considering impact at and beyond exit.
Regardless of the stage, a well-designed impact verification exercise can help a manager identify areas for improvement and create internal accountability and alignment with respect to impact management priorities and goals. A set of fresh eyes can help investors assess the extent to which their IM processes are contributing strategically to impactful work and point the way to where and how these processes can be strengthened. Additionally, as impact management practices are evolving rapidly, even those impact investors who have been iterating on their IM systems for decades have important things to learn and areas for potential improvement. A trusted third-party verifier can help investors keep pace with new and changing frameworks and determine which elements are most relevant based on their impact goals and areas of focus.
Whether it’s emerging industry standards requiring verification or institutional investors requiring that impact fund managers first be verified to earn an allocation, it’s clear that third-party impact verification is here to stay as a defining feature of the impact investing market. Those who embrace independent verification will undoubtedly be better positioned to address concerns about greenwashing. By embracing the opportunity to learn and strengthen their impact management practices, impact investors will be able to chart a course towards higher levels of practice while also communicating their IM approach with confidence and credibility – and most importantly, make better decisions that lead to greater impact.
Sarah Gelfand is one of the impact investing market’s early pioneers. She was a founding Director at the Global Impact Investing Network (GIIN), where she led development of the industry’s leading system for measuring and managing impact (IRIS+). As Managing Director of BlueMark, Sarah co-leads business strategy, business and product development, and supports the firm’s engagement with various market-building and standard-setting initiatives.