Guest Articles

Tuesday
May 18
2021

Adam Bendell

Bringing Impact Data Out of the Dark: Why Impact Investors Need Harmonized Reporting Platforms to Reach Their Goals

Impact reporting today is bespoke, inconsistent, unverified, locked up in information silos and lacking in comparability, with multiple, competing reporting platforms and methodologies. As a result, without any clear and uniform way to measure impact, investors seeking to compare and maximize the positive net impact of their investments must be guided largely by intuition.

Imagine a world in which impact reporting is as uniform as financial reporting. Trusted third parties verify impact and sustainability claims. Impact investors can see portfolio-level impact alongside financial results in a single report that aggregates public and private market investments. That report also offsets unintended negative impacts against positive impacts to yield a net impact statement. The investor can visualize all the impacts of their portfolio — financial, social and environmental — at a glance. In that world, any ambiguity or intentional obfuscation in the use of terms like “impact” and “ESG” become mere memories.

We could be living in that world within this decade if the impact field coalesces around shared terminology and metrics that can be aggregated and used to evaluate investments comparatively and over time. Impact investment matters because the world’s problems are both huge and urgent. We cannot afford to waste capital on anything but the most positively beneficial investments. Investors who can compare social and environmental impact across investments, just as they compare financial performance, will maximize positive and minimize unintended negative impacts of their investments.

 

The Good News

The impact field is making great progress toward this vision in terms of analytics and data collection — something we at Toniic have been pleased to witness and support. There is a rising tide of reporting platforms for private investments, including iPAR, Sopact, Impak Finance, B Analytics and our own Toniic Tracer.

Other platforms focus on the related issues of impact classification — like the IMP+ACT Classification System, which helps private impact funds self-classify their impacts — and ESG risk rating, including Sustainalytics, Bloomberg and MSCI, which provide ESG reporting and ratings for publicly traded equities.

Public equity–focused platforms are gearing up for a degree of convergence in ESG standards driven by the E.U. Sustainable Finance Disclosure Regulation, the merger of the Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC), and the leadership of the Impact Management Project in harmonizing frameworks. This is a big step forward because the various ESG reporting organizations, such as SASB, IFRS, IIRC, GRI and the CDP, today use different, incompatible frameworks that are as confusing as their acronyms. It is not reasonable to expect enterprises to report against multiple conflicting frameworks, so they don’t — and that makes it hard for investors to make sense of the disclosures.

 

The Bad News

Though we have an increasing array of choices, they mostly don’t interoperate or facilitate data aggregation. We will never get to our imagined future unless we address the siloed nature of these platforms.

Consolidation will lead to some progress: As the space matures, larger platforms will gobble up smaller ones. The convergence in public equity ESG frameworks will help as well. But a huge gap remains in the approach taken by platforms reporting on private investments, which don’t have to do financial disclosure, and those reporting on public investments, which do have that requirement. There will always be a marketplace of alternatives, and that is a positive thing. What isn’t positive is that those alternatives use incompatible frameworks, impeding comparability — and we need comparability, not only within public and private equity, but also between them.

If 20% of the companies in an investor’s portfolio report using one framework, 30% use another, and so forth, how can the investor make sense of the data? It’s as unintelligible as would be reporting financial results in seven different currencies without conversion via exchange rates. We need to have the equivalent of “exchange rates” between impact data.

We also need data interchange, so that at least some of the core data housed in one platform is accessible to other platforms. Otherwise, the work required to generate a consolidated impact report will remain too great a barrier — and investors will have to keep guessing about the relative social and environmental impacts of their investments, rather than act on facts and actual impact performance.

 

Hope for Harmonization

Solutions for harmonizing data between platforms are needed, because a mix of commercial and nonprofit platforms will continue driving impact reporting for the foreseeable future — and that is a great thing. Impact measurement and management imposes a burden of additional costs over traditional investing, particularly when verified, and someone has to pay for it. The business models of commercial platforms are necessarily going to differ from those of nonprofit organizations, and these differing models can coexist in peace. However, these models may also lead to differences in an organization’s willingness to move toward harmonization.

Nonprofits are more focused on creating public good, so collaboration with impact reporting platforms is more natural for them. But while for-profit models have less incentive to fully interoperate, it is in their interest to share some data more broadly because the current ESG disclosure process is a Tower of Babel, impeding the growth of the entire field. Such sharing will raise a platform’s brand awareness and even boost its business, as some investors who encounter a platform’s shared data on another platform will likely want more detail, and will pay for more data from the original source.

But despite these individual and sector-wide benefits, changing the status quo will be a challenge. Unless we as a field make harmonization and interoperability a goal, it isn’t going to happen. Instead, each platform will race to become dominant and render the others obsolete. That would be a damaging outcome, because the impact reporting field is broad and no single platform meets the needs of all users.

To truly change the equation, we need leadership toward harmonization, focused on four key elements:

  1. Leverage existing frameworks: If a reasonable framework standard exists, leverage it and improve it, don’t seek to replace it.
  2. Harmonize data models: Data interchange (and ultimately data aggregation) isn’t just a question of enabling technology. It also requires data structure harmonization — for example, translation between slightly different metrics for greenhouse gas emissions.
  3. Code for interoperability: Even if platforms remain separate, they can interoperate. This means users of one platform can easily access a complementary platform, or that one platform can share at least a subset of data with another, in the way autofill on your browser saves you from having to retype your name and address on every website.
  4. Focus on strengths: Each platform excels at some aspects of impact reporting and does not do as well in others. As an example, some platforms focus on ESG reporting (reporting on efforts to mitigate negative impacts) for public equities, while others focus on positive impact reporting for private investments. It is tempting for each to focus on strengthening areas of weakness, but data harmonization and interoperability offer a path to let each platform’s specialty shine.

This work won’t do itself. It requires initiative from the platform sponsors, as well as financial support from funders who are motivated to build an interoperable ecosystem. Some funders are focusing on this issue as a fundamental substrate of the impact investing ecosystem, but it’s a big and hairy problem and will require more than one deep pocket to solve. That’s why donor collaboratives like the Tipping Point Fund are so promising for the field.

We at Toniic are eager to participate in this work, and we are not alone. Our Tracer platform embraces the IMP frameworks, the framing of big-world problems under the 17 U.N. Sustainable Development Goals, and the IRIS+ catalog of impact metrics. Those aren’t the only viable frameworks, but they all have traction — and we have chosen to embrace them rather than create something new, which might (we hope) be better but would impede harmonization. We also built Tracer from the outset to interoperate with the IMP+ACT Alliance Impact Classification System platform to demonstrate the importance of interoperability.

We encourage other platform providers to do the same: Embrace existing frameworks that have traction rather than create your own. Make interoperability a core tenet of your goals, not an afterthought. Focus on the parts you do best, and work with other platforms that do other parts better.

With Tracer, we’ve been focused on interoperability from the outset, because our vision for our platform work is the future described above — a world in which investors motivated to generate positive net social and environmental impact can see, at a glance, both financial and impact performance across their investment portfolio. Based on those insights, they will be better able to redeploy assets to maximize their contribution to the pressing social and environmental problems facing our planet. That’s not a future we (or any other platform provider) will usher in alone — but by working together, we can make sustainable investing a lot easier.

 

Adam S. Bendell is CEO of Toniic, a global network of investors seeking deeper positive net impact.

 

Photo courtesy of Dziana Hasanbekava.

 


 

 

Categories
Impact Assessment, Investing
Tags
data, environmental impact, ESG investing, Impact Assessment, impact investing, social impact, sustainability, sustainable investing