Impact Funds: Doing what they say on the tin?
With calls for greater transparency about how investments are aiming to achieve positive impact alongside financial returns, The Good Economy has launched an impact assurance and verification service.
In July the FCA, the UK’s financial services regulator, issued guiding principles to help market participants and retail investors better understand the basis on which sustainability claims are being made.
The FCA followed this up in November with their ESG strategy, as well as releasing a paper signposting future regulation. This includes requirements on product labelling and mandatory disclosures over sustainability risks, opportunities and impacts.
What does the push towards greater clarity and consistency mean for investors pursuing a positive impact approach to sustainable investing? We see three important implications.
First, it is no longer enough for investors to simply say they are doing ‘impact investing’. They must also demonstrate and evidence – in the regulator’s words – how funds are “seeking a non-financial (real world) impact, and if that impact is being measured and monitored”. As others have observed, this is a pivotal moment where “tell-me has become show-me”.
According to the International Finance Corporation (IFC), the private investment arm of the World Bank, impact investors are “not defined by their membership in an asset class with common risk and return characteristics, but rather by the approach of the investor”. How investors are managing for impact – including their processes, policies and procedures – will be key to demonstrating authenticity. Critical to this will be having robust impact management systems: the process by which investors understand their investments’ effects on people and the planet, and set goals to adapt processes and improve outcomes.
Second, a credible contribution strategy is at the heart of differentiating an impact approach. That is, the ways an investor aims to cause change – whether through financial or non-financial means. This ‘difference made’ can play out across the spectrum of impact goals set out by the Impact Management Project: are investors contributing to less of a bad thing (‘avoiding harm’), more of a good thing (‘benefiting stakeholders’) or improving outcomes where they are most needed (‘contributing to solutions’)?
Of course, investors may not always be able to precisely quantity their contribution to addressing social and environmental challenges. But they will need – in the language proposed by the FCA - to have the “theoretical ability to deliver and measure additionality through investment decision-making and investor stewardship”.
Third, step-changes will be needed in transparency about the specific impact objectives being pursued and how well funds are meeting these objectives. Being able to accurately describe – against industry good practice and emerging standards – the full range of impacts, as well as showing systems in place to measure and manage towards impact, will be critical in enabling shareholders and stakeholders alike to monitor whether their expectations are being met.
As a result, independent assurance of impact processes and performance will become the norm and play an increasingly key role in building confidence in impact investing. The FCA is seeking views on whether “verification” should also be one of the minimum criteria for an impact product label. This echoes the Operating Principles for Impact Management’s requirement for independent verification. Alignment with these Impact Principles, which have now attracted some 150 signatories, is fast becoming the hallmark of authentic impact investing.
To that end, The Good Economy has launched an impact assurance and verification service. Impact Assured is designed to verify alignment with sustainability standards, emerging regulatory requirements and industry good practices – including those codified in the Impact Principles.
Informed by over a decade of experience evaluating and advising on impact strategies for clients, our methodology takes a deep dive into investors’ intentionality to have a positive social and/or environmental impact, their integration of impact considerations into the investment process, and ways they ensure impact integrity through decision-making and disclosures.
Through Impact Assured we help investors ensure they are on the right track to delivering meaningful results by strengthening accountability over their impact claims. The service also provides an opportunity for investment managers to reflect on and refine their impact management systems.