A Watershed Moment in Impact Investing: The ‘Ninth Principle’ Shifts the Focus Beyond Good Intentions
It was a watershed moment five years ago when the G8 Social Impact Investment Taskforce concluded its work on recommendations for the development of the impact investing market.
Fast forward to today, and the vision espoused by that ambitious effort is fast becoming a reality, to “bring a third dimension – impact – to the 20th-century capital market dimensions of risk and return,” in the words of Sir Ronald Cohen, the chair of the Taskforce.
The bookends of this journey have been the publication of the Guidelines for Good Impact Practice, in 2014, by the Working Group on Impact Measurement (which was constituted as part of the Taskforce), and the launch in April this year of the International Finance Corporation (IFC)’s Operating Principles for Impact Management.
The Working Group Guidelines presented the first, collective understanding of what it means to measure and manage for impact. The IFC Impact Principles have essentially taken those same recommended steps – “plan, do, assess and review” – and codified them, introducing accountability for execution and good practice.
The IFC’s Impact Principles
With five years of learning to benefit from, based on an industry consultation focused on the practicalities of impact management, the IFC’s nine Impact Principles:
- Define strategic impact objective(s), consistent with the investment strategy;
- Manage strategic impact on a portfolio basis;
- Establish the manager’s contribution to the achievement of impact;
- Assess the expected impact of each investment, based on a systematic approach;
- Assess, address, monitor and manage potential negative impacts of each investment;
- Monitor the progress of each investment in achieving impact against expectations, and respond appropriately;
- Conduct exits considering the effect on sustained impact;
- Review, document and improve decisions and processes based on the achievement of impact and lessons learned;
- Publicly disclose alignment with the principles, and provide regular independent verification of the alignment.
The Impact Principles have their limitations. They speak to the “process” of impact investing, and not to the “performance” – or, in other words, the actual social and environmental outcomes that are being targeted and delivered. They do, however, respond to the question Tideline hears most often from our clients – “how, precisely, do we integrate impact into our investment decision-making processes?” – which is why we are integrating the Impact Principles into all of our work.
There are a couple of other, key reasons the Impact Principles have quickly gained traction, with 72 signatories at the time of writing:
Accessibility: The principles concisely lay out the fundamental features of effective impact management, in a way that is practical and easy to understand.
Adaptability: The principles represent a threshold level of best practice, but also allow practitioners to implement them in ways that make sense for their particular investment strategies. They are also compatible with and complementary to other tools and resources in the market, like the UN SDGs, the Impact Management Project (IMP), and IRIS+.
Principle Number Nine
For a short time during the IFC’s development of the principles, it looked like there might be only eight of them, rather than nine. And yet, after surviving the consultative process, it is principle number nine that is the real game-changer in impact investing.
The requirement that signatories publicly disclosure their degree of alignment with the principles creates a broad-based commitment to independent verification for the first time, and solidifies the market’s desire to mitigate against the risk of impact washing.
The IFC has provided signatories with some flexibility as to how they fulfill principle nine, for example on the questions of who ought to provide the verification, and how often. However, this much is clear: Signatories are required to publish:
- an annual disclosure statement, including the name of the independent verifier;
- a statement related to the independent verifier’s qualifications or, in the case of internal verification, a description of the verification process and how it is separate from operational units;
- the date of the most recent assessment and next planned review;
- a public statement by the independent verifier conveying its view on the extent to which the investments covered by the principles are managed in alignment.
Tideline has already provided independent verification services to the KKR Global Impact Fund and LeapFrog Investments. We expect to be among a number of specialists developing purpose-built assessment methodologies, and have just published a snapshot of our approach, which asks three questions concerning an investor’s alignment with the principles:
- Compliance: Does the impact management system meet a threshold level of alignment to the core aspect(s) of a given principle?
- Quality: How rigorous is the impact management system, and how consistently is it implemented?
- Depth: How robust and thorough are components of the impact management system and/or the supporting data?
In case you remain unconvinced that the Impact Principles have shifted the center of gravity in impact investing beyond good intentions, UNDP’s new SDG Impact initiative should leave no doubt. SDG Impact is creating not only a robust standard for impact management but also a formal certification. Not surprisingly, UNDP also closes the five-year loop that started with the G8 Social Impact Investment Taskforce, with its own strong ties to Sir Ronald’s legacy. UNDP is implementing SDG Impact in partnership with the Impact Management Project, which was incubated by Bridges Ventures (co-founded by Cohen), along with the Taskforce Working Group.
To Sir Ronald’s “third dimension,” add the “ninth principle,” which now has the flywheel of verifiability turning.
Ben Thornley is a Managing Partner at Tideline and co-leads the firm’s client engagements and business development.
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