What is Impact Verification?

Originally Published in Pioneers Post

What does impact verification actually mean? Who’s doing it – and is it the solution to impact-washing? The Good Economy’s Matt Ripley explains all in our latest impact economy explainer.

What is impact verification?

Impact verification checks an investor’s impact claims against specified industry standards. It involves an independent assessment of either impact management processes or impact performance.

Process verifications examine how investors are helping to create impact – typically focusing on the systems they use to understand and improve their impact.

Performance verifications assess what impacts an investor is helping to deliver – looking at impact reports and impact metrics.

Why is it needed?

Getting independently verified can go a long way to demonstrating the authenticity of an impact strategy. This is particularly timely, with growing concerns about impact-washing and calls for greater scrutiny of impact claims, including through regulation such as the UK’s Sustainability Disclosure Requirements (SDR) and the EU’s Sustainable Finance Disclosure Regulation (SFDR).

We believe that verification can play a crucial role in building trust and credibility in impact investing as a distinct approach to ESG investing. Verification can also provide an opportunity for investment managers to reflect on and refine their impact processes and performance. This is important as many elements of ‘best practice’ are still being codified. Investors can use verification as a learning exercise to assess how they align with both established and emerging standards and ensure they are on the right track to deliver meaningful results.

What does it typically involve?

Approaches to impact verification are still evolving and the field is relatively new. But as a rule of thumb, any verification requires a subject matter (what is being assessed), a set of criteria (the standard to assess against), a third-party verifier (a competent organisation to conduct the assessment and form an opinion about whether the evidence, such as documents, shows adherence to the standards), and users (who make decisions based on the verification’s findings).

For example, The Good Economy verifies the alignment of investor impact management systems with the Impact Principles. Our verification methodology, Impact Assured, takes a deep dive into investors’ intentionality to have a positive impact, their integration of impact considerations into the investment process, and ways they ensure impact integrity through decision-making and disclosures. A set of assessment criteria are drawn from the Impact Principles as well as wider industry standards and market frameworks.

There are five key stages to our verification process: a document review; interviews with staff including the investment leads; an in-depth assessment of a sample of investments to understand how impact drives decision-making; a gap analysis against the criteria; and discussion of conclusions with management to identify and prioritise areas for future action. The whole verification typically takes four to six weeks.

What happens once an investor has been verified?

Verifications have a twin role, helping to both ‘prove’ and ‘improve’ impact. On the ‘prove’ side, a formal report summarising the verification findings is prepared and shared, often in the public domain – as this is a requirement for signatories of the Impact Principles.

On the ‘improve’ side, each verification ends with a report to management, setting out practical recommendations and peer group examples. Investors then use these to adapt their practices and ultimately improve outcomes.

By sharing the detailed findings of their verification, investors can also help build collective knowledge and raise the bar on impact management processes and impact performance. This is why we were excited to release a report late last year on Snowball’s impact verification. By letting others look under the bonnet of their impact processes to show both strengths and weaknesses, Snowball hopes to model the kind of transparency it wants to see in the market, and contribute to the ongoing conversation of what ‘good’ impact management looks like.

Who is doing it?

A wide range of asset managers and owners are seeking to have their impact approach verified. The Impact Principles, for example, has over 150 signatories in more than 35 countries who have committed to independent verification. These signatories now represent more than half of the total US$1.164tn market for impact investing.

Organisations carrying out verifications are typically traditional auditors or specialist firms. The latest Making the Mark report by BlueMark makes a distinction between clients seeking more compliance-oriented verifications, who are more likely to work with a ‘Big Four’ accounting firm; and those interested in a learning-oriented verification, which goes beyond proving alignment to also learn how to address gaps and gain insights into peer practices. For this, investors tend to work with firms with a specialist focus on impact, such as BlueMark or The Good Economy.

Is verification the solution to impact-washing?

It’s a piece of the puzzle. Not many companies set out to intentionally impact-wash, but it’s easy to unintentionally slip into impact-washing territory. This is because there are no clear norms and standards for some aspects of impact processes and performance, and that can be confusing for managers, especially those new to impact: what exactly should I include in my impact report, what level of detail should I disclose when using proxies, and so on.

So we need clarity on what these ‘criteria’ are in order to verify against them. For some areas, like impact management, the standards have begun to be established via initiatives such as the Impact Principles, which has really helped galvanise a move towards verification. The core challenge now is to get more people to sign up to the Principles and get verified. For others areas – like impact reporting – the criteria for what constitutes a quality impact report are still emerging, so the development of verification services and standard-setting is going hand in hand.