There is a bit of an obvious problem with letting the fox guard the henhouse. It is a conflict of interest that can rightly be applied to many circumstances, not least of which is impact investing.
If you take impact investors at their word, they are intentionally generating positive social and environmental impact alongside financial returns. But who is judging how that impact is achieved and what does having impact even mean in different contexts? If you are letting those self-same investors make claims about how much impact they are having, then you can wade into some tricky territory.
These are not new questions, and clarity is emerging from some of the leading practitioners in the field pushing for impact verification services. Impact verification allows an independent third party to assess how well impact is being managed throughout the investment life cycle, from strategic intent through to exit. The industry took a big step forward with the introduction of the Operating Principles for Impact Management, launched in 2019 by the International Finance Corporation (IFC), the private-sector arm of the World Bank.
These nine principles help the industry reach broad consensus on best practices for managing impact, using language that is accessible and outlining steps that are practical. The ninth principle calls for the likes of asset managers and asset owners to publicly disclose how well their impact investments are aligned to the principles and to have their level of alignment be independently verified. The hope is that their introduction will bring greater discipline and transparency to impact investing. A total of 60 organisations signed up when the Operating Principles were first introduced, and today there are more than 100 signatories from around the world.
“A watershed moment”
For Tideline, an impact investing consultancy firm, the Operating Principles were a watershed moment. Not only did a number of their clients become signatories, many asked the obvious question: “How do we know if what we’re doing as an investor aligns to the Principles?” Responding to this new demand, Tideline launched BlueMark, its impact verification arm, in January 2020. The aim is to bring their expertise in what constitutes best practice to clients looking to be independently assessed.
How do we know if what we’re doing as an investor aligns to the Principles?
“The lightbulb went off for us,” says Christina Leijonhufvud, BlueMark’s CEO and co-founder. “We realised that if we were going to perform verifications with integrity, discipline and rigour, we needed to stand it up as a separate line of business and be very attentive to any conflicts that could arise between our consulting relationships and our verification engagements.”
Christina moved over from Tideline, where she was a managing partner and co-founder, and threw herself into building out the new business. As it continues to grow, she explains that the staff will be increasingly independent of the parent company. Already, there are clear conflict procedures, making it impossible for a BlueMark analyst to verify a past consulting client.
All in the timing
Like many new businesses, timing is often a crucial component of success. “I think a lot of dedicated players in this market are recognising that if they don’t undergo the verification themselves, it’s ultimately going to be required,” the CEO tells Invest for Good. “So there’s a movement underfoot towards independent assurance that is, I think, undeniable right now.”
It’s her view that the market needs to undergo this shift for impact investing to truly go mainstream and to bring on board institutional investors by giving them more confidence when making allocations to impact managers and building trust in the impact label. For instance, impact verification is inarguably an important tool in minimising exaggerated claims of impact known as greenwashing or impact-washing that have been one persistent criticism of the industry.
As the movement gains momentum, more and more companies are getting into the business of providing verification, including the big four accounting firms and some boutique firms in Europe. Christina predicts that it will become a competitive business that will organise over time around several dominant players, much like the credit rating industry coalesced around three big firms that control about 95% of the market.
Could so many interested parties actually cloud the effort towards achieving clarity? Christina doesn’t think so but admits that there is still a bit of confusion as the market continues to evolve and grow. “There’s still a lot of work going on, and there’s no single best practice in the market. However, I think there is leaps and bounds of progress being made in terms of harmonising various frameworks.”
It’s a field led by organisations heavy on names that can be shortened to acronyms, including IRIS and HIPSO. These two are being aligned with each other so that there are common definitions and measurement metrics. Another notable player is the Impact Management Project (IMP), which has been vocal about championing common standards through a community of over 2000 practitioners. In a nod to these industry leaders, Christina said: “Without the kind of work that’s been done over many years in developing robust standards for impact measurement and management, it wouldn’t have made sense, frankly, to launch a verification service this early in the market’s evolution.”
Reporting standards are also coming together to create a more cohesive picture for stakeholders and companies producing impact and sustainability reports. As a result, BlueMark has launched a complementary service that focuses specifically on impact reporting, again because investors and clients were asking for it. While BlueMark’s approach draws on a number of different standards, there is increasing collaboration on this front. As Christina puts it, there is now so much consensus on what constitutes best practices in impact measurement and impact management that there is “no excuse” for not aligning to robust standards. This doesn’t mean that every investor should be treated the same; each will have their own strategy and investment thesis - their “secret sauce” - and these will be taken into account.
Not a box-ticking exercise
It’s natural to question whether all these different frameworks with the whiff of academia are in fact box-ticking exercises that, once completed, are forgotten. However, the chief executive insists that BlueMark’s impact verification process, which takes about four weeks, is a rigorous analysis that leads to actionable insights. “There is some aspect of having an independent party come in and look under the hood that obviously can be a little painful.” In fact, she adds, if there was no pain involved, it might indicate that the process is not robust enough.
Since launching, the BlueMark team has performed over 20 impact verifications and only once has a client aborted the process because of dissatisfaction with the initial marks they were receiving. In addition to a verifier statement, clients are left with a roadmap which helps them think about how they might “raise the bar” of their own practices in the months ahead. A benefit for the wider field of impact investing is that others will be able to make meaningful comparisons about who is performing well and what that looks like.
Learning is of course not done in isolation and it’s not just clients who will glean valuable insights. Christina tells Invest for Good that the company will be looking to the standard-setters, the market and its own clients to keep evolving what it offers. “We learn from those who are doing things in really thoughtful and robust ways, who have honed their practices over the years.”
In an effort to be as transparent as possible and to add value, BlueMark in April 2020 produced a report with learnings from their first few impact verifications. In the foreword, Christina lays out the argument for independent verification persuasively: “Good intentions are insufficient. An impact label without the actions and accountability to back it up is of no value. The combination of standard-setting and verification is what gives the market confidence that intentions are backed up by practices, outcomes are backed up by evidence, and impact labels actually mean something.”
Good intentions are insufficient. An impact label without the actions and accountability to back it up is of no value.
Levelling the playing field
Yes, there is a cost involved in being independently verified but the CEO is keen to point out that the cost should not be prohibitive. To back this up, BlueMark has launched a new service called AccessPoint for smaller impact managers - those with $100m of assets under management for private equity strategies or less than $250m for private debt. “With the help of one of our initial funders, the Rockefeller Foundation, we are very focused on expanding access to verification and really levelling the playing field so this is not just a service that the biggest players can afford.”
For any impact investor, however big or small, Christina believes it’s important to hold investment managers to account by whatever means - and that includes adopting the standards which people have worked so hard to put into place. Be sceptical, scrutinise and bring in some sort of independent accountability, she advises. “Don’t be fooled by the excuse of confusion or that there are too many standards or alphabet soup. There’s actually a lot of clarity in the market now.”
Christina Leijonhufvud is the CEO and co-founder of BlueMark, an impact verification service launched by Tideline in 2020. She previously ran several ratings and risk management functions at J.P. Morgan before launching the firm's Social Finance business. Christina currently sits on the Advisory Boards of BRAC USA and the CASE i3 Initiative on Impact Investing at Duke University’s Fuqua School of Business.